##### 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 APRIL 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROMTO
 Commission File Number 000-23401
 GAMETECH INTERNATIONAL, INC.
  DELAWARE
    
    33-0612983(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 900 SANDHILL ROAD, RENO, NEVADA
89521
  þ o
  o o þ
 o þ




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##### 



GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006
INDEX
 PageNo.Part I. Financial Information:Item 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of
April 30, 2006 (Unaudited) and October 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended April 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 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
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18Part II. Other Information:Item 1.
    
    Legal Proceedings
    
    
    19Item 1A.
    
    Risk Factors
    
    
    20Item 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
    
    
    20Signatures
    
    
    22Exhibit 10.35Exhibit 10.36Exhibit 10.37Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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##### 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)
 April 30,
    
    
    October 31,2006
    
    
    2005(Unaudited)
    
    
    (Note A)Assets:Current assets:Cash and cash equivalents
    
    $
    7,927
    
    
    $
    6,330Short-term investments
    
    
    2,204
    
    
    
    503Accounts receivable, less allowance of $2,052 in 2006 and
$2,374 in 2005
    
    
    3,917
    
    
    
    3,573Deposits
    
    
    18
    
    
    
    21Refundable income taxes
    
    
    
    
    
    
    742Restricted short-term investments
    
    
    4,653
    
    
    
    4,581Prepaid expenses and other current assets
    
    
    330
    
    
    
    326Deferred income taxes
    
    
    2,520
    
    
    
    2,549Total current assets
    
    
    21,569
    
    
    
    18,625Bingo equipment, furniture and other equipment, net
    
    
    21,569
    
    
    
    20,060Goodwill, net
    
    
    10,184
    
    
    
    10,184Intangibles, less accumulated amortization of $3,711 in 2006
and $4,335 in 2005
    
    
    1,577
    
    
    
    1,811Restricted cash
    
    
    475
    
    
    
    450Total assets
    
    $
    55,374
    
    
    $
    51,130Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    1,205
    
    
    $
    641Accrued payroll and related obligations
    
    
    1,291
    
    
    
    1,335Accrued loss contingencies
    
    
    3,830
    
    
    
    3,765Income taxes payable
    
    
    497
    
    
    
    Other accrued liabilities
    
    
    1,408
    
    
    
    2,060Total current liabilities
    
    
    8,231
    
    
    
    7,801Non-current employment obligations
    
    
    169
    
    
    
    181Deferred income taxes
    
    
    1,156
    
    
    
    1,259Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 14,144,582 shares issued at April
30, 2006 and 13,740,539 shares issued at
October 31, 2005
    
    
    14
    
    
    
    14Additional paid in capital
    
    
    49,223
    
    
    
    47,319Retained earnings
    
    
    4,677
    
    
    
    2,652Treasury stock, at cost: 1,855,325 shares in 2006 and 2005
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    45,818
    
    
    
    41,889Total liabilities and stockholders equity
    
    $
    55,374
    
    
    $
    51,130
  3




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GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
 (Unaudited)
 Three Months
    
    
    Six MonthsEnded April 30,
    
    Ended April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenue
    
    $
    12,533
    
    
    $
    12,746
    
    
    $
    24,880
    
    
    $
    25,066Cost of revenue
    
    
    4,955
    
    
    
    5,146
    
    
    
    9,607
    
    
    
    10,616Gross profit
    
    
    7,578
    
    
    
    7,600
    
    
    
    15,273
    
    
    
    14,450Operating expenses:General and administrative
    
    
    2,300
    
    
    
    2,809
    
    
    
    4,914
    
    
    
    5,551Sales and marketing
    
    
    2,791
    
    
    
    3,055
    
    
    
    5,511
    
    
    
    6,114Research and development
    
    
    623
    
    
    
    1,049
    
    
    
    1,677
    
    
    
    2,131Loss contingencies
    
    
    33
    
    
    
    8
    
    
    
    65
    
    
    
