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SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004 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
(State or other jurisdiction
of incorporation or organization)
    
    33-0612983
(I.R.S. Employer Identification No.)
 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 x    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes o    No x On September 8, 2004, the registrant had 11,797,014 outstanding shares of
its Common Stock, par value $0.001 per share.




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GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10 Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004
INDEX PageNo.Part I. Financial Information:Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
October 31, 2003 and July 31, 2004
    
    
    3Condensed Consolidated Statements of Operations
Three Months and Nine months Ended July 31, 2003 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows
Nine months Ended July 31, 2003 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16Part II. Other Information:Item 1. Legal Proceedings
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    
    18Signatures
    
    
    19Exhibit 10.26Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 October 31,
    
    July 31,2003
    
    2004(Note A)
    
    (Unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    10,202
    
    
    $
    5,440Short-term investments
    
    
    1,750
    
    
    
    2,513Accounts receivable, less allowance for
doubtful accounts of $2,287 in 2003 and
$2,419 in 2004
    
    
    3,624
    
    
    
    3,723Deposits
    
    
    28
    
    
    
    25Refundable income taxes
    
    
    231
    
    
    
    182Prepaid expenses and other current assets
    
    
    341
    
    
    
    729Deferred income taxes
    
    
    2,185
    
    
    
    2,032Total current assets
    
    
    18,361
    
    
    
    14,644Bingo equipment, furniture and other equipment, net
    
    
    22,319
    
    
    
    24,970Goodwill, net
    
    
    16,809
    
    
    
    16,809Intangibles, less accumulated amortization of
$2,089 in 2003 and $3,277 in 2004
    
    
    2,236
    
    
    
    1,789Restricted cash
    
    
    450
    
    
    
    450Total assets
    
    $
    60,175
    
    
    $
    58,662Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    783
    
    
    $
    990Accrued payroll and related obligations
    
    
    754
    
    
    
    1,037Other accrued liabilities
    
    
    1,743
    
    
    
    1,895Note payable and other obligations
    
    
    275
    
    
    
    Total current liabilities
    
    
    3,555
    
    
    
    3,922Non-current employment obligations
    
    
    448
    
    
    
    413Deferred income taxes
    
    
    3,551
    
    
    
    3,551Commitments and contingenciesStockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 13,592,764 shares issued at October
31, 2003 and 13,652,339 shares issued at July
31, 2004
    
    
    14
    
    
    
    14Capital in excess of par value
    
    
    46,655
    
    
    
    46,850Retained earnings
    
    
    14,048
    
    
    
    12,008Less: Treasury stock, at cost: 1,855,325 shares
at October 31, 2003 and at July 31, 2004
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    52,621
    
    
    
    50,776Total liabilities and stockholders equity
    
    $
    60,175
    
    
    $
    58,662
 See accompanying notes. 3




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004(Unaudited)
    
    (Unaudited)Revenue
    
    $
    12,776
    
    
    $
    12,916
    
    
    $
    39,295
    
    
    $
    38,889Cost of revenue
    
    
    5,905
    
    
    
    6,340
    
    
    
    16,768
    
    
    
    18,036Gross profit
    
    
    6,871
    
    
    
    6,576
    
    
    
    22,527
    
    
    
    20,853Operating expenses:General and administrative
    
    
    2,650
    
    
    
    2,314
    
    
    
    8,651
    
    
    
    8,051Sales and marketing
    
    
    2,929
    
    
    
    3,028
    
    
    
    9,324
    
    
    
    9,459Research and development
    
    
    974
    
    
    
    1,066
    
    
    
    2,851
    
    
    
    3,079Total operating expenses
    
    
    6,553
    
    
    
    6,408
    
    
    
    20,826
    
    
    
    20,589Income from operations
    
    
    318
    
    
    
    168
    
    
    
    1,701
    
    
    
    264Interest and other income (expense), net
    
    
    (14
    )
    
    
    31
    
    
    
    13
    
    
    
    11Income before provision for income taxes
    
    
    304
    
    
    
    199
    
    
    
    1,714
    
    
    
    275Provision for income taxes
    
    
    52
    
    
    
    166
    
    
    
    715
    
    
    
    199Net income
    
    $
    252
    
    
    $
    33
    
    
    $
    999
    
    
    $
    76Basic net income per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.01Diluted net income per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.08
    
    
    $
    0.01Shares used in the calculation of net income per
share:Basic
    
    
    11,732,222
    
    
    
