**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                 |   |   |
| **ý**                                                                                                                                                                                           |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                 |   |   |
| **FOR THE QUARTERLY PERIOD ENDED APRIL 30,  2003**                                                                                                                                                   |
|                                                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                 |   | **OR** |
|                                                                                                                                                                                                 |   |   |
| **o**                                                                                                                                                                                                |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                 |   |   |
| **FOR THE TRANSITION PERIOD FROM               TO               ** |

** **

**CommissionFile Number****000-23401**

 

**GAMETECH INTERNATIONAL, INC.**

(Exact name of registrant asspecified in its charter)

 

| **DELAWARE**                             |   | **33-0612983**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction             |   | (I.R.S. Employer Identification No.) |
| of incorporation or organization)        |   |                                 |
|                                     |   |                                 |
| **900 SANDHILL ROAD, RENO, NEVADA**      |
| **89521**                                |
| (Address of principal executive offices) |
| (Zip code)                               |

 

Registrant’s telephone number,including area code:  **(775) 850-6000**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o  No ý

 

On June 9, 2003, the registrant had11,727,439 outstanding shares of its Common Stock, par value $0.001 per share.

 

 

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**GAMETECHINTERNATIONAL, INC.**

**QUARTERLYREPORT ON FORM 10 –Q**

**FOR THEQUARTERLY PERIOD ENDED APRIL 30, 2003**

**INDEX**

 

 
|                                               |                                                                                                         |
|----------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| Part I. Financial Information:                     |
| Item 1.                                            | Financial Statements (Unaudited)                                                                             |
|                                               |                                                                                                         |
|                                               | Condensed Consolidated Balance Sheets

October 31, 2002 and April 30, 2003                                   |
|                                               |                                                                                                         |
|                                               | Condensed Consolidated Statements of  Operations

Three Months and Six Months Ended April 30,  2002 and 2003 |
|                                               |                                                                                                         |
|                                               | Condensed Consolidated Statements of Cash  Flows

Six Months Ended April 30, 2002 and 2003                   |
|                                               |                                                                                                         |
|                                               | Notes to Condensed Consolidated Financial  Statements                                                        |
|                                               |                                                                                                         |
| Item 2.                                            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  |
|                                               |                                                                                                         |
| Item 3.                                            | Quantitative and Qualitative Disclosures  About Market Risk                                                  |
|                                               |                                                                                                         |
| Item 4.                                            | Controls and Procedures                                                                                      |
|                                               |                                                                                                         |
| Part II.    Other Information: |
|                                               |                                                                                                         |
| Item 1.                                            | Legal Proceedings                                                                                            |
|                                               |                                                                                                         |
| Item 2.                                            | Changes in 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 and Reports on Form 8-K                                                                             |
|                                               |                                                                                                         |
| Signatures                                         |                                                                                                         |
|                                               |                                                                                                         |
| Certifications                                     |                                                                                                         |
|                                                    |                                                                                                              |  |

 

2

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**GAMETECH INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share and per share amounts)**

 
|                                                                                                                                                     |   | **October 31,  2002** |   | **April 30,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
|                                                                                                                                                     |   |                  |   | **(Unaudited)**     |   |
| **Assets:**                                                                                                                                              |   |                  |   |                |   |
| Current assets:                                                                                                                                          |   |                  |   |                |   |
| Cash and cash equivalents                                                                                                                                |   | $                     | 4,233  |                | $      | 8,288 |   |
| Short-term investments                                                                                                                                   |   | 5,045                 |   | 2,613               |   |
| Accounts receivable, net                                                                                                                                 |   | 3,906                 |   | 3,924               |   |
| Deposits                                                                                                                                                 |   | 610                   |   | 60                  |   |
| Refundable income taxes                                                                                                                                  |   | 3,888                 |   | 3                   |   |
| Prepaid expenses and other current assets                                                                                                                |   | 433                   |   | 457                 |   |
| Deferred income taxes                                                                                                                                    |   | 2,278                 |   | 2,278               |   |
| Total current assets                                                                                                                                     |   | 20,393                |   | 17,623              |   |
|                                                                                                                                                     |   |                  |   |                |   |
| Bingo units, furniture and equipment, net                                                                                                                |   | 21,620                |   | 22,627              |   |
| Intangible and other non-current assets, net                                                                                                             |   | 1,128                 |   | 2,441               |   |
| Goodwill                                                                                                                                                 |   | 14,960                |   | 16,809              |   |
| Total assets                                                                                                                                             |   | $                     | 58,101 |                | $      | 59,500 |   |
|                                                                                                                                                     |   |                  |   |                |   |
| **Liabilities and stockholders’ equity:**                                                                                                           |   |                  |   |                |   |
| Current liabilities:                                                                                                                                     |   |                  |   |                |   |
| Accounts payable                                                                                                                                         |   | $                     | 914    |                | $      | 946 |   |
| Accrued payroll and related obligations                                                                                                                  |   | 805                   |   | 794                 |   |
| Other accrued liabilities                                                                                                                                |   | 2,099                 |   | 1,812               |   |
| Current portion of long-term debt                                                                                                                        |   | 13                    |   | 325                 |   |
| Total current liabilities                                                                                                                                |   | 3,831                 |   | 3,877               |   |
|                                                                                                                                                     |   |                  |   |                |   |
| Long-term debt                                                                                                                                           |   | —                |   | 103                 |   |
| Non-current employment obligations                                                                                                                       |   | 432                   |   | 434                 |   |
| Deferred income taxes                                                                                                                                    |   | 3,348                 |   | 3,348               |   |
|                                                                                                                                                     |   |                  |   |                |   |
| Commitments and contingencies                                                                                                                            |   |                  |   |                |   |
|                                                                                                                                                     |   |                  |   |                |   |
| Stockholders’ equity:                                                                                                                               |   |                  |   |                |   |
| Common stock, $.001 par value: 40,000,000 sharesauthorized; 13,090,764 shares issued at  October 31, 2002 and 13,582,764 shares issued at April 30, 2003 |   | 13                    |   | 14                  |   |
| Capital in excess of par value                                                                                                                           |   | 45,716                |   | 46,216              |   |
| Retained earnings                                                                                                                                        |   | 12,857                |   | 13,604              |   |
| Less:  Treasury stock, at  cost: 1,855,325 shares at October 31, 2002 and at April 30, 2003                                                         |   | (8,096                | )      | (8,096              | )      |
| Total stockholders’ equity                                                                                                                          |   | 50,490                |   | 51,739              |   |
| Total liabilities and stockholders’ equity                                                                                                          |   | $                     | 58,101 |                | $      | 59,500 |   |

 

See accompanying notes.

