##### Table of Contents



UNITED STATES 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 JULY 31, 2006
 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
  þ o
  o o þ
 o þ




---



##### 



GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2006
INDEX
 PageNo.Part I. Financial Information:Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of July 31, 2006
(Unaudited) and October 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended July 31, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended July 31, 2006 and 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18Part II. Other Information:Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    22EX-10.1EX-31.1EX-32.1
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
 GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 July 31,
    
    
    October 31,2006
    
    
    2005(Unaudited)
    
    
    (Note A)Assets:Current assets:Cash and cash equivalents
    
    $
    7,661
    
    
    $
    6,330Short-term investments
    
    
    3,803
    
    
    
    503Accounts receivable, less allowance of $2,125 in 2006 and $2,374 in 2005
    
    
    3,801
    
    
    
    3,573Deposits
    
    
    119
    
    
    
    21Refundable income taxes
    
    
    
    
    
    
    742Restricted short-term investments
    
    
    4,515
    
    
    
    4,581Prepaid expenses and other current assets
    
    
    404
    
    
    
    326Deferred income taxes
    
    
    2,886
    
    
    
    2,549Total current assets
    
    
    23,189
    
    
    
    18,625Bingo equipment, furniture and other equipment, net
    
    
    22,095
    
    
    
    20,060Goodwill, net
    
    
    10,184
    
    
    
    10,184Intangibles, less accumulated amortization of $3,889 in 2006 and $4,335 in 2005
    
    
    1,398
    
    
    
    1,811Restricted cash
    
    
    479
    
    
    
    450Total assets
    
    $
    57,345
    
    
    $
    51,130Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    1,435
    
    
    $
    641Accrued payroll and related obligations
    
    
    1,435
    
    
    
    1,335Accrued loss contingencies
    
    
    3,864
    
    
    
    3,765Income taxes payable
    
    
    183
    
    
    
    Other accrued liabilities
    
    
    1,601
    
    
    
    2,060Total current liabilities
    
    
    8,518
    
    
    
    7,801Non-current employment obligations
    
    
    169
    
    
    
    181Deferred income taxes
    
    
    924
    
    
    
    1,259Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000,000 shares authorized; 14,206,782
shares issued at July 31, 2006 and 13,740,539 shares issued at October
31, 2005
    
    
    14
    
    
    
    14Additional paid in capital
    
    
    49,817
    
    
    
    47,319Retained earnings
    
    
    5,999
    
    
    
    2,652Treasury stock, at cost: 1,855,325 shares in 2006 and 2005
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    47,734
    
    
    
    41,889Total liabilities and stockholders equity
    
    $
    57,345
    
    
    $
    51,130
  3




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months
    
    
    Nine MonthsEnded July 31,
    
    
    Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenue
    
    $
    12,430
    
    
    $
    12,444
    
    
    $
    37,310
    
    
    $
    37,510Cost of revenue
    
    
    5,113
    
    
    
    4,770
    
    
    
    14,720
    
    
    
    15,386Gross profit
    
    
    7,317
    
    
    
    7,674
    
    
    
    22,590
    
    
    
    22,124Operating expenses:General and administrative
    
    
    1,885
    
    
    
    3,687
    
    
    
    6,799
    
    
    
    9,237Sales and marketing
    
    
    2,777
    
    
    
    2,940
    
    
    
    8,288
    
    
    
    9,054Research and development
    
    
    550
    
    
    
    888
    
    
    
    2,227
    
    
    
    3,020Loss contingencies
    
    
    33
    
    
    
    24
    
    
    
    99
    
    
    
    32Total operating expenses
    
    
    5,245
    
    
    
    7,539
    
    
    
    17,413
    
    
    
    21,343Income from operations
    
    
    2,072
    
    
    
    135
    
    
    
    5,177
    
    
    
    781Interest and other income (expenses), net
    
    
    129
    
    
    
    45
    
    
    
    328
    
    
    
    73Income before income taxes
    
    
    2,201
    
    
    
    180
    
    
    
    5,505
    
    
    
    854Provision for income taxes
    
    
    879
    
    
    
    95
    
    
    
    2,158
    
    
    