    11,781,942
    
    
    
    11,682,194
    
    
    
    11,758,750Diluted
    
    
    11,754,021
    
    
    
    11,971,145
    
    
    
    11,861,622
    
    
    
    11,923,559Cash dividends per common share
    
    $
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.18
 See accompanying notes. 4




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Nine months EndedJuly 31,2003
    
    2004(unaudited)Cash flows from operating activities:Net income
    
    $
    999
    
    
    $
    76Adjustments to reconcile net income to net cash provided by operating
activities net of effects of acquired business:Depreciation, amortization and obsolescence
    
    
    8,036
    
    
    
    9,441Loss on disposals of furniture and other equipment
    
    
    45
    
    
    
    28Deferred income taxes
    
    
    
    
    
    
    153Changes in operating assets and liabilities:Accounts receivable, net
    
    
    125
    
    
    
    (99
    )Deposits
    
    
    544
    
    
    
    3Refundable income taxes
    
    
    3,888
    
    
    
    49Prepaid expenses and other current assets
    
    
    13
    
    
    
    (388
    )Accounts payable
    
    
    (439
    )
    
    
    207Accrued payroll and related obligations
    
    
    (102
    )
    
    
    283Other accrued liabilities
    
    
    (309
    )
    
    
    185Non-current employment obligations
    
    
    (9
    )
    
    
    (68
    )Net cash provided by operating activities
    
    
    12,791
    
    
    
    9,870Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    3,519
    
    
    
    1,750Payments for purchase of short-term investments
    
    
    (693
    )
    
    
    (2,513
    )Capital expenditures for bingo equipment, furniture and equipment
    
    
    (7,255
    )
    
    
    (10,932
    )Payment for the acquisition of International Gaming Systems, Inc.
    
    
    (3,469
    )
    
    
    Payments for buy out of distributor agreements
    
    
    (600
    )
    
    
    Payments for acquisitions of intangible assets and capitalized costs
of developed software
    
    
    (509
    )
    
    
    (741
    )Net cash used in investing activities
    
    
    (9,007
    )
    
    
    (12,436
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (194
    )
    
    
    (275
    )Payment of dividends
    
    
    
    
    
    
    (2,116
    )Proceeds from sales of common stock
    
    
    531
    
    
    
    195Net cash provided by (used in) financing activities
    
    
    337
    
    
    
    (2,196
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,121
    
    
    
    (4,762
    )Cash and cash equivalents at beginning of period
    
    
    4,233
    
    
    
    10,202Cash and cash equivalents at end of period
    
    $
    8,354
    
    
    $
    5,440Supplemental disclosure of non-cash investing activities:Purchase of intangible assets through the incurrence of long-term debt
    
    $
    537
    
    
    $
    
 See accompanying notes. 5




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GAMETECH INTERNATIONAL, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JULY 31, 2004
(UNAUDITED) NOTES TO FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements as
of July 31, 2004 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- and nine-month periods ended July 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2004. The balance sheet at October 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States 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, 2003. 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 Revenue is recognized 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 and royalties.
We recognize revenue 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 to determine whether collectibility is reasonably assured.
Should changes in conditions cause us to determine the factors are not met for
future transactions, revenue recognized for future reporting periods could be
adversely affected. ALLOWANCE FOR DOUBTFUL ACCOUNTS 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 customers and
distributors for credit worthiness, economic trends, change in 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




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BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT Bingo equipment includes file servers, callers units, point-of-sale
units, other support equipment and the portable and fixed-base player
terminals. 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 our 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 and 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 our bingo terminals and our reported operating results. 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 legal claims and legal proceedings.
Periodically, we review the status of each significant matter and assess our
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
can be reasonably estimated. Because of uncertainties related to these
matters, accruals are based only on the 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 our
estimates. Such revisions in the estimates of 7




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the potential liabilities could have a material impact on our consolidated
results of operations and financial position. See Note E of Notes to these
Condensed Consolidated Financial Statements for a description of our material
legal proceedings. 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 Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2003
    
    2004
    
    2003
    
    2004Net income, as reported
    
    $
    252
    
    
    $
    33
    
    
    $
    999
    
    
    $
    76Deduct: Total
stock-based employee compensation expense
determined under fair
value based method, net of related tax effects
    
    
    (133
    )
    
    
    (56
    )
    
    
    (350
    )
    
    
    (228
    )Pro forma net income (loss)
    
    $
    119
    
    
    $
    (23
    )
    