 

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**GAMETECH INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except share and per shareamounts)**

 
|                                                     |   | **Three  Months Ended  April 30,** |   | **Six Months  Ended  April 30,** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                     |   | **2002**                           |   | **2003**                         |   | **2002** |   | **2003** |   |
|                                                     |   | **(Unaudited)**                    |   | **(Unaudited)**                  |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Revenue                                                  |   | $                                  | 12,106 |                             | $      | 13,322 |   | $ | 23,956 |   | $ | 26,520 |   |
| Cost of revenue                                          |   | 4,536                              |   | 5,600                            |   | 9,499 |   | 10,864 |   |
| Gross profit                                             |   | 7,570                              |   | 7,722                            |   | 14,457 |   | 15,656 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Operating expenses:                                      |   |                               |   |                             |   |   |   |   |   |
| General and administrative                               |   | 2,130                              |   | 3,098                            |   | 4,127 |   | 6,001 |   |
| Sales and marketing                                      |   | 3,115                              |   | 3,201                            |   | 6,117 |   | 6,395 |   |
| Research and development                                 |   | 555                                |   | 882                              |   | 974 |   | 1,877 |   |
| Total operating  expenses                                |   | 5,800                              |   | 7,181                            |   | 11,218 |   | 14,273 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Income from operations                                   |   | 1,770                              |   | 541                              |   | 3,239 |   | 1,383 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Interest and other income, net                           |   | 27                                 |   | 20                               |   | 35 |   | 27 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Income before provision for income taxes                 |   | 1,797                              |   | 561                              |   | 3,274 |   | 1,410 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Provision for income taxes                               |   | 686                                |   | 335                              |   | 1,250 |   | 662 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Net income                                               |   | $                                  | 1,111  |                             | $      | 226 |   | $ | 2,024 |   | $ | 748 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Basic net income per share                               |   | $                                  | 0.10   |                             | $      | 0.02 |   | $ | 0.18 |   | $ | 0.06 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Diluted net income per share                             |   | $                                  | 0.10   |                             | $      | 0.02 |   | $ | 0.17 |   | $ | 0.06 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Shares used in the calculation of net  income per share: |   |                               |   |                             |   |   |   |   |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Basic                                                    |   | 11,190,356                         |   | 11,727,439                       |   | 11,086,937 |   | 11,656,765 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Diluted                                                  |   | 11,680,113                         |   | 11,735,403                       |   | 11,640,846 |   | 11,847,788 |   |

 

Seeaccompanying notes.

 

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**GAMETECH INTERNATIONAL, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                               |   | **Six Months  EndedApril 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                               |   | **2002**                       |   | **2003** |   |
|                                                                               |   | **(unaudited)**                |   |
| **Cash flows from operating activities:**                                          |   |                           |   |   |   |
| Net income                                                                         |   | $                              | 2,024  |   | $ | 748 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                           |   |   |   |
| Depreciation, amortization and obsolescence                                        |   | 3,926                          |   | 5,124 |   |
| Changes in operating assets and liabilities:                                       |   |                           |   |   |   |
| Accounts receivable, net                                                           |   | 596                            |   | (18 | ) |
| Deposits, net                                                                      |   | 25                             |   | 550 |   |
| Refundable income taxes                                                            |   | 575                            |   | 3,885 |   |
| Other current assets                                                               |   | (180                           | )      | (24 | ) |
| Accounts payable                                                                   |   | 82                             |   | 32 |   |
| Other accrued liabilities                                                          |   | (506                           | )      | (306 | ) |
|                                                                               |   |                           |   |   |   |
| Net cash provided by operating activities                                          |   | 6,542                          |   | 9,991 |   |
|                                                                               |   |                           |   |   |   |
| **Cash flows from investing activities:**                                          |   |                           |   |   |   |
| Decrease (increase) in short-term investments                                      |   | (2,800                         | )      | 2,432 |   |
| Capital expenditures for bingo units, furniture and equipment                      |   | (5,400                         | )      | (4,890 | ) |
| Payment for the acquisition of International Gaming Systems, Inc.                  |   | —                         |   | (3,469 | ) |
| Purchase of intangible assets                                                      |   | (279                           | )      | (396 | ) |
|                                                                               |   |                           |   |   |   |
| Net cash used in investing activities                                              |   | (8,479                         | )      | (6,323 | ) |
|                                                                               |   |                           |   |   |   |
| **Cash flows from financing activities:**                                          |   |                           |   |   |   |
| Payments on long-term debt                                                         |   | (714                           | )      | (114 | ) |
| Proceeds from exercise of stock options                                            |   | 1,052                          |   | 501 |   |
|                                                                               |   |                           |   |   |   |
| Net cash provided by financing activities                                          |   | 338                            |   | 387 |   |
|                                                                               |   |                           |   |   |   |
| Net (decrease) increase in cash and cash equivalents                               |   | (1,599                         | )      | 4,055 |   |
| Cash and cash equivalents at beginning of period                                   |   | 10,131                         |   | 4,233 |   |
|                                                                               |   |                           |   |   |   |
| Cash and cash equivalents at end of period                                         |   | $                              | 8,532  |   | $ | 8,288 |   |
|                                                                               |   |                           |   |   |   |
| **Supplemental disclosure of non-cash investing  activities:**                     |   |                           |   |   |   |
| Purchase of intangible assets through the incurrence of long-term  debt            |   | $                              | — |   | $ | 537 |   |

 

Seeaccompanying notes.

 

5

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**GAMETECH INTERNATIONAL, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**APRIL 30, 2003**

**(UNAUDITED)**

 

**NOTEA.  BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements as of April30, 2003 have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In our opinion, all adjustments (consistingof normal recurring adjustments) considered necessary for a fair presentationhave been included.  Operating resultsfor the three- and six-month periods ended April 30, 2003 are not necessarilyindicative of the results that may be expected for the year ending October 31,2003.

 

The balancesheet at October 31, 2002 has been derived from the audited financialstatements at that date but does not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. For further information, refer to the consolidated financial statementsand footnotes thereto included in our annual report on Form 10-K for the yearended October 31, 2002.

 

Certainamounts in the prior period’s condensed consolidated financial statements havebeen reclassified to conform to the current period’s presentation.

 

**NOTEB.  SIGNIFICANT ACCOUNTING POLICIES**

 

**REVENUE RECOGNITION**

 

Revenue isrecognized for bingo units placed in bingo halls under contracts based on(a) a fixed fee per use per session; (b) a fixed weekly fee per unit;or (c) a percentage of the revenue generated by each unit. Revenuerecognition is a key component of our results of operations and determines thetiming of certain expenses, such as commissions and royalties. We recognizerevenue when all of the following factors exist: (a) evidence of anarrangement with the customer; (b) play or availability of the bingounits; (c) a fixed or determinable fee; and (d) collectibility isreasonably assured.

 

**ALLOWANCEFOR DOUBTFUL ACCOUNTS**

 

We estimate the possiblelosses resulting from non-payment of outstanding accounts receivable. Ourcustomer base consists primarily of entities operating in charitable, NativeAmerican, and commercial bingo halls located throughout the United States. Insome jurisdictions, the billing and collection function is performed as part ofa distributor relationship, and in those instances, we maintain allowances forpossible losses resulting from non-payment by both the customer anddistributor. We perform ongoing evaluations of customers and distributors forcredit worthiness, economic trends, changes in customer payment terms, andhistorical collection experience when evaluating the adequacy of our allowancefor doubtful accounts. We also reserve a percentage of accounts receivablebased on aging category. In determining these percentages, we review historicalwrite-offs of receivables, payment trends, and other available information.

