##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM ________TO________ Commission File Number 000-23401 GAMETECH INTERNATIONAL, INC.  DELAWARE
    
    33-0612983(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 900 SANDHILL ROAD, RENO, NEVADA
89521
(Address of principal executive offices)
(Zip code) Registrants telephone number, including area code: (775) 850-6000 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2) Yes o No þ On March 9, 2005, the registrant had 11,875,214 outstanding shares of its Common Stock, par
value $0.001 per share.




---



GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005
INDEX PageNo.Part I. Financial Information:Item 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets October 31, 2004 and January 31, 2005
    
    
    3Condensed Consolidated Statements of Operations Three Months Ended January 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows Three Months Ended January 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16Part II. Other Information:Item 1.
    
    Legal Proceedings
    
    
    17Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    20Exhibit 31Exhibit 32
 2




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 January 31,
    
    
    October 31,2005
    
    
    2004(Unaudited)
    
    
    (Note A)Assets:Current assets:Cash and cash equivalents
    
    $
    4,926
    
    
    $
    6,101Short-term investments
    
    
    2,616
    
    
    
    2,605Accounts receivable, less allowance for
doubtful accounts of $2,445 in 2005 and
$2,454 in 2004
    
    
    3,516
    
    
    
    3,484Deposits
    
    
    32
    
    
    
    29Refundable income taxes
    
    
    96
    
    
    
    100Prepaid expenses and other current assets
    
    
    800
    
    
    
    650Deferred income taxes
    
    
    2,561
    
    
    
    2,358Total current assets
    
    
    14,547
    
    
    
    15,327Bingo equipment, furniture and other equipment, net
    
    
    23,312
    
    
    
    23,952Goodwill, net
    
    
    10,184
    
    
    
    10,184Intangibles, less accumulated amortization of
$3,811 in 2005 and $3,614 in 2004
    
    
    1,797
    
    
    
    1,766Restricted cash
    
    
    450
    
    
    
    450Total assets
    
    $
    50,290
    
    
    $
    51,679Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    464
    
    
    $
    1,343Accrued payroll and related obligations
    
    
    1,296
    
    
    
    1,541Accrued loss contingency
    
    
    3,628
    
    
    
    3,628Income tax payable
    
    
    1,259
    
    
    
    1,214Other accrued liabilities
    
    
    2,039
    
    
    
    2,392Total current liabilities
    
    
    8,686
    
    
    
    10,118Non-current employment obligations
    
    
    201
    
    
    
    202Deferred income taxes
    
    
    888
    
    
    
    689Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 13,730,539 shares issued at January
31, 2005 and 13,700,339 at October 31, 2004
    
    
    14
    
    
    
    14Capital in excess of par value
    
    
    47,280
    
    
    
    47,081Retained earnings
    
    
    1,317
    
    
    
    1,671Less: Treasury stock, at cost: 1,855,325 shares
at January 31, 2005 and at October 31, 2004
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    40,515
    
    
    
    40,670Total liabilities and stockholders equity
    
    $
    50,290
    
    
    $
    51,679
 See accompanying notes. 3




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 Three Months EndedJanuary 31,2005
    
    
    2004(Unaudited)Revenue
    
    $
    12,320
    
    
    $
    12,615Cost of revenue
    
    
    5,470
    
    
    
    5,710Gross profit
    
    
    6,850
    
    
    
    6,905Operating expenses:General and administrative
    
    
    2,741
    
    
    
    2,780Sales and marketing
    
    
    3,059
    
    
    
    3,035Research and development
    
    
    1,083
    
    
    
    1,121Total operating expenses
    
    
    6,883
    
    
    
    6,936Loss from operations
    
    
    (33
    )
    
    
    (31
    )Interest and other income, net
    
    
    35
    
    
    
    6Income (loss) before provision for income taxes
    
    
    2
    
    
    
    (25
    )Provision for (benefit from) income taxes
    
    
    1
    
    
    
    (10
    )Net income (loss)
    
    $
    1
    
    
    $
    (15
    )Basic net income (loss) per share
    
    $
    0.00
    
    
    $
    (0.00
    )Diluted net income (loss) per share
    
    $
    0.00
    
    
    $
    (0.00
    )Shares used
in the calculation of net income (loss) per
share:Basic
    
    
    11,846,327
    
    
    
    11,737,439Diluted
    
    
    11,949,718
    
    
    
    11,737,439Cash dividends per common share
    
    $
    0.03
    
    
    $
    0.12
 See accompanying notes. 4




---



##### Table of Contents



GAMETECH INTERNATIONAL,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months EndedJanuary 31,2005
    
    
    2004(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    1
    
    
    $
    (15
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,075
    
    
    
    2,731Obsolescence
    
    
    241
    
    
    
    168Loss on disposals of furniture and other equipment
    
    
    
    
    
    
    2Stock compensation expense
    
    
    93
    
    
    
    Deferred income taxes
    
    
    (4
    )
    
    
    Interest on short-term investments
    
    
    (11
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (32
    )
    
    
    (524
    )Deposits
    
    
    (3
    )
    
    
    (1
    )Refundable income taxes
    
    
    4
    
    
    
    23Prepaid expenses and other current assets
    
    
    (150
    )
    
    
    (620
    )Accounts payable
    
    
    (879
    )
    
    
    401Accrued payroll and related obligations
    
    
    (245
    )
    
    
    94Income tax payable
    
    
    45
    
    
    
    Other accrued liabilities
    
    
    (353
    )
    
    
    234Non-current employment obligations
    
    
    (1
    )
    
    
    (15
    )Net cash provided by operating activities
    
    
    1,781
    
    
    
    2,478Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    
    
    
    
    1,402Capital expenditures for bingo equipment, furniture and other equipment
    
    
    (2,479
    )
    
    
    (2,676
    )Payments for acquisitions of intangible assets and capitalized costs
of developed software
    
    
    (228
    )
    
    
    (184
    )Net cash used in investing activities
    
    
    (2,707
    )
    
    
    (1,458
    )Cash flows from financing activities:Payments on long-term debt
    
    
    
    
    
    
    (81
    )Payments of dividends
    
    
    (355
    )
    
    
    (1,408
    )Proceeds from exercise of stock options
    
    
    106
    
    
    
    Net cash used in financing activities
    
    
    (249
    )
    
    
    (1,489
    )Net decrease in cash and cash equivalents
    
    
    (1,175
    )
    