    8Total operating expenses
    
    
    5,747
    
    
    
    6,921
    
    
    
    12,167
    
    
    
    13,804Income from operations
    
    
    1,831
    
    
    
    679
    
    
    
    3,106
    
    
    
    646Interest and other income (expenses), net
    
    
    97
    
    
    
    (7
    )
    
    
    197
    
    
    
    28Income before income taxes
    
    
    1,928
    
    
    
    672
    
    
    
    3,303
    
    
    
    674Provision for income taxes
    
    
    742
    
    
    
    369
    
    
    
    1,278
    
    
    
    370Net income
    
    $
    1,186
    
    
    $
    303
    
    
    $
    2,025
    
    
    $
    304Net income per share:Basic
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.17
    
    
    $
    0.03Diluted
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.16
    
    
    $
    0.03Shares used in calculating net income per share:Basic
    
    
    12,094
    
    
    
    11,875
    
    
    
    12,002
    
    
    
    11,861Diluted
    
    
    12,654
    
    
    
    11,906
    
    
    
    12,540
    
    
    
    11,929Dividends
declared per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.03
  4




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GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Six Months Ended April 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,025
    
    
    $
    304Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    5,131
    
    
    
    6,099Obsolescence and loss on disposal of bingo terminals and related
equipment
    
    
    270
    
    
    
    303Loss on disposal of furniture and other equipment
    
    
    3
    
    
    
    19Stock compensation expense
    
    
    95
    
    
    
    93Deferred income taxes
    
    
    (74
    )
    
    
    841Interest on short-term investments
    
    
    (42
    )
    
    
    (16
    )Interest on restricted cash
    
    
    (25
    )
    
    
    Other changes in operating assets and liabilities:Accounts receivable, net
    
    
    (344
    )
    
    
    (155
    )Deposits
    
    
    3
    
    
    
    2Refundable income taxes
    
    
    742
    
    
    
    100Restricted short-term investments
    
    
    (72
    )
    
    
    (3,406
    )Prepaid expenses and other current assets
    
    
    (4
    )
    
    
    (101
    )Accounts payable
    
    
    564
    
    
    
    (618
    )Accrued payroll and related obligations
    
    
    (44
    )
    
    
    (416
    )Accrued loss contingencies
    
    
    65
    
    
    
    8Income taxes payable
    
    
    497
    
    
    
    (703
    )Other accrued liabilities
    
    
    (652
    )
    
    
    (406
    )Non-current employment obligations
    
    
    (12
    )
    
    
    (10
    )Net cash provided by operating activities
    
    
    8,126
    
    
    
    1,938Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    16,270
    
    
    
    2,121Payments for purchase of short-term investments
    
    
    (17,929
    )
    
    
    Capital expenditures for bingo equipment, furniture, and other equipment
    
    
    (6,565
    )
    
    
    (3,804
    )Payments for acquisitions of intangible assets
    
    
    (114
    )
    
    
    (406
    )Net cash used in investing activities
    
    
    (8,338
    )
    
    
    (2,089
    )Cash flows from financing activities:Payment of dividends
    
    
    
    
    
    
    (355
    )Proceeds from issuance of common stock
    
    
    1,809
    
    
    
    106Net cash provided by (used in) financing activities
    
    
    1,809
    
    
    
    (249
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,597
    
    
    
    (400
    )Cash and cash equivalents at beginning of period
    
    
    6,330
    
    
    
    6,101Cash and cash equivalents at end of period
    
    $
    7,927
    
    
    $
    5,701Supplemental
Cash Flow Information:Cash paid during the period for:Income taxes
    
    $
    114
    
    
    $
    177
  5




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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




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##### 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
 7




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




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Three Months Ended
    
    
    
    Six Months EndedApril 30,
    
    
    
    April 30,2005
    
    
    
    2005Net income, as reported
    
    
    $
    303
    
    
    
    $
    304Stock-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
    
    
    