 

**LEGALCONTINGENCIES**

 

We are currently involved in various claimsand legal proceedings.  Periodically, wereview the status of each significant matter and assess the potential financialexposure.  If the potential loss fromany claim or legal proceeding is considered probable and the amount can beestimated, we accrue a liability for the estimated loss.  Significant judgment is required in both thedetermination of probability and the determination as to whether an exposure isreasonably estimable.  Because ofuncertainties related to these matters, accruals are based only on the

6

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best information available atthe time.  As additional informationbecomes available, we reassess the potential liability related to pendingclaims and litigation and may revise our estimates.  Such revisions in the estimates of the potential liabilitiescould have a material impact on the results of operations and financial position.  See Note E of Notes to CondensedConsolidated Financial Statements for a description of our material legalproceedings.

 

**BINGO UNIT****DEPRECIATIONAND OBSOLESCENCE RESERVES**

 

Bingo units,furniture and equipment are stated at cost and depreciated using thestraight-line method over the estimated useful lives of the assets. Theestimated useful lives are as follows:

 

| Bingo units                    |   | 3-5 years |   |
|--------------------------------|--------|-----------|--------|
| Office furniture and equipment |   | 5-7 years |   |
| Leasehold improvements         |   | 10 years  |   |

 

We providereserves for excess or obsolete bingo units on hand, which are not expected tobe used. The reserves are based upon several factors, including estimatedforecast of bingo unit demand for placement into halls.

 

**GOODWILLAND OTHER INTANGIBLE ASSETS**

 

In 2001 theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 142, “*Goodwilland Other Intangible Assets*” (“Statement 142”), which we earlyadopted as of November 1, 2001. Under Statement 142, goodwill and intangibleassets deemed to have indefinite lives are no longer amortized but are subjectto an annual impairment review, and depending upon the results of that reviewthe recorded goodwill and intangible assets may be written down and charged toincome from operations when their carrying value exceeds their estimated fairvalue.

 

**PRO FORMA STOCK – BASED COMPENSATIONINFORMATION**

 

Pro formainformation regarding net income and earnings per share is required by SFAS No.123, “*Accounting for Stock-BasedCompensation,*” (“Statement 123”) as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation – Transitionand Disclosure,*” (“Statement 148”), and has been determined as if wehad accounted for our employee stock options under the fair value method ofthat statement.

 

Our pro forma informationfollows:

(In thousands, except per share amounts)

 
|                                                                                                                           |   | **Three  Months Ended  April 30,** |   | **Six Months  Ended  April 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                                                                           |   | **2002**                           |   | **2003**                         |   | **2002** |   | **2003** |   |
|                                                                                                                           |   | **(Unaudited)**                    |   | **(Unaudited)**                  |   |
|                                                                                                                           |   |                               |   |                             |   |
| Net income,  as reported                                                                                                       |   | $                                  | 1,111  |                             | $      | 226 |   | $ | 2,024 |   | $ | 748 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method, net of related tax effects |   | (178                               | )      | (105                             | )      | (375 | ) | (218 | ) |
| Pro forma  net income                                                                                                          |   | $                                  | 933    |                             | $      | 121 |   | $ | 1,649 |   | $ | 530 |   |
|                                                                                                                           |   |                               |   |                             |   |   |   |   |   |
| Earnings per share:                                                                                                            |   |                               |   |                             |   |   |   |   |   |
| Basic – as  reported                                                                                                      |   | $                                  | 0.10   |                             | $      | 0.02 |   | $ | 0.18 |   | $ | 0.06 |   |
| Basic – pro  forma                                                                                                        |   | $                                  | 0.08   |                             | $      | 0.01 |   | $ | 0.15 |   | $ | 0.05 |   |
|                                                                                                                           |   |                               |   |                             |   |   |   |   |   |
| Diluted – as  reported                                                                                                    |   | $                                  | 0.10   |                             | $      | 0.02 |   | $ | 0.17 |   | $ | 0.06 |   |
| Diluted –  pro forma                                                                                                      |   | $                                  | 0.08   |                             | $      | 0.01 |   | $ | 0.14 |   | $ | 0.04 |   |

 

7

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**NEWACCOUNTING PRONOUNCEMENTS**

 

EffectiveNovember 1, 2002, we adopted SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*” (“Statement144”).  This statement addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  The adoption of Statement 144did not have a material impact on our financial statements and relateddisclosures.

 

In April 2002,the FASB issued SFAS No. 145, “*Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 andTechnical Corrections*” (“Statement 145”). Statement 145 updates,clarifies and simplifies existing accounting pronouncements. Statement 145rescinds SFAS No. 4 (“Statement 4”), which required all gains and losses fromextinguishment of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain Accounting Principles Board (“APB”) Opinion No. 30 will now be used toclassify those gains and losses because Statement 4 has been rescinded.Statement 145 amends SFAS No. 13 to require that certain lease modificationsthat have economic effects similar to sale-leaseback transactions be accountedfor in the same manner as sale-leaseback transactions. This amendment isconsistent with the FASB’s goal of requiring similar accounting treatment fortransactions that have similar economic effects. Statement 145 also makestechnical corrections to existing pronouncements. While those corrections arenot substantive in nature, in some instances, they may change accountingpractice. We adopted the provisions of Statement 145 for fiscal 2003, which didnot result in a material impact to financial position, cash flows or results ofoperations.

 

In July 2002,the FASB issued SFAS No. 146, “*Accountingfor Costs Associated with Exit or Disposal Activities*” (“Statement146”). Statement 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues Task Force(“EITF”) Issue No. 94-3, “*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)*”(“Issue 94-3”). The principal difference between Statement 146 and Issue 94-3relates to Statement 146’s requirements for recognition of a liability for acost associated with an exit or disposal activity. Statement 146 requires thata liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. Under Issue 94-3, a liability for anexit cost as generally defined in Issue 94-3 was recognized at the date of anentity’s commitment to an exit plan. A fundamental conclusion reached by theFASB in Statement 146 is that an entity’s commitment to a plan, by itself, doesnot create an obligation that meets the definition of a liability. Therefore,Statement 146 eliminates the definition and requirements for recognition ofexit costs in Issue 94-3. Statement 146 also establishes that fair value is theobjective for initial measurement of the liability. The provisions of Statement146 are effective for exit or disposal activities that are initiated afterDecember 31, 2002. We do not expect the adoption of Statement 146 will have amaterial impact on financial position, cash flows or results of operations.

 

In November2002, the 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 thedelivery or performance of multiple products, services, and/or rights to useassets. The consensus mandates how to identify whether goods or services orboth that are to be delivered separately in a bundled sales arrangement shouldbe accounted for separately because they are “separate units of accounting.”The guidance can affect the timing of revenue recognition for sucharrangements, even though it does not change rules governing the timing orpattern of revenue recognition of individual items accounted for separately.The final consensus will be applicable to agreements entered into in fiscalyears beginning after June 15, 2003 with early adoption permitted.Additionally, companies will be permitted to apply the consensus guidance toall existing arrangements as the cumulative effect of a change in accountingprinciple in accordance with APB Opinion No. 20, *Accounting Changes*. We are assessing

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the potential impact of Issue00-21, but at this point do not believe the adoption of Issue 00-21 will have amaterial impact on our financial position, cash flows or results of operations.