    
    (469
    )Cash and cash equivalents at beginning of period
    
    
    6,101
    
    
    
    10,202Cash and cash equivalents at end of period
    
    $
    4,926
    
    
    $
    9,733
 See accompanying notes. 5




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JANUARY 31, 2005
(UNAUDITED) NOTES TO FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements as of January 31, 2005
have been prepared in accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. In our opinion, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended January 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending October 31, 2005. The balance sheet at October 31, 2004 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes thereto included in our annual report on
Form 10-K for the year ended October 31, 2004. Certain amounts in the prior periods condensed consolidated financial statements have been
reclassified to conform to the current periods presentation. NOTE B. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION We recognize revenue for bingo terminals placed in bingo halls under contracts based on (1) a
fixed fee per use per session; (2) a fixed weekly fee per terminal; or (3) a percentage of the
revenue generated by each terminal. Our revenue recognition is a key component of our results of
operations, and determines the timing of certain expenses, such as commissions. We recognize
revenue in accordance with U.S. generally accepted accounting principles when all of the following
factors exist: (a) evidence of an arrangement with the customer; (b) play or availability of the
bingo terminals; (c) a fixed or determinable fee; and (d) collectibility is reasonably assured. We
exercise judgment in assessing the credit worthiness of our customers and therefore in our
determination of whether collectibility is reasonably assured. Should changes in conditions cause
us to determine these criteria are not met for future transactions, revenue recognized for future
reporting periods could be adversely affected ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Our receivables are recorded when revenue is recognized in accordance with our revenue
recognition policy and represent claims against third parties that will be settled in cash. The
carrying value of our receivables, net of allowance for doubtful accounts represents its estimated
net realizable value. We estimate the possible losses resulting from non-payment of outstanding accounts receivable. Our
customer base consists primarily of entities operating in charitable, Native American, and
commercial bingo halls located throughout the United States. In some jurisdictions, the billing and
collection function is performed as part of a distributor relationship, and in those instances, we
maintain allowances for possible losses resulting from non-payment by both the customer and
distributor. We perform ongoing evaluations of our customers and distributors for credit
worthiness, economic trends, changes in our customer payment terms, and historical collection
experience when evaluating the adequacy of our allowance for doubtful accounts. We also reserve a
percentage of our accounts receivable based on aging category. In determining these percentages, we
review historical write-offs of our receivables, payment trends, and other available information.
While such estimates have been within our expectations and the provisions established, a change in
financial condition of specific customers or in overall trends experienced may result in future
adjustments of our estimates of recoverability of our receivables. 6




---



##### Table of Contents



BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT Bingo equipment includes portable and fixed-base player terminals as well as file servers,
callers units, point-of-sale units, and other support equipment. Bingo equipment, furniture, and
other equipment are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows: Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
 We provide reserves for excess or obsolete bingo terminals on hand that we do not expect to be
used. Our reserves are based upon several factors, including estimated forecast of bingo terminal
demand for placement into halls. Our estimates of future bingo terminal demand may prove to be
inaccurate, in which case we may have understated or overstated the provision required for excess
or obsolete bingo terminals. Although we attempt to assure the accuracy of our estimated forecasts,
any significant unanticipated changes in demand or technological developments could have a
significant impact on the value of bingo terminals, results of operations, and financial condition. SOFTWARE DEVELOPMENT CAPITALIZATION We capitalize costs related to the development of certain software products that meet the
criteria of Statement of Financial Accounting Standards (SFAS) No. 86  Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed. SFAS No. 86 provides for the
capitalization of computer software that is to be used as an integral part of a product or process
to be sold or leased, after technological feasibility has been established for the software and all
research and development activities for the other components of the product or process have been
completed. We are capitalizing qualified costs of software developed for new products or for
significant enhancements to existing products. We cease capitalizing costs when the product is
available for general release to our customers. We amortize the costs on a straight-line method
over the estimated economic life of the product beginning when the product is available for general
release. The achievement of technological feasibility and the estimate of a products economic life
require managements judgment. Any changes in key assumptions, market conditions, or other
circumstances could result in an impairment of the capitalized asset and a charge to our operating
results. GOODWILL We are required to perform an annual goodwill impairment review, and depending upon the
results of that measurement, the recorded goodwill may be written down and charged to income from
operations when its carrying amount exceeds its estimated fair value. In addition, we assess the
impairment of goodwill whenever events or changes in circumstances indicate that the carrying value
may not be recoverable, such as a significant adverse change in legal factors or in the business
climate, an adverse action or assessment by a regulator, unanticipated competition, or a loss of
key personnel. LONG-LIVED ASSETS We have adopted the provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires impairment losses to be recognized for
long-lived assets and identifiable intangibles, other than goodwill, 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. LEGAL CONTINGENCIES We are currently involved in various claims and legal proceedings. Periodically, we review
the status of each significant matter and assess the potential financial exposure. If the
potential loss from any claim or legal proceeding is considered probable and the amount can be
estimated, we accrue a liability for the estimated loss. Significant judgment is required in both
the determination of probability and the determination as to whether an exposure is reasonably
estimable. Because of uncertainties related to these matters, accruals are based only on the 7




---



##### Table of Contents



best information available at the time. As additional information becomes available, we reassess
the potential liability related to our pending claims and litigation and may revise their
estimates. Such revisions in the estimates of the potential liabilities could have a material
impact on the results of operations, and financial condition. PRO FORMA STOCK-BASED COMPENSATION INFORMATION Pro forma information regarding net income (loss) and net income (loss) per share is required
by SFAS No. 123, Accounting for Stock-Based Compensation,as amended by SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure,and has been determined as if we had
accounted for our employee stock options under the fair value method of that statement. Our
pro forma information follows: (In thousands, except per
share amounts)
Three Months EndedJanuary 31,2005
    
    
    2004Net income (loss), as reported
    
    $
    1
    
    
    $
    (15
    )Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects
    
    
    93
    
    
    
    Deduct: Total stock-based employee
compensation expense
determined under fair value based method,
net of related tax effects
    
    
    (63
    )
    
    
    (67
    )Pro forma net income (loss)
    