    $
    649
    
    
    $
    (152
    )Net income (loss) per share:Basic  as reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.09
    
    
    $
    0.01Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.06
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.08
    
    
    $
    0.01Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.06
    
    
    $
    (0.01
    )
 NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 00-21, Multiple-Deliverable Revenue Arrangements (Issue
00-21). Issue 00-21 addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to
use assets. The consensus mandates how to identify whether goods or services or
both that are to be delivered separately in a bundled sales arrangement should
be accounted for separately because they are separate units of accounting.
The guidance can affect the timing of revenue recognition for such
arrangements, even though it does not change rules governing the timing or
pattern of revenue recognition of individual items accounted for separately.
The final consensus will be applicable to agreements entered into in fiscal
years beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The
adoption of Issue 00-21 did not have a material impact on our financial
position, cash flows or results of operations. 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 8




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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 entered
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. NOTE C. ACQUISITION OF ASSETS On November 7, 2002, we acquired certain assets of International Gaming
Systems, Inc. for a cash purchase price of $3.5 million, which included
approximately $69,000 of acquisition costs. The transaction was accounted for
as a purchase of a business in accordance with SFAS No. 141, Business
Combinations, and accordingly, the operating results have been included in our
consolidated financial statements since the date of acquisition. The total purchase price of the transaction has been allocated to the
identifiable intangible assets and tangible assets acquired, based on their
estimated fair values at the date of acquisition, with any residual amount
allocated to goodwill as follows: (In thousands)Acquired assets:Bingo equipment
    
    $
    582Intellectual property
    
    
    750Distributor contracts
    
    
    260Trademarks
    
    
    28Goodwill
    
    
    1,849$
    3,469
 The maximum potential contingent payments relating to the acquisition were
$2,043,000, which was placed in escrow pending the outcome of certain events.
The escrow was comprised of the following four components: $900,000 (the New
York Escrow Amount); $413,000 (the Title Transfer Escrow Amount); $230,000
(the Bingo Unit Escrow Amount); and $500,000 (the Holdback Escrow Amount).
The full amount of the Title Transfer Escrow Amount, the Bingo Unit Escrow
Amount and the Holdback Escrow Amount has been released to IGS as a result of
the successful transfer of title of certain assets to us, the verification of
the number of bingo terminals acquired and the satisfaction of certain
representations and warranties made by IGS. These amounts have been included
in the purchase price allocated to the assets acquired. The release of the New
York Escrow Amount is contingent upon the negotiation of new contracts with
IGSs former New York customers or the receipt by us of continuing revenues
from the New York customers. As of July 31, 2004, $882,938 of the New York
Escrow Amount has been released to IGS. The entire amount of the New York
Escrow Amount has been included in the purchase price allocated to the assets
acquired as we currently consider it probable that the remaining funds will be
paid to IGS. NOTE D. NET INCOME PER SHARE OF COMMON STOCK The calculation of the basic and diluted net income per share is the same
except for the dilutive effect of outstanding stock options (determined using
the treasury stock method). The dilution was 21,799 and 189,203 shares for the
three months ended July 31, 2003 and 2004, respectively. The dilution was
179,428 and 164,809 shares for the nine months ended July 31, 2003 and 2004,
respectively. NOTE E. 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 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 trial of the case. 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 9