 

In November2002, the FASB issued Interpretation No. 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*” (“FIN 45”). Thisinterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued. It also clarifies that a guarantor is requiredto recognize, at the inception of a guarantee, a liability for the fair valueof the obligation undertaken in issuing the guarantee. The disclosurerequirements of FIN 45 are effective for interim and annual periods afterDecember 15, 2002, and we have adopted those requirements for the consolidatedfinancial statements included in this Form 10-Q. The initial recognition andinitial measurement requirements of FIN 45 are effective prospectively forguarantees issued or modified after December 31, 2002.  The adoption of the recognition and initialmeasurement requirements of FIN 45 did not have a material impact on ourfinancial position, cash flows or results of operations.

 

In December2002, the FASB issued Statement 148, which amends Statement 123 and providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. Statement 148also amends the disclosure requirements of Statement 123 to require moreprominent and frequent disclosures in financial statements about the effects ofstock-based compensation. The transition guidance and annual disclosureprovisions of Statement 148 are effective for financial statements issued forfiscal years ending after December 15, 2002. Adoption of Statement 148 did nothave a material impact on our financial position, cash flows or results ofoperations.

 

In January2003, the FASB issued Interpretation No. 46, “*Consolidationof Variable Interest Entities - an Interpretation of ARB No. 51*”(“FIN 46”).  FIN 46 addressesconsolidation by business enterprises of variable interest entities that havecertain characteristics.  Transferors toqualifying special-purpose entities and “grandfathered” qualifyingspecial-purpose entities subject to the reporting requirements of Statement140, “*Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities,*” areexcluded from the scope of FIN 46.  FIN46 is applicable immediately to variable interest entities created or obtainedafter April 30, 2003.  We currently haveno contractual relationship or other business relationship with a variableinterest entity and therefore the adoption did not have an effect on our consolidatedfinancial position or results of operations. However, if we enter into any such arrangement with a variable interestentity in the future, our consolidated financial position or results ofoperations may be adversely impacted.

 

**NOTEC.  ACQUISITION OF ASSETS**

 

In November2002, we acquired certain assets of International Gaming Systems, Inc.(“IGS”) for a cash purchase price of $3.4 million.  Among other things, the acquisition added toour operationsapproximately 1,400 fixed-base bingo units in approximately 20 additional bingohalls. The acquisition was accounted for as a purchase of a business inaccordance with SFAS No. 141, “*BusinessCombinations*”. We determined the appropriate purchase priceallocation based on estimated fair values at the date of acquisition fortangible and identifiable intangible assets acquired to be approximately$600,000 for bingo units and support equipment and approximately $1.0 millionfor identifiable intangibles with a residual amount of approximately $1.8 millionassigned to goodwill.

 

**NOTED.  NET INCOME PER SHARE OF COMMON STOCK**

 

Thecalculation of the basic and diluted earnings per share is the same except forthe dilutive effect of outstanding stock options.  The dilution was 489,757 and 7,964 shares for the three monthsended April 30, 2002 and 2003, respectively. The dilution was 553,909 and 191,023 shares for the six months endedApril 30, 2002 and 2003, respectively.

 

**NOTEE.  LITIGATION**

 

We are inlitigation with a former distributor in Texas in which each party is seekingdamages from the other resulting from alleged material breaches and resultanttermination of the related distributor agreement. As a result of thetermination of the agreement during our fourth quarter of 2002, we fullyreserved our existing accounts receivable from the distributor atOctober 31, 2002, including certain monies received by the distributor andowed to us that have been placed in a bank account subject to the court’scontrol. Subsequent collections by the distributor, if any, against accountsreceivable existing at the contract termination date will also be placed inthat account. In addition, we have posted a deposit of approximately $450,000with the court, which is included in other non-current

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assets, net on the accompanyingcondensed consolidated balance sheet. The disposition of the funds (monies heldin the bank account and our deposit) is pending the outcome of the litigation.The terms of the distributor agreement contain certain contingent commissionliabilities, and other liabilities, which if a final judgment were renderedunfavorable to us, could have a material adverse effect on our financialposition and results of operations.  Ifan unfavorable judgment were rendered determining the contingent commissionliabilities to be payable, they would be calculated based on terms included inthe terminated distributor agreement. Those terms call for commissions on a diminishing percentage of revenuesfrom the relative customers over the three-year period following thetermination of the distributor agreement. For the first year following termination, commissions would becalculated on 80% of the revenues, for the second year commissions would becalculated on 70% of the revenues and for the third year commissions would becalculated on 60% of the revenues. Assuming revenues for the three-year period remained constant at therate earned over the first eight months following termination of thedistributor agreement, the contingent liability would amount to approximately$2.4 million.  No trial date has beenset and there can be no assurance of a favorable outcome of the litigation. Wehave not accrued any liability at April 30, 2003 for this matter.

 

We are in litigation withCapital Gaming Supplies, Inc. (“Capital”), a distributor in Mississippi forIGS.  Capital claims that we tortiouslyinterfered with alleged existing and prospective customer accounts inMississippi. We have denied the allegations and filed a counter-claim seeking ajudgment that Capital tortiously interfered with our customer accounts.  In addition, Capital has amended itscomplaint, adding other claims against us and other defendants, including aclaim against IGS and its principals. In November 2002, we acquired certain assets of IGS (see footnote C) andagreed to assume liability for certain claims filed by Capital against IGS andits principals.  We have not accrued anyliability at April 30, 2003 for this matter and intend to vigorously oppose Capital’sclaims. Trial is set for January 26, 2004. While we have a reasonable basis for believing Capital’s claims arewithout merit, we cannot provide any assurance that we will obtain a favorableoutcome.

 

In March 2003, the SouthCarolina Department of Revenue (“Department”) issued a notice to all personsand entities that use electronic daubing devices (such as our portable andfixed-base bingo units) to cease and desist using the devices as of September4, 2003.  The notice is a reversal ofthe Department’s previous position provided to us in 1995 regarding the use ofsuch devices.  The Department’s decisionwas not made due to any violation or improper conduct on our part.  We have filed a Request for Contested CaseHearing regarding the Department’s reversal. We disagree with the Department’s position and are actively seekinglegal and legislative relief so that our electronic daubing devices maycontinue to be used.  Historically,South Carolina has accounted for less than 5% of our annual revenues.  We can make no assurances that we will beable to continue to provide equipment to the South Carolina market afterSeptember 4, 2003.

 

We are involved in variousother legal proceedings arising out of our operations in the ordinary course ofour business.  We do not believe thatany of these proceedings will have a material adverse effect on our business,financial condition, or results of operations beyond the immaterial amountsrecorded in the accompanying condensed consolidated financial statements. However,if settlement is not reached and the lawsuits proceed to trial, unfavorableoutcomes could have a material adverse effect on our financial position andresults of operations.

 

**ITEM2.**  **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with our condensed consolidated financialstatements and notes thereto included elsewhere in this report,as well as our audited consolidated financialstatements for the fiscal yearended October 31, 2002 contained in our annual report on Form 10-K. Thefollowing discussion contains certain forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from theresults anticipated in these forward-looking statements as a result of thefactors set forth in this report and those risk factors included in our annualreport on Form 10-K for the fiscal year ended October 31, 2002.