    $
    31
    
    
    $
    (82
    )Net income (loss) per share:Basic  as reported
    
    $
    0.00
    
    
    $
    (0.00
    )Basic  pro forma
    
    $
    0.00
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.00
    
    
    $
    (0.00
    )Diluted  pro forma
    
    $
    0.00
    
    
    $
    (0.01
    )
 NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46, Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51(FIN 46). In
December 2003, FIN 46 was revised to clarify certain provisions and effective dates for
application. FIN 46 addresses consolidation by business enterprises of variable interest entities
that have certain characteristics. Transferors to qualifying special-purpose entities and
grandfathered qualifying special-purpose entities subject to the reporting requirements of SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,are excluded from the scope of FIN 46. FIN 46 is applicable no later than the end of
the first interim or annual reporting period ending after March 15, 2004, unless we have an
interest in a special purpose entity, which the effective date for application is no later than the
end of the first interim or annual reporting period ending after December 15, 2003. We currently
have no contractual relationship or other business relationship with a variable interest entity.
However, if we enter into any such arrangement with a variable interest entity in the future, our
financial position, cash flows or results of operations may be adversely impacted. 8




---



##### Table of Contents



In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility
expense, freights, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. We do not expect
the adoption of this recently-issued accounting pronouncement to have a material impact on our
financial position, cash flows or results of operations. In December 2004, the FASB issued SFAS No.123 (revised 2004, or R), Share-Based Payment a
revision of FASB Statement No. 123 Accounting for Stock-Based Compensation. SFAS No. 123 supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123 (R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. The new standard will be effective for our fourth
quarter ended October 31, 2005. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:  1.
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date, and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.2.
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented, or (b) prior interim periods of the year of
adoption. We
have not determined the method upon which we will adopt SFAS No. 123(R). As permitted by SFAS No. 123, we currently account for share-based payments to employees using
APB Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have
a significant impact on our result of operations, although it will have no impact on its overall
financial position. We cannot predict the impact of adoption of SFAS No. 123(R) at this time
because it will depend on levels of share-based payments granted in the future. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. NOTE C. NET INCOME (LOSS) PER SHARE OF COMMON STOCK The calculation of the basic and diluted net income (loss) per share is the same except for
the dilutive effect of outstanding stock options (determined using the treasury stock method). The
dilution was 103,391 shares for the three months ended January 31, 2005. There is no effect of
outstanding options on the diluted loss per share for the three months ended January 31, 2004 because
their effect would be anti-dilutive. Stock options to purchase 419,500 and 967,760 shares of our
common stock were not included in the computation of diluted net income (loss) per share for the
three months ended January 31, 2005 and 2004, respectively, because the effect would be
anti-dilutive. NOTE D. LITIGATION On March 22, 2001, we filed a claim in the United States District Court, District of Arizona,
GAMETECH INTERNATIONAL, INC. V. TREND GAMING SYSTEMS, LLC, CV 01-540 PHX PGR, seeking a declaratory
judgment that we are not in material breach of our November 1, 1999 distribution agreement with
Trend Gaming Systems, LLC (Trend) and seeking damages for past due payments and wrongful
withholdings by Trend. Trend has counterclaimed, alleging that its payments are in compliance with
its contractual obligations and that it is entitled to withhold certain monies. Trend also contends
that we are in breach of certain of our contractual obligations to Trend or its customers. On
December 16, 2002, the court entered at our request an order enjoining Trend from using
approximately $540,000 in funds it had collected on our behalf, pending a trial on our ownership 9




---



##### Table of Contents



interest in those funds. The money has been placed in a bank account subject to the courts control
and now totals approximately $585,000. In addition, collections of accounts receivable by Trend, if
any, will also be placed in that account, pending the resolution of the case. We have posted a
$450,000 deposit with the court, which is presented as restricted cash on our consolidated balance
sheets. We fully reserved the accounts receivable from Trend as of October 31, 2004 and 2003.
Trend filed a motion for summary judgment alleging that the termination of the distribution
agreement was improper. On May 16, 2003, the court dismissed Trends motion for summary judgment.
On December 2, 2003, Trend filed a renewed motion for summary judgment alleging that we did not
have the right to terminate the distribution agreement based upon Trends failure to ensure that we
received our minimum rate of return. The court, on March 19, 2004, denied Trends renewed motion
for summary judgment. Trial in this matter commenced October 4, 2004. On November 1, 2004, the
jury returned a verdict in favor of Trend against us. The jury awarded Trend $3,527,000 in
compensatory damages. Trend concedes that it is not entitled to prejudgment interest on that sum.
Trend seeks an award of $810,000 in legal fees and $26,000 in expenses and costs. We plan to
contest the fee request. The jury also awarded us $735,000 in compensatory damages for funds Trend
collected on our behalf. We have moved for a new trial. No judgment has been entered in the case.
Should the court not grant a new trial, we intend to post a supersedeas bond to stay collection
while we appeal to the Ninth Circuit Court of Appeals. We expect that we will be required to
collateralize the supersedeas bond with cash. Any cash used in the collateralization of the bond
would be accounted for as restricted cash on our consolidated balance sheets. We cannot provide
assurance that we will succeed in setting the judgment aside by the trial or appellate court. For
the year ended October 31, 2004, we have recorded an estimated loss contingency in the Trend Gaming
Systems litigation of $3,628,000, which is estimated based on the amounts of the judgment described
above. The estimated loss contingency is included in operating expenses in the statement of
operations for the year ended October 31, 2004. There has been no change to the recorded loss
contingency during the current quarter. On October 30, 2002, Capital Gaming Supplies (Capital) filed a claim in the United States
District Court, Southern District of Mississippi, CAPITAL GAMING SUPPLIES, INC. V. GAMETECH
INTERNATIONAL, INC. Civil Action No. 3:02 CV1636WS, seeking a judgment that we tortiously
interfered with alleged existing and prospective customer accounts. We denied the allegations and
filed a counter-claim seeking a judgment that Capital tortiously interfered with our customer
accounts. On April 18, 2003, Capital filed an amended complaint adding other claims against us and
other defendants, including a claim for malicious breach of contract against International Gaming
Systems, Inc. (IGS), and its principals. In November 2002, we acquired certain assets of IGS and
we assumed certain claims filed by Capital against IGS and its principals. Capital sought
compensatory and punitive damages from all defendants. On September 30, 2004, the district court
entered a summary judgment in favor of all defendants dismissing all of Capitals claims with
prejudice. Capital is currently appealing the judgment to the Fifth Circuit Court of Appeals. We
continue to believe that Capitals claims are without merit and that the district courts judgment
will be affirmed. However, we cannot provide assurance that we will successfully defend the
judgment on appeal. An unfavorable outcome could have a material adverse effect on our financial
position, cash flows, and results of operations. On March 2, 2004 the jury rendered a unanimous verdict in our favor awarding compensatory and
punitive damages against Trend Gaming (involving a prior distribution agreement in Virginia) in the
total amount of approximately $1.5 million. The jury also returned a verdict against Steven W. and
Rhonda Hieronymus awarding compensatory and punitive damages of $1,030,000. The court reduced
compensatory damages against Trend Gaming to $1,055,000. The court affirmed $150,000 in punitive
damages against Trend Gaming and awarded GameTech costs of suit in the amount of $650,000.
Compensatory damages against Mr. and Mrs. Hieronymus have been reduced to $762,000 but the punitive
damage award against them in the amount of $150,000 remains unchanged. Of the total compensatory
damages of $1.1 million awarded to us, $762,000 represents compensation for lost profits. We can
only collect such damages from one of the defendants to avoid a double recovery. We have not
recorded an estimated gain contingency, as we can make no assurances whether we will be able to
collect any award from the defendants. On March 3, 2005, we received an Original Notice of Opportunity to Show Compliance
(Notice) from the Texas Lottery Commission. The Notice alleges that we engaged in acts
prohibited by Sections 2001.553, 2001.556, 2001.206 and 2001.407 of the Texas Bingo Enabling Act
(Enabling Act). The Notice specifically alleges that a former employee of ours, with our
approval, engaged in direct sales and contract negotiations or attempted to induce sales with
commercial lessors and charitable organizations while not licensed to do so; engaged in selling,
distributing, and supplying bingo equipment and supplies without a distributors license; engaged
in pricing acting in concert with distributors, commercial lessors, and charitable organizations, a
potential violation of the Enabling Act; and engaged in direct distribution of bingo supplies and
equipment to persons other than a licensed distributor. The Notice gives us the ability to
demonstrate compliance with the Enabling Act prior to a hearing. 10