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have the right to terminate the distribution agreement based upon Trends
failure to insure that we received our minimum rate of return. The court, on
March 19, 2004 denied Trends renewed motion for summary judgment. A May 10,
2004 trial date has been rescheduled for October 4, 2004. We have denied the
allegations and intend to vigorously pursue and defend this matter. However,
we cannot provide assurance that we will obtain a favorable outcome. An
unfavorable outcome could have a material adverse effect on our financial
position, cash flows and results of operations. In June 2004, Steven W. Hieronymus, Rhonda Hieronymus and Trend Gaming
Systems, LLC filed a claim in the 98th Judicial District Court, Travis County,
Texas, STEVEN W. HIERONYMUS, RHONDA HIERONYMUS AND TREND GAMING SYSTEMS, LLC V.
THE TEXAS LOTTERY COMMISSION AND GAMETECH INTERNATIONAL, INC, alleging that our
judgment against Steven and Rhonda Hieronymus (involving a prior distribution
agreement in Virginia) creates an unlawful credit interest in Trend Gaming
Systems, LLC in violation of the Texas Bingo Enabling Act because Mr.
Hieronymus owns a greater than 10% interest in Trend Gaming Systems, LLC. The
plaintiffs request an injunction against our enforcement of the judgment
against Steven and Rhonda Hieronymus. The plaintiffs have moved for summary
judgment and we have filed a cross motion for summary judgment on the issue.
Neither motion has been set for hearing. No discovery has been done and no
trial date is scheduled. We intend to vigorously defend our position.
However, we cannot provide assurance that we will obtain a favorable outcome.
An unfavorable outcome could have a material adverse effect on our financial
position, cash flows and results of operations. On October 30, 2002, Capital Gaming Supplies filed a claim in the United
States District Court, Southern District of Mississippi, CAPITAL GAMING
SUPPLIES, INC. V. GAMETECH INTERNATIONAL, INC., 3:02 CV 1636 WS, seeking a
judgment that we tortiously interfered with alleged existing and prospective
customer accounts. We have 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 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 seeks compensatory and punitive damages from
all defendants. The January 28, 2004 trial date has been postponed
indefinitely. We intend to defend and pursue vigorously this matter. We
believe that Capitals claims are without merit. However, we cannot provide
assurance that we will obtain a favorable outcome. An unfavorable outcome could
have a material adverse effect on our financial position, cash flows and
results of operations. We are involved in various other legal proceedings arising out of our
operations in the ordinary course of our business. We do not believe that any
of those proceedings will have a material adverse effect on our financial
position, cash flows or results of operations. 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. NOTE F. 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, and 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. The agreement is secured by substantially
all our assets. The agreement contains certain restrictive covenants, which
among other things require that specified financial balances and ratios be
maintained, profitability be maintained on a rolling four quarter basis, and
restrict the incurrence of additional indebtedness. At July 31, 2004, there
was no outstanding balance under the line-of-credit. NOTE G. INCOME TAXES Our income tax provision was recorded at an effective rate of 72.3% for
the nine-months ended July 31, 2004 compared to 41.7% for the nine months ended
July 31, 2003. The actual effective tax rate is different from the expected
federal rate of 35% due to certain permanent differences between financial and
tax accounting and state income taxes. 
 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, 2003 contained in our annual report on Form 10-K. The
following discussion contains 10




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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, 2003. OVERVIEW We design, develop, and market interactive electronic bingo systems. We
currently market portable systems that can be played anywhere within a bingo
hall and a fixed-base system with touchscreen-activated monitors. For our three
most recent fiscal years ended October 31, 2001, 2002 and 2003, our portable
terminals generated approximately 77%, 77% and 73% of our revenues,
respectively, while, during those same years, our fixed-base terminals
generated the balance of our revenues. For the three- and nine-months ended
July 31, 2004, portable terminals accounted for 74% of our revenues and
fixed-based terminals accounted for 26% of our revenues. As of July 31, 2004,
we had systems in service in 35 states and in five foreign countries. We generate revenue by placing electronic 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 revenues generated by each
terminal. Revenue growth is affected by player acceptance of electronic bingo
as an addition or an alternative to paper bingo, and our ability to expand
operations into new markets. 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 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 bingo systems
within bingo halls, depreciation of bingo systems, repair, refurbishment, and
disposals of bingo terminals and related support equipment, and excess or
obsolescence reserve; (b) general and administrative, consisting of activities
associated with management of our company and related support, which includes
finance and accounting, legal, compliance, information systems, and human
resources; (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. During the first nine months of fiscal 2004, the following events occurred
that affected, or may in the future affect, our results of operations or
liquidity and capital resources. We have incurred significant expenses in aggressively defending or
pursuing certain legal issues, including defense of a patent infringement
lawsuit in Nevada, our litigation with a former distributor in Texas, and
litigation with a former distributor for IGS in Mississippi. The terms of the
terminated distributor agreement with the former Texas distributor contain
certain contingent commission liabilities, which if a final judgment were
rendered unfavorable to us, could have an adverse effect on our financial
position, results of operations and liquidity. The contingent commission
liabilities, only if determined at trial to be payable, would be calculated
based on terms included in the terminated distributor agreement. Assuming
revenues for the three-year period following termination of the distributor
agreement remained constant at the rate earned over the first 23 months
following termination of the distributor agreement, the contingent liability
would amount to approximately $2.1 million. Regarding the patent infringement
matter, an unfavorable outcome at trial could result in substantial damages and
payment of the plaintiffs fees and costs. The Mississippi distributor lawsuit
could result in a punitive damages award which could be materially adverse to
our company. We have not accrued any amount related to these contingent
liabilities. We have denied the allegations
and intend to vigorously pursue and defend this matter. We are involved in various other legal proceedings arising out of the
ordinary course of our business. While we do not believe that any of those
proceedings will have a material adverse effect on our financial position, cash
flows or results of operations, they do sometimes result in significant
expenses in defending or pursuing our legal position. One such matter
involving a terminated distributor in Virginia and Kentucky went to trial
during February 2004. On March 2, 2004 the jury rendered a unanimous verdict
in our favor awarding compensatory and punitive damages against Trend Gaming in
the total amount of approximately $1.5 million. The court reduced compensatory
damages against Trend Gaming to $1,055,330 but has upheld the $150,000 in
punitive damages awarded against Trend Gaming. Compensatory damages against Mr.
and Mrs. Hieronymus have been reduced to $761,851 but the punitive 11