 

**OVERVIEW**

 

We design, develop, andmarket interactive electronic bingo systems. We currently market portablehand-held systems that can be used anywhere within a bingo hall and afixed-base system with light pen- or touchscreen-activated monitors.For our three most recent fiscal years endedOctober 31, 2000, 2001, and 2002, our portable hand-held units generatedapproximately 75%, 77% and 77% of our revenues, respectively, while, duringthose same periods, our fixed-based units generated the balance of ourrevenues.  For the first six months offiscal 2003,

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our hand-held units producedapproximately 74% of our revenues and our fixed-base units, including thoseacquired from IGS, produced approximately 26% of our revenues. As of April 30,2003, we had systems in service in over 25 of the more than 30 states thatallow electronic bingo systems for use with charitable and commercialorganizations. Under the Indian Gaming Regulatory Act, or IGRA, electronicbingo may be played on Native American lands in the 46 states where bingo islegal. We estimate that bingo currently is played on tribal Native Americanlands in 30 states. As of April 30, 2003, we had units in operation in NativeAmerican bingo halls in 13 of those states. Collectively, as of April 30, 2003,we had products in 34 states and in 4 countries outside of the United States.

 

We generate revenue byplacing electronic bingo systems in bingo halls under contracts based on(a) a fixed fee per use per session; (b) a fixed weekly fee per unit;or (c) a percentage of the revenues generated by each unit. Revenue growthis affected by player acceptance of electronic bingo as an addition or analternative to paper bingo, and our ability to expand operations into newmarkets. Fixed-base bingo units generate greater revenue per unit than portablebingo units, but also require a greater initial capital investment.

 

We typically install ourelectronic bingo systems at no charge to our customers, and we capitalize thecosts. We record depreciation of bingo equipment over a three- and five-yearestimated useful life using the straight-line method of depreciation.

 

Our expenses consistprimarily of (a) cost of revenue, consisting of expenses associated withtechnical and operational support of the bingo systems within bingo halls,depreciation of bingo units, repair, refurbishment, and disposals of bingounits and related support equipment, and excess or obsolescence reserve;(b) general and administrative, consisting of activities associated withmanagement of our company and related support, which includes finance andaccounting, legal, compliance, information systems, human resources, andaccounts receivable reserve; (c) sales and marketing, consisting primarilyof commissions paid to distributors for promoting and supporting our productsand an internal sales force with a focus upon generating new customers andupgrades for existing customers; and (d) research and development(R&D), consisting of company-sponsored R&D activities to provideplayers with new or enhanced products on which to play bingo.

 

During the first six-monthperiod of fiscal 2003, the following events occurred that affected, or may inthe future affect, our results of operations or liquidity and capitalresources.

 

In November2002, we acquired certain assets of IGS for a cash purchase price of$3.4 million.  Among other things,the acquisition added to our operations approximately 1,400 fixed-base bingounits in approximately 20 additional bingo halls. The acquisition was accountedfor as a purchase of a business in accordance with SFAS No. 141, “*Business Combinations*”. We determined theappropriate purchase price allocation based on estimated fair values at thedate of acquisition for tangible and identifiable intangible assets acquired tobe approximately $600,000 for bingo units and support equipment andapproximately $1.0 million for identifiable intangibles with a residual amountof approximately $1.8 million assigned to goodwill.

 

We have incurred significantexpenses in aggressively defending or pursuing certain legal issues, includingdefense of a patent infringement lawsuit in Nevada and our litigation with aformer distributor in Texas.  The termsof the terminated distributor agreement with that Texas distributor containcertain contingent commission liabilities, which if a final judgment wererendered unfavorable to us, could have an adverse effect on our financialposition, results of operation and liquidity.  The contingent commission liabilities, only if determined attrial to be payable, would be calculated based on terms included in theterminated distributor agreement. Assuming revenues for the three-year periodremained constant at the rate earned over the first eight months followingtermination of the distributor agreement, the contingent liability would amountto approximately $2.4 million.  However, because we do not currently believeit probable that there will be an unfavorable outcome, we have not accrued anyamount related to these contingent liabilities.

 

Since the endof fiscal 2002, we have increased the staffing of our research and developmentdepartment by 50% and, thus far this fiscal year, we have more than doubled theamount expended in outside research and development costs from the first sixmonths of fiscal 2002.  We anticipatethat the growth in our research and development efforts will continue throughthe balance of the fiscal year.

 

During thefirst six-month period of fiscal 2003, our capital expenditures wereapproximately $4.9 million, $4.6 million of which represented investments inbingo and related support equipment, primarily for our color hand-held unit,the TED2 CTM.

 

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**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses ourcondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the balance sheet date andreported amounts of revenue and expenses during the reporting period. On an ongoingbasis, we evaluate our estimates and judgments, including those related torevenue recognition, bad debts, bingo unit depreciation, goodwill impairment,and contingencies and litigation. We base our estimates and judgments onhistorical experience and on various other factors that are reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

 

We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our condensed consolidated financialstatements.

 

***REVENUE RECOGNITION***

 

Revenue is recognized forbingo units placed in bingo halls under contracts based on (a) a fixed feeper use per session; (b) a fixed weekly fee per unit; or (c) apercentage of the revenue generated by each unit. Our revenue recognition is akey component of our results of operations, and determines the timing ofcertain expenses, such as commissions and royalties. We recognize revenue inaccordance with accounting principles generally accepted in the United Stateswhen all of the following factors exist: (a) evidence of an arrangementwith the customer; (b) play or availability of the bingo units; (c) afixed or determinable fee; and (d) collectibility is reasonably assured.We exercise judgment in assessing the creditworthiness of our customers andtherefore in our determination of whether collectibility is reasonably assured.Should changes in conditions cause us to determine these criteria are not metfor future transactions, revenue recognized for future reporting periods couldbe adversely affected.

 

***ALLOWANCE FOR DOUBTFUL ACCOUNTS***

 

We estimate the possiblelosses resulting from non-payment of outstanding accounts receivable. Weperform ongoing evaluations of our customers and distributors forcreditworthiness, economic trends, changes in our customer payment terms, andhistorical collection experience when evaluating the adequacy of our allowancefor doubtful accounts. We also reserve a percentage of our accounts receivablebased on aging category. In determining these percentages, we review historicalwrite-offs of our receivables, payment trends, and other available information.While such estimates have been within our expectations and the provisionsestablished, a change in financial condition of specific customers or inoverall trends experienced may result in future adjustments of our estimates ofrecoverability of our receivables.

 

***RESERVE FOR BINGO UNIT OBSOLESCENCE***

 

We provide reserves forexcess or obsolete bingo units on hand that we do not expect to be used. Ourreserves are based upon several factors, including our estimated forecast ofbingo unit demand for placement into halls. Our estimates of future bingo unitdemand may prove to be inaccurate, in which case we may have understated oroverstated the provision required for excess and obsolete bingo units. Althoughwe attempt to assure the accuracy of our estimated forecasts, any significantunanticipated changes in demand or technological developments could have asignificant impact on the value of our bingo units and our reported operatingresults.