    465Net income
    
    $
    1,322
    
    
    $
    85
    
    
    $
    3,347
    
    
    $
    389Net income per share:Basic
    
    $
    0.11
    
    
    $
    0.01
    
    
    $
    0.28
    
    
    $
    0.03Diluted
    
    $
    0.10
    
    
    $
    0.01
    
    
    $
    0.26
    
    
    $
    0.03Shares used in calculating net income per share:Basic
    
    
    12,312
    
    
    
    11,875
    
    
    
    12,107
    
    
    
    11,865Diluted
    
    
    12,969
    
    
    
    11,880
    
    
    
    12,684
    
    
    
    11,944Dividends declared per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.03
  4




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months Ended July 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,347
    
    
    $
    389Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,695
    
    
    
    8,818Obsolescence and loss on disposal of bingo terminals and related equipment
    
    
    522
    
    
    
    381Loss on disposal of furniture and other equipment
    
    
    4
    
    
    
    20Stock compensation expense
    
    
    197
    
    
    
    93Deferred income taxes
    
    
    (672
    )
    
    
    442Interest on short-term investments
    
    
    (109
    )
    
    
    (25
    )Interest on restricted cash
    
    
    (29
    )
    
    
    Other changes in operating assets and liabilities:Accounts receivable, net
    
    
    (228
    )
    
    
    (529
    )Deposits
    
    
    (98
    )
    
    
    8Refundable income taxes
    
    
    742
    
    
    
    100Restricted short-term investments
    
    
    66
    
    
    
    (3,432
    )Prepaid expenses and other current assets
    
    
    (78
    )
    
    
    173Accounts payable
    
    
    794
    
    
    
    (272
    )Accrued payroll and related obligations
    
    
    100
    
    
    
    348Accrued loss contingencies
    
    
    99
    
    
    
    104Income taxes payable
    
    
    183
    
    
    
    (1,214
    )Other accrued liabilities
    
    
    (459
    )
    
    
    232Non-current employment obligations
    
    
    (12
    )
    
    
    (10
    )Net cash provided by operating activities
    
    
    12,064
    
    
    
    5,626Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    20,004
    
    
    
    2,131Payments for purchase of short-term investments
    
    
    (23,195
    )
    
    
    Capital expenditures for bingo equipment, furniture, and other equipment
    
    
    (9,730
    )
    
    
    (5,565
    )Payments for acquisitions of intangible assets
    
    
    (113
    )
    
    
    (609
    )Net cash used in investing activities
    
    
    (13,034
    )
    
    
    (4,043
    )Cash flows from financing activities:Payment of dividends
    
    
    
    
    
    
    (355
    )Tax benefit from stock options exercised
    
    
    283
    
    
    
    Proceeds from issuance of common stock
    
    
    2,018
    
    
    
    106Net cash provided by (used in) financing activities
    
    
    2,301
    
    
    
    (249
    )Net increase in cash and cash equivalents
    
    
    1,331
    
    
    
    1,334Cash and cash equivalents at beginning of period
    
    
    6,330
    
    
    
    6,101Cash and cash equivalents at end of period
    
    $
    7,661
    
    
    $
    7,435Supplemental Cash Flow Information:Cash paid during the period for:Income taxes
    
    $
    1,623
    
    
    $
    1,124
  5




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTES TO FINANCIAL STATEMENTS
 NOTE A. BASIS OF PRESENTATION
   USE OF ESTIMATES
  RECLASSIFICATIONS
  NOTE B. SIGNIFICANT ACCOUNTING POLICIES
 REVENUE RECOGNITION
  ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
   6




---



##### Table of Contents



BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT
  Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
  SOFTWARE DEVELOPMENT CAPITALIZATION
 Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed
  GOODWILL
  LONG-LIVED ASSETS
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 LEGAL CONTINGENCIES
  7




---



##### Table of Contents



STOCK-BASED COMPENSATION
    Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards.
 8




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2005Net income, as reported
    
    $
    85
    
    
    $
    389Stock-based employee
compensation expense included
in reported net income, net of
related tax benefits
    
    
    
    
    
    
    29Stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax
effects
    
    
    (343
    )
    