    (140
    )
    
    
    
    (121
    )Pro forma net income
    
    
    $
    163
    
    
    
    $
    212Net income per share:Basic:As reported
    
    
    $
    0.03
    
    
    
    $
    0.03Pro forma
    
    
    $
    0.01
    
    
    
    $
    0.02Diluted:As reported
    
    
    $
    0.03
    
    
    
    $
    0.03Pro forma
    
    
    $
    0.01
    
    
    
    $
    0.02
  RECENT ACCOUNTING PRONOUNCEMENTS
 FASB 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.
 NOTE C. NET INCOME PER SHARE
  9




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income, as reported
    
    $
    1,186
    
    
    $
    303
    
    
    $
    2,025
    
    
    $
    304Weighted average number
of shares
outstanding
    
    
    12,094
    
    
    
    11,875
    
    
    
    12,002
    
    
    
    11,861Incremental shares from
the assumed exercise of
dilutive stock options
    
    
    560
    
    
    
    31
    
    
    
    538
    
    
    
    68Dilutive weighted shares
    
    
    12,654
    
    
    
    11,906
    
    
    
    12,540
    
    
    
    11,929Net income per share:Basic
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.17
    
    
    $
    0.03Diluted
    
    $
    0.09
    
    
    $
    0.03
    
    
    $
    0.16
    
    
    $
    0.03
 NOTE D. LEGAL PROCEEDINGS
 GameTech International, Inc. v. Trend Gaming Systems, LLC
 10




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##### Table of Contents



NOTE E. CREDIT AGREEMENT
  NOTE F. INCOME TAXES
  NOTE G. RESTRICTED SHORT TERM INVESTMENT
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
   11




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##### Table of Contents



OVERVIEW
     TM
 APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   12




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##### 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




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Goodwill
  Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 Legal Contingencies
  14




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##### Table of Contents



RESULTS OF OPERATIONS
  Three Months Ended April 30,
    
    
    Six Months Ended April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net revenue
    
    $
    12,533
    
    
    
    100.0
    %
    
    $
    12,746
    
    
    
    100.0
    %
    
    $
    24,880
    
    
    
    100.0
    %
    
    $
    25,066
    
    
    
    100.0
    %Cost of revenue
    
    
    4,955
    
    
    
    39.5
    %
    
    
    5,146
    
    
    
    40.4
    %
    
    
    9,607
    
    
    
    38.6
    %
    
    
    10,616
    
    
    
    42.4
    %Gross profit
    
    
    7,578
    
    
    
    60.5
    %
    
    
    7,600
    
    
    
    59.6
    %
    
    
    15,273
    
    
    
    61.4
    %
    
    
    14,450
    
    
    
    57.6
    %Operating expenses:General and administrative
    
    
    2,300
    
    
    
    18.3
    %
    
    
    2,809
    
    
    
    22.0
    %
    
    
    4,914
    
    
    
    19.8
    %
    
    
    5,551
    
    
    
    22.1
    %Sales and marketing
    
    
    2,791
    
    
    
    22.3
    %
    
    
    3,055
    
    
    
    24.0
    %
    
    
    5,511
    
    
    
    22.1
    %
    
    
    6,114
    
    
    
    24.4
    %Research and development
    
    
    623
    
    
    
    5.0
    %
    
    
    1,049
    
    
    
    8.2
    %
    
    
    1,677
    
    
    
    6.7
    %
    
    
    2,131
    
    
    
    8.5
    %Loss contingencies
    
    
    33
    
    
    
    0.3
    %
    
    
    8
    
    
    
    0.1
    %
    
    
    65
    
    
    
    0.3
    %
    
    
    8
    
    
    
    0.0
    %Total operating expenses
    
    
    5,747
    
    
    
    45.9
    %
    
    
    6,921
    
    
    
    54.3
    %
    
    
    12,167
    
    
    
    48.9
    %
    
    
    13,804
    
    
    