 

***IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS***

 

We elected to early adoptStatement 142 during our fiscal year end October 31, 2002, and accordinglywe discontinued amortization of our goodwill as of November 1, 2001. Wecompleted the required measurement test as of that date and determined therewas no impairment of goodwill upon adoption of Statement 142. Thismeasurement included market multiple methodology and a discounted cash flowmethodology.

 

In addition, we are alsorequired to perform an annual goodwill impairment review, and depending uponthe results of that measurement, the recorded goodwill may be written down andcharged to income from operations when its carrying amount exceeds itsestimated fair value. In addition, we assess the impairment of goodwill

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whenever events or changes incircumstances indicate that the carrying value may not be recoverable, such asa significant adverse change in legal factors or in the business climate, anadverse action or assessment by a regulator, unanticipated competition, or aloss of key personnel. The review for fiscal 2002 was completed as ofJuly 31, 2002 (the valuation date), and we determined there was noimpairment of goodwill as of that date. Any subsequent impairment loss couldhave a material adverse impact on our financial condition and results ofoperations.

 

We assess the impairment ofidentifiable intangible assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors we considerimportant that could trigger an impairment review include the following:

 

• a significant change in the manner of ouruse of the acquired assets or the strategy for our overall business;

 

• a significant decrease in the market priceof an asset;

 

• a significant adverse change in legalfactors or in the business climate that could affect the value of an asset,including an adverse action or assessment by a regulator;

 

• a current period operating or cash flow losscombined with a history of operating or cash flow losses or a projection orforecast that demonstrates continuing losses associated with the use of anasset; and

 

• a currentexpectation that, more likely than not, an asset will be sold or otherwisedisposed of significantly before the end of its previously estimated usefullife.

 

***LEGAL CONTINGENCIES***

 

We are currently involved in various claimsand legal proceedings.  Periodically, wereview the status of each significant matter and assess our potential financialexposure.  If the potential loss fromany claim or legal proceeding is considered probable and the amount can beestimated, we accrue a liability for the estimated loss.  Significant judgment is required in both thedetermination of probability and the determination as to whether an exposurecan be reasonably estimated.  Because ofuncertainties related to these matters, accruals are based only on the bestinformation available at the time.  Asadditional information becomes available, we reassess the potential liabilityrelated to our pending claims and litigation and may revise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material impact on our results of operationsand financial position.  See Note E ofNotes to Condensed Consolidated Financial Statements for a description of ourmaterial legal proceedings.

 

**RESULTSOF OPERATIONS**

 

**ThreeMonths Ended April 30, 2003 Compared with Three Months Ended April 30, 2002**

 

REVENUE.  We generated revenue of $13.3 million for the three monthsended April 30, 2003 compared to $12.1 million for the comparable prior-yearperiod.  The $1.2 million, or 10.0%, netincrease in revenue from the second quarter of fiscal 2002 was primarily due toincreased TED2 C bingo unit placement and the contributionfrom the former IGS halls.

 

COST OF REVENUE.  Cost ofrevenue increased $1.1 million, or 23.5%, to $5.6 million for the three monthsended April 30, 2003 from $4.5 million for the comparable prior-year period.Cost of revenue as a percent of revenue for the current three-month periodincreased to 42.0% compared to 37.5% for the three months ended April 30, 2002.The increase in cost of revenue over the prior year was driven by a plannedincrease of $621,000 in service and operations principally for personnel andrelated costs attributable to the growth in service, and an increase of$649,000 in bingo unit depreciation and amortization primarily as a result ofour investment in TED2C color hand-held unitsand IGS units.  These increases werepartially offset with a decrease of $232,000 related to a write-off of acapitalized development project for the three months ended April 30, 2002,disposals of bingo units and equipment repair expenses.

 

GENERAL AND ADMINISTRATIVE.  General and administrative costs increased $968,000, or 45.4%, to $3.1million for the three months ended April 30, 2003 from $2.1 million for thecomparable prior-year period.  Generaland administrative costs as a percent of revenue for the current three-monthperiod were 23.3% compared to 17.6% for the three months ended April 30,2002.  Increased legal and consultingexpenses accounted for $722,000 of the increase and were the primary factorsdriving our costs above last year. We believe the elevated level of legal

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expenses, including thoserelated to defense of a patent infringement lawsuit in Nevada, litigation witha former distributor in Texas, litigation with a former distributor of IGS inMississippi and other legal proceedings, will continue for the third quarter offiscal 2003.

 

SALES AND MARKETING.* * Sales, marketing, and commission expenses increased $87,000, or2.8%, to $3.2 million for the three months ended April 30, 2003, from $3.1million for the comparable prior-year period.  Sales, marketing, and commission expenses as a percent of revenue forthe current three-month period were 24.0% compared to 25.7% for the threemonths ended April 30, 2002. Distributor commissions increased $56,000 to $2.2 million for the threemonths ended April 30, 2003 primarily due to the 10.0% increase inrevenue.  Distributor commissionexpenses, as a percentage of revenue for the current three-month period were16.3% compared to 17.5% for the three months ended April 30, 2002. Commissionswill fluctuate as the mix of revenue generated by distributors and thosecustomers served directly by us varies.

 

RESEARCH AND DEVELOPMENT. Research and development costs increased$326,000, or 58.7%, to $882,000 for the three months ended April 30, 2003 from$555,000 for the comparable prior-year period. Research and development costs as a percent of revenue for the currentthree-month period were 6.6% compared to 4.6% for the three months ended April30, 2002.  The increase is a result ofsignificant growth in the engineering staff and external project costs for newor enhanced products on which to play bingo. The accelerated level of investment in research and development costs isexpected to continue for the balance of fiscal 2003 and beyond.

 

PROVISION FOR INCOME TAXES.  Our income tax provision was adjusted during the current quarter torecognize an effective fiscal-year rate of 47.0%; the rate for the quarterended April 30, 2003 was 59.7% compared to 38.2% for the quarter ended April30, 2002.  The effective tax ratesreflect certain permanent differences and the effect of state and federalincome taxes on the pre-tax income.

 

**SixMonths Ended April 30, 2003 Compared with Six Months Ended April 30, 2002**

 

REVENUE.  We generated revenue of $26.5 million for the six monthsended April 30, 2003 compared to $24.0 million for the comparable prior-yearperiod.  The $2.6 million, or 10.7%, netincrease in revenue from the first six months of fiscal 2002 was primarily dueto increased TED2 C bingo unit placement and the contributionfrom the IGS halls.

 

COST OF REVENUE.  Cost ofrevenue increased $1.4 million, or 14.4%, to $10.9 million for the six monthsended April 30, 2003 from $9.5 million for the comparable prior-year period.Cost of revenue as a percent of revenue for the current six-month periodincreased to 41.0% compared to 39.7% for the six months ended April 30,2002.  The increase in cost of revenuewas primarily due to a $1.5 million increase in depreciation and amortization,as a result of our investment in TED2 C colorhand-held units and IGS units, and an increase of $814,000 in service andoperations, principally for personnel and related costs attributable to thegrowth in service.  These increases werepartially offset with a decrease of $944,000 related to a write-off of acapitalized development project for the six months ended April 30, 2002,refurbishments and disposals of bingo units and equipment expenses.