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damage award against them in the amount of $150,000 remains unchanged. Of
the total compensatory damages of $1,055,330 awarded against both sets of
defendants, $761,851 represents compensation for lost profits. We can only
collect such damages from one of the defendants to avoid a double recovery. We
have petitioned the court for an award against Trend Gaming for our legal fees
and costs. We can make no assurances whether we will be able to collect any
award from the defendants. While this particular matter appears to be resolved, we anticipate that
our legal expenses will continue at an elevated level as trial dates in two
other proceedings have been set for fiscal 2004. We have significantly increased the staffing in our research and
development and quality assurance departments. We expect to maintain a high
level of expenditures in these areas as we focus on new product development and
new features that can be added to our existing equipment. On January 16, 2004, we paid our first ever cash dividend. The one-time
special dividend of $0.12 per share aggregated approximately $1.4 million. On
March 31, 2004, a regular quarterly dividend of $0.03 per share was paid to
stockholders of record as of March 22, 2004 and aggregated approximately
$353,000. Additionally, on July 12, 2004, a regular quarterly dividend of
$0.03 per share was paid to stockholders of record as of July 1, 2004 and
aggregated approximately $354,000. During the first nine-month period of fiscal 2004, our capital
expenditures were approximately $10.9 million, $10.2 million of which
represented investments in bingo and related support equipment. 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 date 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 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 the Condensed Consolidated Financial Statements
contained elsewhere in this report. Critical accounting policies are those that require management 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. 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 competitors 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 financial
position, cash flows and results of operations. 12