---



##### Table of Contents



In the event that we are found to have violated the Enabling Act, administrative penalties, up
to and including revocation of our Texas license, could be imposed. We deny the allegations and
intend to defend vigorously this matter. However, we cannot provide assurance that we will prevail
in this matter or that any administrative penalties that may be imposed will not have a material
adverse effect on our financial position, cash flows, and results of operations. We are involved in various other legal proceedings arising in the ordinary course of our
business. We do not believe that any of those proceedings will have a material adverse effect on
our business, financial position, or results of operations. NOTE E. CREDIT AGREEMENTS Effective April 2, 2004, we renewed our revolving line-of-credit agreement with a bank. The
maximum amount available under the terms of the agreement is $5.0 million, which was amended to
$2.5 million effective February 1, 2005. The line of credit was reduced as a result of breaches of
certain covenants in the line of credit agreement, including failure to meet certain financial
conditions as well as exceeding a litigation loss contingency minimum, for which we received a
waiver from the bank for non-compliance with these covenants at October 31, 2004. Borrowings bear
interest based on the banks prime rate or LIBOR plus 2.0 percent, at our option. Interest is
payable monthly and the agreement expires on April 2, 2005. We can give no assurance that the
credit agreement will be renewed. Our obligations under the agreement are secured by substantially
all of our assets. The agreement contains certain restrictive covenants, which among other things,
require that specified financial balances and ratios be maintained, requires profitability to be
maintained on a rolling four quarter basis, and restrict the incurrence of additional indebtedness
and payment of dividends. At January 31, 2005 and 2004, there was no outstanding balance under the
line-of-credit. At March 14, 2005, we were not in compliance with certain of the financial
covenants and we expect that we will not be in compliance with such covenants through the April 2,
2005 expiration date. The bank has agreed to continue the lending relationship however, the bank
reserves the right to terminate the agreement at their discretion. NOTE F. INCOME TAXES We recorded our income tax provision at an effective rate of 46.9% for the three-months ended
January 31, 2005 compared with 42.9% for the three-months ended January 31, 2004. The actual
effective tax rate is different from the expected federal rate of 35%, reflecting certain permanent
differences between financial accounting and tax accounting and the effect of state and federal
income taxes and nondeductible expenses (stock compensation expense) on the pre-tax income in the
current year. NOTE G. STOCK COMPENSATION In December 2004, the vesting period for 20,000 options to purchase shares of our common stock was
accelerated and became fully vested. As a result of this stock option modification, we recorded
compensation expense of $29,000 for the quarter ended January 31, 2005. The stock compensation
expense was calculated using the intrinsic value method, which compares the common stock option
exercise price to the fair market value of the underlying common
stock on the date of modification.
The stock compensation expense is recorded in cost of revenue in the consolidated statement of
operations. In January 2005, the term for 67,500 fully vested options to purchase shares of our common stock
was extended for an additional six months. As a result of this stock option modification, we
recorded compensation expense of $64,000 for the quarter ended January 31, 2005. The stock options
are subject to variable accounting under Accounting Principles Board Opinion No. 25. Under variable
accounting the Company is required to remeasure the value of the options, and the corresponding
compensation expense, at the end of each reporting period until the option is exercised, cancelled,
or expires unexercised. As a result, the stock-based compensation recognized in any given period
can vary due to changes in the valuation of the common stock of the Company. The stock
compensation expense is recorded in sales and marketing expense in the consolidated statement of
operations. 11