 

GENERAL AND ADMINISTRATIVE.  General and administrative costs increased $1.9 million, or 45.4%, to$6.0 million for the six months ended April 30, 2003 from $4.1 million for thecomparable prior-year period.  Generaland administrative costs as a percent of revenue for the current six-monthperiod were 22.6% compared to 17.2% for the six months ended April 30, 2002.The first quarter of fiscal 2002 included a benefit from reductions of $236,000and $332,000 to the October 31, 2001 reserves for management incentivecompensation and bad debts, respectively. Additionally, legal and consulting expenses increased $1.1 million abovelast year partially due to defense of a patent infringement lawsuit in Nevada,litigation with our former distributor in Texas, litigation with a formerdistributor of IGS in Mississippi and other legal proceedings.

 

SALES AND MARKETING.* * Sales, marketing, and commission expenses increased $278,000, or4.5%, to $6.4 million for the six months ended April 30, 2003 from $6.1 millionfor the comparable prior-year period.  Sales, marketing, and commission expenses as a percent of revenuedecreased for the current six-month period to 24.1% from 25.5% for the sixmonths ended April 30, 2002. Distributor commissions increased $281,000 to $4.4 million for the sixmonths ended April 30, 2003, primarily due to the 10.7% increase inrevenue.  Distributor commissionexpenses, as a percentage of revenue, for the current six-month period were16.6% compared to 17.2% for the six months ended April 30, 2002.  Commissions will fluctuate as the mix ofrevenue generated by distributors and those customers served directly by usvaries.

 

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RESEARCH AND DEVELOPMENT. Research and development costs increased$903,000, or 92.7%, to $1.9 million for the six months ended April 30, 2003from $974,000 for the comparable prior-year period.  Research and development costs as a percent of revenue for thecurrent six-month period were 7.1% compared to 4.1% for the six months endedApril 30, 2002.  The increase was aresult of significant growth in the engineering staff and external projectcosts for new or enhanced products on which to play bingo.

 

PROVISION FOR INCOME TAXES.  Our income tax provision is recorded at an effective rate of 47.0% forthe six-months ended April 30, 2003 compared to 38.2% for the six months endedApril 30, 2002.  The effective tax ratesreflect certain permanent differences and the effect of state and federalincome taxes on the pre-tax income.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Operatingactivities provided $10.0 million of cash for the six months ended April30, 2003 compared to $6.5 million for the six months ended April 30, 2002.The $10.0 million consisted primarily of net income of $748,000, adjustedby $5.1 million from depreciation, amortization, and obsolescenceprovisions, $3.9 million from refunded income taxes plus a net source of fundsof $234,000 from other operating assets and liabilities

 

We used approximately$6.3 million of cash in investing activities for the six months endedApril 30, 2003 compared to $8.5 million of cash for the six months endedApril 30, 2002. The $6.3 million consisted of $4.9 million of capitalexpenditures ($4.6 million of which was expended on bingo units andassociated support equipment), the purchase of certain assets of IGS and thepurchase of other intangible assets for a total of $3.9 million and a decreasein short-term investments of $2.4 million.

 

We received net cash of$387,000 in financing activities for the six months ended April 30, 2003compared to $338,000 for the six months ended April 30, 2002. The $387,000received for the six months ended April 30, 2003 was primarily proceeds fromstock option exercises of $501,000, offset by payments of $114,000 on long-termdebt.

 

As of April 30, 2003, we hadcash and cash equivalents and short-term investments of approximately$10.9 million. In addition to our cash and cash equivalents and short-terminvestments, we have a $10.0 million line of credit with Wells Fargo Bank,N.A., which has an interest rate based on the prime rate or London InterBankOffered Rate (“LIBOR”) plus 2.0%, at our option, on which there was nooutstanding balance at April 30, 2003. The revolving credit facility expires onApril 2, 2004.  We believe thatcash flow from operations and cash, cash equivalents, and short-terminvestments on hand, together with funds available under the revolving creditfacility, will be sufficient to support our operations and provide for budgetedcapital expenditures and liquidity requirements through fiscal 2003. Ourlong-term liquidity requirements will depend on many factors, including therate at which we expand our business, and whether we do so internally orthrough acquisitions. In addition, strategic opportunities we may pursue couldrequire us to fund our portion of operating expenses of such ventures and mayrequire us to advance additional amounts should any partners in such venturesbe unable to meet unanticipated capital calls or similar funding events. To theextent that the funds generated from the sources described above areinsufficient to fund our activities in the long term, we may be required toraise additional funds through public or private financing. No assurance can begiven that additional financing will be available or that, if it is available,it will be on terms acceptable to us.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our revolving creditfacility with Wells Fargo is a $10.0 million line of credit with aninterest rate based on the prime rate or LIBOR plus 2.0%, at our option. Theline of credit expires on April 2, 2004.

 

Because the interest rate onthe revolving credit facility is variable, our cash flow may be affected byincreases in interest rates, in that we would be required to pay more interestin the event that both the prime and LIBOR interest rates increase. We do notbelieve, however, that any risk inherent in the variable-rate nature of theloan is likely to have a material effect on our interest expense or availablecash. We currently maintain a zero balance on the revolving credit facility.

 

***Sensitivity Analysis.***   Assuming we had a $2.0 million balanceoutstanding as of April 30, 2003, the rate of interest calculated using theprime rate option would be 4.25%. Our monthly interest payment, if the ratestayed constant, would be $7,083. If the prime rate rose to 8.0%, which assumesan unusually large increase, our monthly payment would be $13,333. A morelikely increase of 1.0% or 2.0%, given the recent trend of decreasing or

 

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relatively low interest rates,would result in a monthly payment of $8,750 or $10,417, respectively. We do notbelieve the risk resulting from such fluctuations is material or that thepayment required would have a material effect on cash flow.

 

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

Based on their evaluation,as of a date within 90 days prior to the date of the filing of thisreport, of the effectiveness of our disclosure controls and procedures, ourChief Executive Officer and Chief Financial Officer have each concluded thatour disclosure controls and procedures are effective and sufficient to ensurethat we record, process, summarize, and report information required to bedisclosed by us in our periodic reports filed under the Securities Exchange Actwithin the time periods specified by the Securities and Exchange Commission’srules and forms. Subsequent to the date of their evaluation, there have notbeen any significant changes in our internal controls or in other factors thatcould significantly affect these controls, including any corrective action withregard to significant deficiencies and material weaknesses.