    
    (508
    )Pro forma net loss
    
    $
    (258
    )
    
    $
    (90
    )Net income (loss) per share:Basic:As reported
    
    $
    0.01
    
    
    $
    0.03Pro forma
    
    $
    (0.02
    )
    
    $
    (0.01
    )Diluted:As reported
    
    $
    0.01
    
    
    $
    0.03Pro forma
    
    $
    (0.02
    )
    
    $
    (0.01
    )
  RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Certain Hybrid Financial
Instruments. Accounting for Derivative Instruments
and Hedging Activities, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.
   9




---



##### Table of Contents



NOTE C. NET INCOME PER SHARE
   (In thousands, except per share amounts)Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income, as reported
    
    $
    1,322
    
    
    $
    85
    
    
    $
    3,347
    
    
    $
    389Weighted average number of shares outstanding
    
    
    12,312
    
    
    
    11,875
    
    
    
    12,107
    
    
    
    11,865Incremental shares from the assumed exercise of dilutive stock options
    
    
    657
    
    
    
    5
    
    
    
    577
    
    
    
    79Dilutive weighted shares
    
    
    12,969
    
    
    
    11,880
    
    
    
    12,684
    
    
    
    11,944Net income per share:Basic
    
    $
    0.11
    
    
    $
    0.01
    
    
    $
    0.28
    
    
    $
    0.03Diluted
    
    $
    0.10
    
    
    $
    0.01
    
    
    $
    0.26
    
    
    $
    0.03
 NOTE D. LEGAL PROCEEDINGS
 GameTech International, Inc. v. Trend Gaming Systems, LLC
  10




---



##### Table of Contents



NOTE E. CREDIT AGREEMENT
  NOTE F. INCOME TAXES
  NOTE G. RESTRICTED SHORT TERM INVESTMENTS
  NOTE H. SUBSEQUENT EVENTS
 1. Resignation of Chief Financial Officer
  2. Entry into a Material Definitive Agreement
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
   11




---



##### Table of Contents



OVERVIEW
     TM
 APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   12




---



##### Table of Contents



Revenue Recognition
  Bingo Equipment, Furniture, and Other Equipment
  Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
  Software Development Capitalization
 Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed
  Accounts Receivable and Allowance for Doubtful Accounts
   13




---



##### Table of Contents



Goodwill
  Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Legal Contingencies
  RESULTS OF OPERATIONS
  Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net revenue
    
    $
    12,430
    
    
    
    100.0
    %
    
    $
    12,444
    
    
    
    100.0
    %
    
    $
    37,310
    
    
    
    100.0
    %
    
    $
    37,510
    
    
    
    100.0
    %Cost of revenue
    
    
    5,113
    
    
    
    41.1
    %
    
    
    4,770
    
    
    
    38.3
    %
    
    
    14,720
    
    
    
    39.5
    %
    
    
    15,386
    
    
    
    41.0
    %Gross profit
    
    
    7,317
    
    
    
    58.9
    %
    
    
    7,674
    
    
    
    61.7
    %
    
    
    22,590
    
    
    
    60.5
    %
    
    
    22,124
    
    
    
    59.0
    %Operating expenses:General and administrative
    
    
    1,885
    
    
    
    15.2
    %
    
    
    3,687
    
    
    
    29.6
    %
    
    
    6,799
    
    
    
    18.2
    %
    
    
    9,237
    
    
    
    24.6
    %Sales and marketing
    
    
    2,777
    
    
    
    22.3
    %
    
    
    2,940
    
    
    
    23.6
    %
    
    
    8,288
    
    
    
    22.2
    %
    
    
    9,054
    
    
    
    24.1
    %Research and development
    
    
    550
    
    
    
    4.4
    %
    
    
    888
    
    
    
    7.1
    %
    
    
    2,227
    
    
    
    6.0
    %
    
    
    3,020
    
    
    
    8.1
    %Loss contingencies
    
    
    33
    
    
    
    0.3
    %
    
    
    24
    
    
    
    0.2
    %
    
    
    99
    
    
    
    0.3
    %
    
    
    32
    
    
    
    0.1
    %Total operating expenses
    
    
    5,245
    
    
    