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with our condensed consolidated
financial statements and notes thereto included elsewhere in this report, as well as our
audited consolidated financial statements for the fiscal year ended October 31, 2004 contained in
our annual report on Form 10-K. The following discussion contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
the results anticipated in these forward-looking statements as a result of the factors set forth in
this report and those risk factors included in our annual report on Form 10-K for the fiscal year
ended October 31, 2004. OVERVIEW We design, develop, and market interactive electronic player terminals and bingo systems. We
currently market portable systems that can be played anywhere within a bingo hall and fixed-base
systems with light-pen or touchscreen-activated monitors. For our three most recent fiscal years
ended October 31, 2004, 2003, and 2002, our portable terminals generated approximately 74%, 73%,
and 77% of our revenue, respectively, while our fixed-base terminals generated the balance of our
revenue during those same years. For the three-months ended January 31, 2005, portable systems
accounted for 76% of our revenue and fixed-base systems accounted for 24% of our revenue. As of
January 31, 2005, we had systems in service in 36 states and in six foreign countries. We generate revenue by placing electronic player terminals and bingo systems in bingo halls
under contracts based on (1) a fixed fee per use per session; (2) a fixed weekly fee per terminal;
or (3) a percentage of the revenue generated by each terminal. Revenue growth is affected by player
acceptance of electronic bingo as an addition or an alternative to paper bingo, our ability to
expand operations into new markets and our ability to increase our market share, and regulatory
acceptance within jurisdictions. Fixed-base bingo terminals generate greater revenue per terminal
than portable bingo terminals, but also require a greater initial capital investment. We typically install our electronic player terminals and bingo systems at no charge to our
customers, and we capitalize the costs. We record depreciation of bingo equipment over a three- and
five-year estimated useful life using the straight-line method of depreciation. Our expenses consist primarily of (a) cost of revenue, consisting of expenses associated with
technical and operational support of the player terminals and bingo systems within bingo halls,
depreciation and amortization of bingo terminals, repair, refurbishment, and disposals of bingo
terminals and related support equipment, and excess or obsolescence reserve; (b) general and
administrative expenses, consisting of activities associated with management of our company and
related support, which includes finance and accounting, legal, compliance, information systems,
human resources, and accounts receivable reserve; (c) sales and marketing, consisting primarily of
commissions paid to distributors for promoting and supporting our products and an internal sales
force with a focus upon generating new customers and upgrades for existing customers; and (d)
research and development, consisting of company-sponsored research and development activities to
provide players with new or enhanced products on which to play electronic bingo. A number of events occurred that affected, or may in the future affect, our results of
operations or liquidity and capital resources. We have continued to incur significant expenses in aggressively defending or pursuing certain
legal issues, including the following:  
    Trend (Texas) Litigation.We continue to engage in litigation with a former Texas
distributor. As we have previously reported, on November 1, 2004, a jury awarded a
former Texas distributor $3,527,000 in compensatory damages while awarding our Company
$735,000 in compensatory damages. The former Texas distributor is seeking an
additional $810,000 in legal fees and $26,000 in expenses and costs. We have moved for
a new trial. Final entry of judgment has yet to occur in the case. Should the court
not grant a new trial, we intend to post a supersedeas bond to stay collection while we
take an appeal to the Ninth Circuit Court of Appeals. At and for the year ended
October 31, 2004 we have recorded an estimated loss contingency in the Trend Gaming
Systems litigation of $3,628,000. The estimated loss contingency is included in
operating expenses in the consolidated statement of operations. 12




---



##### Table of Contents




    Patent Infringement Litigation.We continue to defend a patent infringement lawsuit
in Nevada. An unfavorable outcome at trial could result in substantial damages and
payment of the plaintiffs fees and costs. We have not accrued any amounts related to
the patent infringement matter.
    Mississippi Distributor Litigation.We are a defendant in ongoing litigation with a
former distributor in Mississippi. On September 30, 2004, the district court entered
a summary judgment in favor of all defendants dismissing all the distributors claims
with prejudice. The distributor is currently appealing the judgment to the Fifth
Circuit Court of Appeals. The Mississippi distributor lawsuit could result in a
punitive damages award, which could be materially injurious to us. We have not accrued
any amounts related to the Mississippi litigation.
    Texas Lottery Commission.On March 3, 2005, we received an Original Notice of
Opportunity to Show Compliance from the Texas Lottery Commission. The notice alleges
that we engaged in acts prohibited by the Texas Bingo Enabling Act, or the Enabling
Act. The notice specifically alleges that a former employee of ours, with our
approval, engaged in direct sales and contract negotiations or attempted to induce
sales with commercial lessors and charitable organizations while not licensed to do so;
engaged in selling, distributing, and supplying bingo equipment and supplies without a
distributors license; engaged in pricing acting in concert with distributors,
commercial lessors and charitable organizations in violation of the Enabling Act; and
engaged in direct distribution of bingo supplies and equipment to persons other than a
licensed distributor. The Notice gives us the ability to demonstrate compliance with
the Enabling Act prior to a hearing. In the event that we are found to have violated
the Enabling Act, administrative penalties, up to and including revocation of our Texas
license, could be imposed. We have denied the allegations and intend to vigorously
defend this matter. However, we cannot provide assurance that we will prevail in this
matter or that any administrative penalties that may be imposed will not have a
material adverse effect on our financial position, cash flows, and results of
operations. During the quarter ended January 31, 2005 capital expenditures were approximately $2.5 million
primarily as an investment in player terminals and bingo systems and related support equipment.
This investment included an increase in the number of installed TravelerTM and
TED2CTM color-portable terminals. We also upgraded our fixed-base systems in
many markets. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses our condensed consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the balance sheet dates and
reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we
evaluate our estimates and judgments, including those related to revenue recognition, bad debts,
bingo terminal depreciation, goodwill impairment, and contingencies and litigation. We base our
estimates and judgments on historical experience and on various other factors we believe that are
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. These estimates and assumptions are affected by the application of our significant accounting
policies. Our significant accounting policies are described in Note B to our Condensed
Consolidated Financial Statements contained elsewhere in this report. Critical accounting policies are those that require us to make the most difficult, subjective,
or complex judgments, often as a result of inherently uncertain matters that may change in
subsequent periods. Our critical accounting policies include revenue recognition, allowance for
doubtful accounts, reserves for bingo terminal obsolescence, capitalization of software development
costs, impairment of assets, and assessment and evaluation of litigation and contingencies. 13