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RESULTS OF OPERATIONS Three Months Ended July 31, 2004 Compared with Three Months Ended July 31, 2003 REVENUE. We generated revenue of $12.9 million for the three-months ended
July 31, 2004 compared to $12.8 million for the comparable prior-year period.
The modest increase in revenue from the third quarter of fiscal 2003 was due to
growth in the installed base of terminals and revenue per terminal in certain
geographical markets and, to a lesser degree, the contribution from the growing
deployment of our Pay-N-Play feature. These factors were sufficient to offset
a decline in the installed base in other geographical markets and the effects
of competitive pricing pressure in certain markets. COST OF REVENUE. Cost of revenue increased $435,000, or 7.4%, to $6.3
million for the three months ended July 31, 2004 from $5.9 million for the
comparable prior-year period. Cost of revenue as a percent of revenue for the
current three-month period increased to 49.1% compared to 46.2% for the
three-months ended July 31, 2003. The increase in cost of revenue over the
prior year third quarter was the result of an increase of nearly $308,000 in
depreciation and amortization expense, primarily due to our investment in TED 2
C portable color terminals, Traveler portable color terminals and continuing
purchases of our fixed base terminals. We expect the higher level of
depreciation expense to continue as we invest in our new color portable
terminal, the Traveler, and our fixed-base terminals. Disposals of bingo
terminals and related support equipment, and the excess and obsolescence
reserve increased approximately $172,000. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$336,000, or 12.7%, to $2.3 million for the three months ended July 31, 2004
from $2.7 million for the comparable prior-year period. General and
administrative costs as a percent of revenue were 17.9% for the current period,
down from 20.7% for the prior year three-month period. The third quarter of
fiscal 2003 included elevated levels of legal expenses, including those related
to defense of a patent infringement lawsuit in Nevada, litigation with a former
distributor in Texas, litigation with a former distributor of IGS in
Mississippi, and other legal proceedings including our successful litigation
against a former distributor in Virginia and Kentucky and a Virginia
sub-distributor in late 2003. Subject to collectibility, we were awarded at
least $2.1 million in damages in these victories, however, no such amounts have
been recorded. SALES AND MARKETING. Sales, marketing, and commission expenses increased
$99,000, or 3.4%, to $3.0 million for the three months ended July 31, 2004 from
$2.9 million for the comparable prior-year period. Sales, marketing, and
commission expenses as a percent of revenue for the current three-month period
were 23.4% compared to 22.9% for the three months ended July 31, 2003.
Distributor commissions increased $107,000 to $2.1 million for the three months
ended July 31, 2004. Commissions will fluctuate because the mix of revenue
generated by distributors and those customers we serve directly varies. RESEARCH AND DEVELOPMENT. Research and development costs increased
$92,000, or 9.4%, to $1.1 million for the three months ended July 31, 2004 from
$974,000 for the comparable prior-year period. Research and development costs
as a percent of revenue for the current three-month period were 8.3% compared
to 7.6% for the three months ended July 31, 2003. The emphasis on new product
development and feature enhancements for existing products continues as a major
focus. During the third quarter of fiscal 2004, we capitalized $241,000 of costs,
from our research and development and quality assurance functions, connected
with the internal development of software that meets technological feasibility
and recoverability tests in accordance with FASB Statement No. 86. We had no
such capitalized costs in the third quarter of fiscal 2003. PROVISION FOR INCOME TAXES. Our income tax provision was adjusted during
the current quarter to recognize an effective fiscal-year rate of 72.3%.
Consequently, the rate for the quarter ended July 31, 2004 was 83.6% compared
to 17.1%, which was adjusted last year for an effective fiscal-year rate of
41.7%, for the quarter ended July 31, 2003. The actual effective tax rate is
different from the expected federal rate of 35% due to certain permanent
differences between financial and tax accounting and state income taxes. Nine Months Ended July 31, 2004 Compared with Nine Months Ended July 31, 2003 REVENUE. We generated revenue of $38.9 million for the nine months ended
July 31, 2004 compared to $39.3 million for the comparable prior-year period.
The $406,000, or 1.0%, net decrease in revenue from the first nine months of
fiscal 2003 occurred during the first quarter of fiscal 2004 and was due to
several factors, including fewer installed terminals in some geographical
markets and price erosion due to competition in others. We believe 13




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the introduction of feature enhancements to existing products and the
availability of new products will provide for future revenue growth. However,
the time required to move newly developed features and products through beta
testing and regulatory approvals, where required, is difficult to predict. Our
newest portable color terminal, the Traveler, began with limited nationwide
rollout in the third fiscal quarter of fiscal 2004. COST OF REVENUE. Cost of revenue increased $1.3 million, or 7.6%, to
$18.0 million for the nine months ended July 31, 2004 from $16.8 million for
the comparable prior-year period. Cost of revenue as a percent of revenue for
the current nine-month period increased to 46.4% compared to 42.7% for the nine
months ended July 31, 2003. The increase in cost of revenue over the prior year
nine-month period was the result of an increase of $883,000 in depreciation
and amortization expense, primarily due to our investment in TED 2 C portable
color terminals, Traveler portable color terminals, and our fixed-base
terminals, an increase of $274,000 in service cost due to increased staffing in
field and product support centers and a $105,000 increase in operations expense
that includes our quality assurance function that we have expanded to keep pace
with the development of new features and new products. Additionally, costs
associated with the repair, refurbishment and disposal of bingo terminals and
related support equipment increased $121,000. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$600,000, or 6.9%, to $8.1 million for the nine months ended July 31, 2004 from
$8.7 million for the comparable prior-year period. General and administrative
costs as a percent of revenue for the current nine-month period were 20.7%
compared to 22.0% for the prior year nine month period. The first nine-months
of fiscal 2003 and fiscal 2004 included elevated levels of legal expenses,
including those related to defense of a patent infringement lawsuit in Nevada,
litigation with a former distributor in Texas, litigation with a former
distributor of IGS in Mississippi, and other legal proceedings including our
successful litigation against a former distributor in Virginia and Kentucky and
a Virginia sub-distributor in late 2003. The improvement in general and
administrative costs came as a net result of a decrease of $418,000 in
consulting fees and in outside legal fees of $356,000; partially offset with
increases of $52,000 in bad debt expense and outside accounting fees of
$62,000. SALES AND MARKETING. Sales, marketing, and commission expenses increased
$135,000, or 1.4%, to $9.5 million for the nine months ended July 31, 2004.
Sales, marketing, and commission expenses as a percent of revenue for the
current nine-month period were 24.3% compared to 23.7% for the nine months
ended July 31, 2003. Distributor commissions increased $57,000 to $6.5 million
for the nine months ended July 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 $78,000 as a
result of increases in non-payroll costs such as travel, marketing, facilities
and property taxes. RESEARCH AND DEVELOPMENT. Research and development costs increased
$228,000, or 8.0%, to $3.1 million for the nine months ended July 31, 2004 from
$2.9 million for the comparable prior-year period. Research and development
costs as a percent of revenue for the current nine-month period were 7.9%
compared to 7.3% for the nine months ended July 31, 2003. The emphasis on new
product development and feature enhancements for existing products continues as
a major focus. During the first nine months of fiscal 2004, we capitalized approximately
$594,000 of costs, from our research and development and quality assurance
functions, connected with the internal development of software that meets
technological feasibility and recoverability tests in accordance with FASB
Statement No. 86. We had no such capitalized costs in the first nine months of
fiscal 2003. PROVISION FOR INCOME TAXES. Our income tax provision was recorded at an
effective rate of 72.3% for the nine months ended July 31, 2004 compared to
41.7% for the nine months ended July 31, 2003. The actual effective tax rate
is different from the expected federal rate of 35% due to certain permanent
differences between financial and tax accounting and state income taxes. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $9.9 million of cash for the nine months
ended July 31, 2004 compared to $12.8 million for the nine months ended July
31, 2003. The $9.9 million consisted primarily of our income of $76,000
adjusted by $9.4 million of non-cash expense for depreciation, amortization,
and obsolescence provisions, and $353,000 provided by changes in other
operating assets and liabilities. During the nine months ended July 31, 2003,
the $12.8 million provided by operating activities consisted primarily of net
income of $999,000 adjusted by $8.0 million of non-cash expense for
depreciation, amortization and obsolescence reserves, $3.9 million from
refunded income taxes offset by $132,000 from changes in other operating assets
and liabilities. 14