    55.1
    %Income from operations
    
    
    1,831
    
    
    
    14.6
    %
    
    
    679
    
    
    
    5.3
    %
    
    
    3,106
    
    
    
    12.5
    %
    
    
    646
    
    
    
    2.6
    %Interest and other income
(expense), net
    
    
    97
    
    
    
    0.8
    %
    
    
    (7
    )
    
    
    (0.1
    %)
    
    
    197
    
    
    
    0.8
    %
    
    
    28
    
    
    
    0.1
    %Income before provision for
income taxes
    
    
    1,928
    
    
    
    15.4
    %
    
    
    672
    
    
    
    5.3
    %
    
    
    3,303
    
    
    
    13.3
    %
    
    
    674
    
    
    
    2.7
    %Provision for income taxes
    
    
    742
    
    
    
    5.9
    %
    
    
    369
    
    
    
    2.9
    %
    
    
    1,278
    
    
    
    5.1
    %
    
    
    370
    
    
    
    1.5
    %Net income
    
    $
    1,186
    
    
    
    9.5
    %
    
    $
    303
    
    
    
    2.4
    %
    
    $
    2,025
    
    
    
    8.1
    %
    
    $
    304
    
    
    
    1.2
    %
   Net revenue
  Cost of Revenue
  15




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Gross Profit
  Operating Expenses
      Provision for Income Taxes
  16




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LIQUIDITY AND CAPITAL RESOURCES
       17




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##### Table of Contents



Purchase Commitments
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Currency Rate Fluctuations
  Market Risks
    Sensitivity Analysis Market Risks.
 
 ITEM 4. CONTROLS AND PROCEDURES.
  18




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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
 19




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 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.
  Nominee
    
    Votes in Favor
    
    
    WithheldRichard T. Fedor
    
    
    10,835,397
    
    
    
    534,400Donald K. Whitaker
    
    
    10,837,197
    
    
    
    532,600Scott H. Shackelton
    
    
    10,837,197
    
    
    
    532,600Richard H. Irvine
    
    
    10,817,397
    
    
    
    552,400Jay M. Meilstrup
    
    
    10,780,384
    
    
    
    589,413
   Votes in Favor
    
    Opposed
    
    
    Abstained
    
    
    Broker Non-Vote6,352,804
    
    
    725,946
    
    
    
    607,304
    
    
    
    4,235,103
  Votes in Favor
    
    Opposed
    
    
    Abstained
    
    
    Broker Non-Vote11,322,347
    
    
    44,450
    
    
    
    3,000
    
    
    
    551,360
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
 10.35
    
    Credit Agreement, dated April 3, 2006, by and between the
Registrant and Wells Fargo Bank, National Association.10.36
    
    Revolving Line of Credit Note, dated April 3, 2006 in favor
of Wells Fargo Bank, National Association.10.37
    
    Letter Agreement by and between the Registrant and John
McCafferty, dated as of May 22, 2006.31.1
    
    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.
 20




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##### Table of Contents



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.
 21




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##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/S/ Jay M. Meilstrup
    
    Chief Executive Officer and President
    
    June 14, 2006Jay
M. Meilstrup
    
    (Principal Executive Officer)/S/ James C. Wilson
    
    Chief Financial Officer
    
    June 14, 2006James
C. Wilson
    
    (Principal Financial Officer)/S/ Ann D. McKenzie
    
    Corporate Controller
    
    June 14, 2006Ann
D. McKenzie
    
    (Principal Accounting Officer)
 22




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##### Table of Contents



EXHIBIT INDEX
 10.35
    
    Credit Agreement, dated April 3, 2006, by and between the
Registrant and Wells Fargo Bank, National Association.10.36
    
    Revolving Line of Credit Note, dated April 3, 2006, in favor
of Wells Fargo Bank, National Association.10.37
    
    Letter Agreement by and between the Registrant and John
McCafferty, dated as of May 22, 2006.31.1
    
    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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