---



##### Table of Contents



Changes in internal or external conditions could cause actual results to differ from our
estimates and could cause future reporting periods to be adversely affected. If changes in
conditions lead us to believe that our criteria for revenue recognition are not met for future
transactions, revenue recognized for future reporting periods could be significantly less. Changes
in financial conditions of specific customers or in overall collection trends may result in
adjustments to our reserves for doubtful accounts. Changes in technology, our competitors
offerings, market conditions, or other factors affecting our business prospects could result in an
increase in reserves for bingo terminal obsolescence or in an impairment to the carrying value of
goodwill, other intangible assets or the capitalized cost of developed software. As additional
information becomes available and we reassess our potential liability related to litigation or
other contingencies, we may revise our estimates and such revisions could have an adverse effect on
our results of operations, cash flows, and financial position. RESULTS OF OPERATIONS Three Months Ended January 31, 2005 Compared with Three Months Ended January 31, 2004 REVENUE. We generated revenue of $12.3 million for the three months ended January 31, 2005
compared with $12.6 million for the comparable prior-year quarter. The $295,000, or 2.3%, net
decrease in revenue from the first quarter of fiscal 2004 was primarily a result of the loss of a
significant customer account in the last quarter of our prior fiscal year. Additionally, an
unfavorable legislative change in the state of Oklahoma occurred at the start of our first fiscal
quarter 2005. Oklahoma enacted legislation that permits casino-style gaming devices. This will
have the effect of reducing the demand for electronic bingo gaming in general in Oklahoma. The
expected loss of substantial Oklahoma business, combined with the loss of the customer account,
will likely result in revenue for fiscal year 2005 being less than that for fiscal 2004. We began
limited nationwide distribution of our newest portable color terminal, the Traveler, in the third
fiscal quarter of fiscal year 2004. We continued accelerated Traveler distributions into the first
fiscal quarter of fiscal 2005. We have experienced an increased profitability over the Travelers
predecessor during this limited time period. COST OF REVENUE. Cost of revenue decreased $240,000, or 4.2%, to $5.5 million for the quarter
ended January 31, 2005 from $5.7 million for the comparable prior-year period. Cost of revenue as a
percent of revenue for the current quarter decreased to 44.4% compared with 45.3% for the quarter
ended January 31, 2004. The decrease in cost of revenue over the prior year first quarter was in
service and operations of $303,000 as a result of a reduction of operations personnel.
Additionally, costs associated with the obsolete bingo terminal, repair, refurbishment, and
disposal of bingo terminals and related support equipment decreased $360,000 from the prior year
principally as a result of transitioning refurbishment activities in house from outside vendors.
Depreciation and amortization expense increased $442,000, primarily as a result of our investment
in Traveler portable color terminals, and our fixed-base terminals. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased $39,000, or 1.4%, to
$2.7 million for the quarter ended January 31, 2005 from $2.8 million for the comparable prior-year
quarter. General and administrative costs were 22.3% percent of revenue for the current quarter
compared to 22.0% for the prior year quarter. Legal expenses for the first quarter of fiscal 2005
were $178,000 below the first quarter fiscal 2004. The first quarters of fiscal 2005 and 2004
included high levels of legal expenses, including those related to defense of litigation with a
former distributor in Texas, patent infringement lawsuit in Nevada, litigation with a former
distributor of IGS in Mississippi, and other legal proceedings. The decrease in legal expenses were
partially offset with increased accounting fees of $164,000, as a result of an increased effort
towards compliance associated with the Sarbanes-Oxley Act of 2002. SALES AND MARKETING. Sales and marketing expenses increased $24,000, or 0.8%, to $3.1
million for the quarter ended January 31, 2005 from $3.0 million for the comparable prior-year
quarter. Sales and marketing expenses as a percent of revenue for the current quarter were 24.8%
compared with 24.1% for the quarter ended January 31, 2004. Sales and marketing includes
distributor commissions and personnel, travel, promotional, and support costs for our internal
sales force. Distributor commissions decreased $249,000 to $1.8 million for the quarter ended
January 31, 2005. Distributor commissions, as a percentage of revenue for the current quarter were
15.0% compared with 16.6% for the quarter ended January 31, 2004. Commissions will fluctuate
because the mix of revenue generated by distributors and those customers we serve directly varies.
Costs associated with our internal sales force grew by $273,000 as a result of increased sales
commissions, and stock compensation expense. 14




---



##### Table of Contents



RESEARCH AND DEVELOPMENT. Research and development costs decreased $38,000, or 3.4%, to $1.1
million for the quarter ended January 31, 2005 from $1.1 million for the comparable prior-year
quarter. Research and development costs as a percent of revenue for the current quarter were 8.8%
compared with 8.9% for the quarter ended January 31, 2004. The emphasis on new product development
and feature enhancements for existing products continues as a major focus. During the first quarter of fiscal 2005, we capitalized approximately $148,000 of payroll
related costs compared with $138,000 for the quarter ended January 31, 2004. These capitalized
payroll related costs were from our research and development and quality assurance functions, and
were incurred in connection with the internal development of software that meets technological
feasibility and recoverability tests in accordance with FASB Statement No. 86. PROVISION FOR (BENEFIT FROM) INCOME TAXES. Our income tax provision was recorded at an
effective rate of 46.9% for the quarter ended January 31, 2005 compared with 42.9% for the quarter
ended January 31, 2004. The actual effective tax rate is different from the expected federal rate
of 35% due to certain permanent differences between financial accounting and tax accounting and the
effect of state and federal income taxes and nondeductible expenses on the pre-tax income in the
current year. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $1.8 million of cash for the quarter ended January 31, 2005
compared with $2.5 million for the quarter ended January 31, 2004. The $1.8 million consisted
primarily of our net income of $1,000 adjusted by $3.3 million from depreciation, amortization,
and obsolescence provisions, less a net use of funds of $1.6 million from changes in other
operating assets and liabilities. During the quarter ended January 31, 2004, the $2.5 million
consisted primarily of our net loss of $15,000 adjusted by $2.9 million from depreciation,
amortization, and obsolescence provisions, less a net use of funds of $408,000 from changes in
other operating assets and liabilities. We used approximately $2.7 million of cash in investing activities for the quarter ended
January 31, 2005 compared with $1.5 million of cash for the quarter ended January 31, 2004. The
$2.7 million consisted of $2.5 million of capital expenditures (bingo terminals and associated
support equipment), and the payments for acquisitions of intangible assets and capitalized costs of
developed software of $228,000. During fiscal 2004, the $1.5 million consisted of $2.7 million of
capital expenditures ($2.3 million of bingo terminals and associated support equipment), and
payments for acquisitions of intangible assets and capitalized costs of developed software of
$184,000, partially offset with proceeds received from short-term investments of $1.4 million. We used net cash of $249,000 in financing activities for the quarter ended January 31, 2005
compared with $1.5 million used for the quarter ended January 31, 2004. The $249,000 used for the
quarter ended January 31, 2005 was primarily for cash dividends of $355,000, partially offset with
proceeds from stock option exercises of $106,000. The $1.5 million used for the quarter ended
January 31, 2004 was primarily for cash dividends of $1.4 million and payments of $81,000 on
long-term debt. As of January 31, 2005, we had cash and cash equivalents and short-term investments of
approximately $7.5 million. In addition to our cash and cash equivalents and short-term
investments, we have a $2.5 million line of credit with Wells Fargo Bank, N.A., which has an
interest rate based on the prime rate or London InterBank Offered Rate (LIBOR) plus 2 basis
points, at our option, on which there was no outstanding balance at January 31, 2005. At March 14,
2005, we were not in compliance with certain of the financial covenants and we expect that we will
not be in compliance with such covenants through the April 2, 2005 expiration date. The bank has
agreed to continue the lending relationship; however, the bank reserves the right to terminate the
agreement at their discretion. We expect to renew the revolving credit facility with similar terms
and adjusted covenants; however, no assurance can be made for renewal. We believe that cash flows
from operations and cash, cash equivalents, and short-term investments on hand will be sufficient
to support our operations, provide for budgeted capital expenditures, provide cash collateral for
the posting of a bond to appeal the jury decision relating to our former distributor in Texas, and
meet liquidity requirements through the next twelve months. Our long-term liquidity
requirements will depend on many factors, including the rate at which we expand our business and
whether we do so internally or through acquisitions. In addition, strategic opportunities we may
pursue could require us to fund our portion of operating expenses of such ventures and may require
us 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 our activities in the long term, we may be
required to raise 15