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We used approximately $12.4 million of cash in investing activities for
the nine months ended July 31, 2004 compared to the $9.0 million of cash
invested during the nine months ended July 31, 2003. In fiscal 2004, the $12.4
million consisted of $10.9 million of capital expenditures ($10.2 million of
which was expended on bingo terminals and associated support equipment), the
purchase and development of other intangible assets for a total of $741,000,
and an increase in short-term investments of $763,000. During fiscal 2003, the
$9.0 million consisted of $7.3 million of capital expenditures ($6.7 million of
which was expended on bingo terminals and associated support equipment), the
purchase of certain assets of IGS and other intangible assets for a total of
$4.6 million and a decrease in short-term investments of $2.8 million. We used net cash of $2.2 million in financing activities for the nine
months ended July 31, 2004 compared to $337,000 provided by financing
activities for the nine months ended July 31, 2003. The $2.2 million used for
the nine months ended July 31, 2004 was primarily for cash dividends of $2.1
million, payments of $275,000 on long-term debt, less proceeds from stock
option exercises of $194,000. The $337,000 provided for the nine months ended
July 31, 2003 was primarily proceeds from stock option exercises of $531,000,
offset by payments of $194,000 on long-term debt. As of July 31, 2004, we had cash and cash equivalents and short-term
investments of approximately $8.0 million. In addition to our cash and cash
equivalents and short-term investments, we have a $5.0 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 2.0%, at our option, on which
there was no outstanding balance at July 31, 2004. The revolving credit
facility expires on April 2, 2005. 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, make dividend payments, and meet liquidity requirements through
the remainder of fiscal 2004. 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 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 July 31, 2004: Payments Due by YearOctober 31,(In thousands)RemainingTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterOperating Leases
    
    $
    3,833
    
    
    $
    234
    
    
    $
    729
    
    
    $
    714
    
    
    $
    587
    
    
    $
    545
    
    
    $
    1,024Other Long Term Obligations
    
    
    659
    
    
    
    9
    
    
    
    42
    
    
    
    44
    
    
    
    45
    
    
    
    45
    
    
    