    42.2.
    %
    
    
    7,539
    
    
    
    60.6
    %
    
    
    17,413
    
    
    
    46.7
    %
    
    
    21,343
    
    
    
    56.9
    %Income from operations
    
    
    2,072
    
    
    
    16.7
    %
    
    
    135
    
    
    
    1.1
    %
    
    
    5,177
    
    
    
    13.9
    %
    
    
    781
    
    
    
    2.1
    %Interest and other income
(expense), net
    
    
    129
    
    
    
    1.0
    %
    
    
    45
    
    
    
    0.4
    %
    
    
    328
    
    
    
    0.9
    %
    
    
    73
    
    
    
    0.2
    %Income before provision for
income taxes
    
    
    2,201
    
    
    
    17.7
    %
    
    
    180
    
    
    
    1.4
    %
    
    
    5,505
    
    
    
    14.8
    %
    
    
    854
    
    
    
    2.3
    %Provision for income taxes
    
    
    879
    
    
    
    7.1
    %
    
    
    95
    
    
    
    0.8
    %
    
    
    2,158
    
    
    
    5.8
    %
    
    
    465
    
    
    
    1.2
    %Net income
    
    $
    1,322
    
    
    
    10.6
    %
    
    $
    85
    
    
    
    0.7
    %
    
    $
    3,347
    
    
    
    9.0
    %
    
    $
    389
    
    
    
    1.0
    %
  14




---



##### Table of Contents



2
 Net revenue
  Cost of Revenue
 2
 Gross Profit
  Operating Expenses
    15




---



##### Table of Contents



Provision for Income Taxes
  LIQUIDITY AND CAPITAL RESOURCES
     16




---



##### Table of Contents



Purchase Commitments
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Currency Rate Fluctuations
  Market Risks
    17




---



##### Table of Contents



Sensitivity Analysis Market Risks.
  
 ITEM 4. CONTROLS AND PROCEDURES.
  CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
 GameTech International, Inc. v. Trend Gaming Systems, LLC
 18




---



##### Table of Contents



ITEM 1A. RISK FACTORS
 There is no assurance that the Summit acquisition will be successfully completed. If we fail to
obtain required financing and licenses and Summit meets our conditions to closing, we will be
required to pay Summit a $1 million termination fee.
  If completed, our acquisition of Summit may not produce the results we anticipate.
  
    
    the diversion of management time and effort from our existing business
    
    managing a much larger combined business, including implementing adequate internal controls
    
    the potential loss of key employees of Summit, and
    
    maintaining Summits customers and growing the customer base and markets.
   
    
    its dependence on the video lottery terminal industry
    
    its dependence on key markets in Montana, Louisiana, South Dakota, and West Virginia
    
    its ability to respond to rapid technological change and market demand for product enhancements, and
    
    changes in laws and regulations.
 We anticipate incurring significant debt to finance the acquisition of Summit.
  19




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS
 2.1
    
    Asset Purchase Agreement dated August 30, 2006 between GameTech
International, Inc. and Summit Amusement & Distributing, Ltd.
(incorporated by reference to Exhibit 2.1 to our Form 8-K filed
August 30, 2006).10.1
    
    Severance Agreement with James C. Wilson dated August 29, 2006.31.1
    
    Certification of Chief Executive Officer and Acting 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 and Acting Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 20




---



##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/S/ Jay M. Meilstrup

Jay M. Meilstrup
    
    Chief Executive
Officer/Acting Chief
Financial Officer
(Principal Executive Officer
and Acting Chief Financial Officer)
    
    September 14, 2006/S/ Ann D. McKenzie

Ann D. McKenzie
    
    Corporate Controller
(Principal Accounting Officer)
    
    September 14, 2006
 21




---



##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Asset Purchase Agreement dated August 30, 2006 between GameTech
International, Inc. and Summit Amusement & Distributing, Ltd.
(incorporated by reference to Exhibit 2.1 to our Form 8-K filed
August 30, 2006).10.1
    
    Severance Agreement with James C. Wilson dated August 29, 2006.31.1
    
    Certification of Chief Executive Officer and Acting 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 and Acting Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 22