---



##### Table of Contents



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 us. Contractual Obligations The following table summarizes information on contractual obligations as of January 31, 2005: Payments Due by YearOctober 31,(In thousands)RemainingTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterOperating leases
    
    $
    3,431
    
    
    $
    521
    
    
    $
    687
    
    
    $
    577
    
    
    $
    563
    
    
    $
    570
    
    
    $
    513Purchase commitment
    
    
    1,500
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long term obligations
    
    
    269
    
    
    
    12
    
    
    
    76
    
    
    
    21
    
    
    
    22
    
    
    
    23
    
    
    
    115Total contractual cash
obligations
    
    $
    5,200
    
    
    $
    2,033
    
    
    $
    763
    
    
    $
    598
    
    
    $
    585
    
    
    $
    593
    
    
    $
    628
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We maintain an investment portfolio, of approximately $2.6 million, in available-for-sale debt
securities of the U.S. Government and its agencies, and in investment grade corporate issues. The
values of these investments are subject to changes in interest rates. However, because these
investments are short-term and are generally allowed to mature, we do not believe that any risk
inherent in our portfolio is likely to have a material effect on expected cash flows. We monitor
these investments for impairment and make appropriate reductions in carrying value when necessary. Our revolving credit facility with Wells Fargo is a $2.5 million line of credit with an
interest rate based on the prime rate or LIBOR plus 2 basis points, at our option. The agreement
contains certain restrictive covenants, which among other things require that specified financial
balances and ratios be maintained, annual profitability be maintained, restrictions on the
incurrence of additional indebtedness and payment of dividends. The line of credit expires on
April 2, 2005. No assurance can be made for renewal. We currently maintain a zero balance on the
revolving credit facility. At March 14, 2005, we were not in compliance with certain of the
financial covenants and we expect that we will not be in compliance with such covenants through the
April 2, 2005 expiration date. The bank has agreed to continue the lending relationship however,
the bank reserves the right to terminate the agreement at their discretion. Because the interest rate on the revolving credit facility is variable, our cash flow may be
affected by increases in interest rates, in that we would be required to pay more interest in the
event that both the prime and LIBOR interest rates increase. We do not believe, however, that any
risk inherent in the variable-rate nature of the loan is likely to have a material effect on our
interest expense or available cash. Sensitivity Analysis.Assuming we had a $2.0 million balance outstanding as of January 31,
2005, the rate of interest calculated using the prime rate option would be 5.25%. Our monthly
interest payment, if the rate stayed constant, would be $8,750. If the prime rate rose to 8.0%,
which assumes an unusually large increase, our monthly payment would be $13,333. A more likely
increase of 1.0% or 2.0%, given the relatively low interest rates, would result in a monthly
payment of $10,417 or $12,083, respectively. We do not believe the risk resulting from such
fluctuations is material or that the payment required would have a material effect on cash flow. 
 ITEM 4. CONTROLS AND PROCEDURES. We have evaluated, with the participation of our Chief Executive Officer and Acting Principal
Financial Officer, the effectiveness of our disclosure controls and procedures as of January 31,
2005. Based on this evaluation, our Chief Executive Officer and Acting Principal Financial Officer
have each concluded that our disclosure controls and procedures are effective to ensure that we
record, process, summarize, and report information required to be disclosed by us in our quarterly
reports filed under the Securities Exchange Act within the time periods specified by the Securities
and Exchange Commissions rules and forms. During the quarterly period covered by this report,
there have not been any changes in our internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 16