    474Total Contractual Cash
Obligations
    
    $
    4,492
    
    
    $
    243
    
    
    $
    771
    
    
    $
    758
    
    
    $
    632
    
    
    $
    590
    
    
    $
    1,498
 Purchase Commitments From time to time, we enter into commitments with our vendors to purchase
terminals and support equipment at fixed prices or guaranteed quantities.
During the second quarter of this fiscal year, we entered into such an
agreement with one of our vendors to provide approximately $5.2 million in
Traveler terminals, with the majority of the terminals to be delivered by the
end of the current fiscal year. At July 31, 2004, $4.6 million of the
commitment was outstanding. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We maintain an investment portfolio in available-for-sale debt securities
of the U.S. Government and its agencies, and from time to time 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. 15




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Our revolving credit facility with Wells Fargo is a $5.0 million line of
credit with an interest rate based on the prime rate or LIBOR plus 2.0%, 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 and restrictions on the
incurrence of additional indebtedness. The line of credit expires on April 2,
2005. 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. We currently have no outstanding borrowings
under the revolving credit facility. Sensitivity Analysis.Assuming we had a $2.0 million balance
outstanding as of July 31, 2004, the rate of interest calculated using the
prime rate option would be 4.25%. Our monthly interest payment, if the rate
stayed constant, would be $7,083. 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 recent trend of decreasing or
relatively low interest rates, would result in a monthly payment of $8,750 or
$10,417, 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 Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of July 31, 2004. Based on this evaluation, our Chief Executive
Officer and Chief 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. 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, 2003. 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 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 16




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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 trial of the case. 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 insure that we received
our minimum rate of return. The court, on March 19, 2004 denied Trends
renewed motion for summary judgment. A May 10, 2004 trial date has been
rescheduled for October 4, 2004. We have denied the allegations and intend to
vigorously pursue and defend this matter. However, we cannot provide assurance
that we will obtain a favorable outcome. An unfavorable outcome could have a
material adverse effect on our financial position, cash flows and results of
operations. In June 2004, Steven W. Hieronymus, Rhonda Hieronymus and Trend Gaming
Systems, LLC filed a claim in the 98th Judicial District Court, Travis County,
Texas, STEVEN W. HIERONYMUS, RHONDA HIERONYMUS AND TREND GAMING SYSTEMS, LLC V.
THE TEXAS LOTTERY COMMISSION AND GAMETECH INTERNATIONAL, INC, alleging that our
judgment against Steven and Rhonda Hieronymus (involving a prior distribution
agreement in Virginia) creates an unlawful credit interest in Trend Gaming
Systems, LLC in violation of the Texas Bingo Enabling Act because Mr.
Hieronymus owns a greater than 10% interest in Trend Gaming Systems, LLC. The
plaintiffs request an injunction against our enforcement of the judgment
against Steven and Rhonda Hieronymus. The plaintiffs have moved for summary
judgment and we have filed a cross motion for summary judgment on the issue.
Neither motion has been set for hearing. No discovery has been done and no
trial date is scheduled. We intend to vigorously defend our position.
However, we cannot provide assurance that we will obtain a favorable outcome.
An unfavorable outcome could have a material adverse effect on our financial
position, cash flows and results of operations. On October 30, 2002, Capital Gaming Supplies filed a claim in the United
States District Court, Southern District of Mississippi, CAPITAL GAMING
SUPPLIES, INC. V. GAMETECH INTERNATIONAL, INC., 3:02 CV 1636 WS, seeking a
judgment that we tortiously interfered with alleged existing and prospective
customer accounts. We have 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 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 seeks compensatory and punitive damages from
all defendants. The January 28, 2004 trial date has been postponed
indefinitely. We intend to defend and pursue vigorously this matter. We
believe that Capitals claims are without merit. However, we cannot provide
assurance that we will obtain a favorable outcome. An unfavorable outcome could
have a material adverse effect on our financial position, cash flows and
results of operations. We are involved in various other legal proceedings arising out of 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 financial
condition, cash flows or results of operations. 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. UNREGISTERED SALES OF EQUITY 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 17




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ITEM 6. EXHIBITS AND REPORT ON FORM 8-K a)EXHIBITS:10.26
    
    Employment Agreement dated August 3, 2004 between the
Registrant and Cornelius T. Klerk.31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES Pursuant to the requirements 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. Furman

John B. Furman
    
    Chief Executive Officer and President
(Principal Executive Officer)
    
    September 14, 2004/S/ Cornelius T. Klerk

Cornelius T. Klerk
    
    Chief Financial Officer,
(Principal Financial Officer)
    
    September 14, 2004/S/ Ann D. McKenzie

Ann D. McKenzie
    
    Corporate Controller,
(Principal Accounting Officer)
    
    September 14, 2004
 19