 

**CAUTIONARYSTATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995**

 

This documentincludes various “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Sections 21E of the SecuritiesExchange Act of 1934, as amended, which represent our expectations or beliefsconcerning future events.  Statementscontaining expressions, such as “believes,” “anticipates,” or “expects,” usedin our press releases and periodic reports on Forms 10-K and 10-Q filed withthe Commission, are intended to identify forward-looking statements.  All forward-looking statements involve risksand uncertainties.  Although we believeour expectations are based upon reasonable assumptions within the bounds of ourknowledge of our business and operations, there can be no assurances thatactual results will not materially differ from expected results.  We caution that these and similar statementsincluded in this report are further qualified by important factors that couldcause actual results to differ materially from those in the forward-lookingstatements.  Such factors include thosediscussed in our annual report on Form 10-K for the year ended October 31,2002.  Readers are cautioned not toplace undue reliance on forward-looking statements, which speak only as of thedate thereof.  We undertake noobligation to publicly release any revisions to such forward-looking statementsto reflect events or circumstances after the date hereof.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

On March 22, 2001, wefiled a claim in the United States District Court, District of Arizona,GAMETECH INTERNATIONAL, INC. V. TREND GAMING SYSTEMS, LLC, CV 01-540 PHXPGR, seeking a declaratory judgment that we are not in material breach of ourNovember 1, 1999 distribution agreement with Trend Gaming Systems, LLC, orTrend, and seeking damages for past due payments and wrongful withholdings byTrend. Trend has counterclaimed, alleging that its payments are in compliancewith its contractual obligations and that it is entitled to withhold certainmonies. Trend also contends that we are in breach of certain of our contractualobligations to Trend or its customers. On December 16, 2002, the courtentered at our request an order enjoining Trend from using approximately$540,000 in funds it had collected on our behalf, pending a trial on ourownership interest in those funds. The money has been placed in a bank accountsubject to the court’s control. In addition, collections of accounts receivableby Trend, if any, will also be placed in that account, pending the trial of thecase. No trial date has been set. Trend filed a motion for summary judgmentalleging that the termination of the distribution agreement was improper.  On May 16, 2003, the court denied Trend’smotion for summary judgment. We have denied the allegations and intend tovigorously pursue and defend this matter. However, we cannot provide assurance that we will obtain a favorableoutcome. An unfavorable outcome could have a material adverse effect on ourbusiness, financial position, and results of operations.

 

On October 30, 2002, CapitalGaming Supplies filed a claim in the United States District Court, SouthernDistrict of Mississippi, CAPITAL GAMING SUPPLIES, INC. V. GAMETECHINTERNATIONAL, INC., 3:02 CV 1636 WS, seeking a judgment that we tortiouslyinterfered with alleged existing and prospective customer accounts. We havedenied the allegations and filed a counter-claim seeking a judgment thatCapital tortiously interfered with our customer accounts. Capital recently filedan amended complaint adding other claims against us

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and other defendants, includinga claim for malicious breach of contract against International Gaming Systems,LLC or IGS, and its principals.  InNovember 2002, we acquired certain assets of IGS and we assumed certain claimsfiled by Capital against IGS and its principals. Capital seeks compensatory andpunitive damages from all defendants. Trial is set for January 26, 2004. We intend to defend and pursuevigorously this matter.  We believe thatCapital’s claims are without merit. However, we cannot provide assurance thatwe will obtain a favorable outcome. An unfavorable outcome could have amaterial adverse effect on our business, financial position, and results ofoperations.

 

In March 2003, the SouthCarolina Department of Revenue (“Department”) issued a notice to all personsand entities that use electronic daubing devices (such as our portable andfixed-base bingo units) to cease and desist using the devices as of September4, 2003.  The notice is a reversal ofthe Department’s previous position provided to us in 1995 regarding the use ofsuch devices.  The Department’s decisionwas not made due to any violation or improper conduct on our part.  We have filed a Request for Contested CaseHearing regarding the Department’s reversal. We disagree with the Department’s position and are actively seekinglegal and legislative relief so that our electronic daubing devices maycontinue to be used.  Historically,South Carolina has accounted for less than 5% of our annual revenues.  We can make no assurances that we will beable to continue to provide equipment to the South Carolina market afterSeptember 4, 2003.

 

We are involved in variousother legal proceedings arising out of our operations in the ordinary course ofour business. We do not believe that any of these proceedings will have amaterial adverse effect on our business, financial condition, or results ofoperations beyond the amounts recorded in the accompanying condensed consolidated financial statements. However, if settlementis not reached and the lawsuits proceed to trial, an unfavorable outcome couldhave a material adverse effect on our financial position and results ofoperations.

 

**ITEM2.  CHANGES IN SECURITIES AND USE OFPROCEEDS.**

 

Not Applicable

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not Applicable

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not Applicable

 

**ITEM 5. OTHER INFORMATION**

 

Not Applicable

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 
| a) EXHIBITS:            |
|-------------------------|
|                    |   |   |   |   |
| 10.24                   |   | Letter  Amendment dated April 2, 2003 between Well Fargo Bank, N.A., and the  Registrant, amending the letter agreement between the parties dated August  19, 1998, together with Revolving Line of Credit Note dated April 2, 2003. |
|                    |   |   |   |   |
| 99.1                    |   | Certification of Chief Executive Officer pursuant to U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                    |   |   |
| 99.2                    |   | Certification of Chief Financial Officer pursuant to U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                    |   |   |
| b) REPORTS  ON FORM 8-K |
|                    |   |   |
| 99.3                    |   | On March 10, 2003 we filed a current report on Form 8-K, reporting  the March 7, 2003 adoption of a Stockholder Rights Plan. |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| **Signature**            |   | **Title**                       |   | **Date**       |
|--------------------------|--------|---------------------------------|--------|----------------|
|                     |   |                            |   |           |
| /S/ Clarence  H. Thiesen |   | Chief  Executive Officer        |   | June 16,  2003 |
| Clarence H.  Thiesen     |   | (Principal  Executive Officer)  |   |           |
|                     |   |                            |   |           |
| /S/ John P.  Hewitt      |   | Chief  Financial Officer,       |   | June 16,  2003 |
| John P.  Hewitt          |   | (Principal  Financial Officer)  |   |           |
|                     |   |                            |   |           |
| /S/ Ann D.  McKenzie     |   | Corporate  Controller,          |   | June 16,  2003 |
| Ann D.  McKenzie         |   | (Principal  Accounting Officer) |   |           |

 

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**CERTIFICATION**

 

I, Clarence H. Thiesen, certify that:

 

1.                           I have reviewed this quarterly report on Form10-Q of GameTech International, Inc.;

 

2.                           Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report; and

 

3.                           Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations, andcash flows of the registrant as of, and for, the periods presented in thisquarterly report.

 

4.                           The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)    Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)    Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)    Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           The registrant’s other certifying officers and I have disclosed, based onour most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)    All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize, andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)    Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                           The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

 

Date:  June 16, 2003

 

 
|   | /S/ Clarence H. Thiesen |
|--------|-------------------------|
|   | Clarence H. Thiesen     |
|   | Chief Executive Officer |

 

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**CERTIFICATION**

 

 

I, John P. Hewitt, certify that:

 

1.                           I have reviewed this quarterly report on Form10-Q of GameTech International, Inc.;

 

2.                           Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report; and

 

3.                           Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results ofoperations, and cash flows of the registrant as of, and for, the periodspresented in this quarterly report.

 

4.                           The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)    Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)    Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)    Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                           The registrant’s other certifying officers and I have disclosed, based onour most recent evaluation, to the registrant’s auditors and the audit committeeof registrant’s board of directors (or persons performing the equivalentfunction):

 

a)    All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize, andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)    Any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                           The registrant’s other certifying officers and I have indicated in thisquarterly report whether there were significant changes in internal controls orin other factors that could significantly affect internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

 

Date:  June 16, 2003

 

 
|   | /S/ John P. Hewitt      |
|--------|-------------------------|
|   | John P. Hewitt          |
|   | Chief Financial Officer |

 

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