---



##### Table of Contents



CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 This document includes various forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934,
as amended, which represent our expectations or beliefs concerning future events. Statements
containing expressions, such as believes, anticipates, or expects, used in our press releases
and periodic reports on Forms 10-K and 10-Q filed with the Commission, are intended to identify
forward-looking statements. All forward-looking statements involve risks and uncertainties.
Although we believe our expectations are based upon reasonable assumptions within the bounds of our
knowledge of our business and operations, there can be no assurances that actual results will not
materially differ from expected results. We caution that these and similar statements included in
this report are further qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Such factors include those discussed in
our annual report on Form 10-K for the year ended October 31, 2004. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the date thereof. We
undertake no obligation to publicly release any revisions to such forward-looking statements to
reflect events or circumstances after the date hereof. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. On March 22, 2001, we filed a claim in the United States District Court, District of Arizona,
GAMETECH INTERNATIONAL, INC. V. TREND GAMING SYSTEMS, LLC, CV 01-540 PHX PGR, seeking a declaratory
judgment that we are not in material breach of our November 1, 1999 distribution agreement with
Trend Gaming Systems, LLC (Trend) and seeking damages for past due payments and wrongful
withholdings by Trend. Trend has counterclaimed, alleging that its payments are in compliance with
its contractual obligations and that it is entitled to withhold certain monies. Trend also contends
that we are in breach of certain of our contractual obligations to Trend or its customers. On
December 16, 2002, the court entered at our request an order enjoining Trend from using
approximately $540,000 in funds it had collected on our behalf, pending a trial on our ownership
interest in those funds. The money has been placed in a bank account subject to the courts control
and now totals approximately $585,000. In addition, collections of accounts receivable by Trend, if
any, will also be placed in that account, pending the resolution of the case. We have posted a
$450,000 deposit with the court, which is presented as restricted cash on our consolidated balance
sheets. We fully reserved the accounts receivable from Trend as of October 31, 2004 and 2003.
Trend filed a motion for summary judgment alleging that the termination of the distribution
agreement was improper. On May 16, 2003, the court dismissed Trends motion for summary judgment.
On December 2, 2003, Trend filed a renewed motion for summary judgment alleging that we did not
have the right to terminate the distribution agreement based upon Trends failure to ensure that we
received our minimum rate of return. The court, on March 19, 2004, denied Trends renewed motion
for summary judgment. Trial in this matter commenced October 4, 2004. On November 1, 2004, the
jury returned a verdict in favor of Trend against us. The jury awarded Trend $3,527,000 in
compensatory damages. Trend concedes that it is not entitled to prejudgment interest on that sum.
Trend seeks an award of $810,000 in legal fees and $26,000 in expenses and costs. We plan to
contest the fee request. The jury also awarded us $735,000 in compensatory damages for funds Trend
collected on our behalf. We have moved for a new trial. No judgment has been entered in the case.
Should the court not grant a new trial, we intend to post a supersedeas bond to stay collection
while we appeal to the Ninth Circuit Court of Appeals. We expect that we will be required to
collateralize the supersedeas bond with cash. Any cash used in the collateralization of the bond
would be accounted for as restricted cash on our consolidated balance sheets. We cannot provide
assurance that we will succeed in setting the judgment aside by the trial or appellate court. For
the year ended October 31, 2004, we have recorded an estimated loss contingency in the Trend Gaming
Systems litigation of $3,628,000, which is estimated based on the amounts of the judgment described
above. The estimated loss contingency is included in operating expenses in the statement of
operations for the year ended October 31, 2004. There has been no change to the recorded loss
contingency during the current quarter. On October 30, 2002, Capital Gaming Supplies (Capital) filed a claim in the United States
District Court, Southern District of Mississippi, CAPITAL GAMING SUPPLIES, INC. V. GAMETECH
INTERNATIONAL, INC. Civil Action No. 3:02 CV1636WS, seeking a judgment that we tortiously
interfered with alleged existing and prospective customer accounts. We denied the allegations and
filed a counter-claim seeking a judgment that Capital tortiously interfered with our customer
accounts. On April 18, 2003, Capital filed an amended complaint adding 17




---



##### Table of Contents



other claims against us and other defendants, including a claim for malicious breach of contract against International
Gaming Systems, Inc. (IGS), and its principals. In November 2002, we acquired certain assets of
IGS and we assumed certain claims filed by Capital against IGS and its principals. Capital sought
compensatory and punitive damages from all defendants. On September 30, 2004, the district court
entered a summary judgment in favor of all defendants dismissing all of Capitals claims with
prejudice. Capital is currently appealing the judgment to the Fifth Circuit Court of Appeals. We
continue to believe that Capitals claims are without merit and that the district courts judgment
will be affirmed. However, we cannot provide assurance that we will successfully defend the
judgment on appeal. An unfavorable outcome could have a material adverse effect on our financial
position, cash flows, and results of operations. On March 2, 2004 the jury rendered a unanimous verdict in our favor awarding compensatory and
punitive damages against Trend Gaming (involving a prior distribution agreement in Virginia) in the
total amount of approximately $1.5 million. The jury also returned a verdict against Steven W. and
Rhonda Hieronymus awarding compensatory and punitive damages of $1,030,000. The court reduced
compensatory damages against Trend Gaming to $1,055,000. The court affirmed $150,000 in punitive
damages against Trend Gaming and awarded GameTech costs of suit in the amount of $650,000.
Compensatory damages against Mr. and Mrs. Hieronymus have been reduced to $762,000 but the punitive
damage award against them in the amount of $150,000 remains unchanged. Of the total compensatory
damages of $1.1 million awarded to us, $762,000 represents compensation for lost profits. We can
only collect such damages from one of the defendants to avoid a double recovery. We have not
recorded an estimated gain contingency, as we can make no assurances whether we will be able to
collect any award from the defendants. On March 3, 2005, we received an Original Notice of Opportunity to Show Compliance
(Notice) from the Texas Lottery Commission. The Notice alleges that we engaged in acts
prohibited by Sections 2001.553, 2001.556, 2001.206 and 2001.407 of the Texas Bingo Enabling Act
(Enabling Act). The Notice specifically alleges that a former employee of ours, with our
approval, engaged in direct sales and contract negotiations or attempted to induce sales with
commercial lessors and charitable organizations while not licensed to do so; engaged in selling,
distributing, and supplying bingo equipment and supplies without a distributors license; engaged
in pricing acting in concert with distributors, commercial lessors, and charitable organizations, a
potential violation of the Enabling Act; and engaged in direct distribution of bingo supplies and
equipment to persons other than a licensed distributor. The Notice gives us the ability to
demonstrate compliance with the Enabling Act prior to a hearing. In the event that we are found to have violated the Enabling Act, administrative penalties, up
to and including revocation of our Texas license, could be imposed. We deny the allegations and
intend to defend vigorously this matter. However, we cannot provide assurance that we will prevail
in this matter or that any administrative penalties that may be imposed will not have a material
adverse effect on our financial position, cash flows, and results of operations. We are involved in various other legal proceedings arising in our operations in the ordinary
course of our business. We do not believe that any of these proceedings will have a material
adverse effect on our business, financial condition, cash flows, or results of operations beyond
the amounts recorded in the accompanying condensed consolidated financial statements. However, if
settlement is not reached and the lawsuits proceed to trial, an unfavorable outcome could have a
material adverse effect on our financial position, cash flows, and results of operations. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not Applicable 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable 
 ITEM 5. OTHER INFORMATION. Not Applicable 18




---



##### Table of Contents



ITEM 6. EXHIBITS.  a)
EXHIBITS:  31
    Certification of President, Chief Executive Officer, Director, and Acting
Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.32
    Certification of President, Chief Executive Officer, Director, and Acting
Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 19




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Signature
    
    Title
    
    Date/S/ John B. FurmanPresident, Chief Executive Officer, and Director
    
    March 17, 2005John B. Furman
    
    (Principal Executive Officer and Acting Principal Financial Officer)/S/ Ann D. McKenzieCorporate Controller
    
    March 17, 2005Ann D. McKenzie
    
    (Principal Accounting Officer)
 20




---



##### Table of Contents



Exhibit Index ExhibitNumber
    
    Description31
    
    Certification of President, Chief Executive Officer, Director, and Acting Principal
Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as amended.32
    
    Certification of President, Chief Executive Officer, Director, and Acting Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 21