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SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM ________TO________ Commission File Number 000-23401 GAMETECH INTERNATIONAL, INC.  DELAWARE
(State or other jurisdiction
of incorporation or organization)
    
    33-0612983
(I.R.S. Employer Identification No.)
 900 SANDHILL ROAD, RENO, NEVADA
89521
(Address of principal executive offices)
(Zip code) Registrants telephone number, including area code: (775) 850-6000 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes o No x On June 8, 2004, the registrant had 11,768,939 outstanding shares of its
Common Stock, par value $0.001 per share.




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GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10 Q
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004
INDEX PageNo.Part I. Financial Information:Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets October 31, 2003 and April 30, 2004
    
    
    3Condensed Consolidated Statements of Operations Three Months and Six Months Ended April 30, 2003 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows Six Months Ended April 30, 2003 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16Part II. Other Information:Item 1. Legal Proceedings
    
    
    16Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits and Reports on Form 8-K
    
    
    17Signatures
    
    
    18EX-31.1EX-31.2EX-32.1EX-32.2
 2




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 October 31,
    
    April 30,2003
    
    2004(Note A)
    
    (Unaudited)Assets:Current assets:Cash and cash equivalents
    
    $
    10,202
    
    
    $
    8,493Short-term investments
    
    
    1,750
    
    
    
    1,493Accounts receivable, less allowance for
doubtful accounts of $2,287 in 2003 and
$2,393 in 2004
    
    
    3,624
    
    
    
    3,363Deposits
    
    
    28
    
    
    
    37Refundable income taxes
    
    
    231
    
    
    
    197Prepaid expenses and other current assets
    
    
    341
    
    
    
    629Deferred income taxes
    
    
    2,185
    
    
    
    2,153Total current assets
    
    
    18,361
    
    
    
    16,365Bingo equipment, furniture and other equipment, net
    
    
    22,319
    
    
    
    23,329Goodwill, net
    
    
    16,809
    
    
    
    16,809Intangibles, less accumulated amortization of
$2,089 in 2003 and $2,874 in 2004
    
    
    2,236
    
    
    
    1,899Restricted cash
    
    
    450
    
    
    
    450Total assets
    
    $
    60,175
    
    
    $
    58,852Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    783
    
    
    $
    545Accrued payroll and related obligations
    
    
    754
    
    
    
    766Other accrued liabilities
    
    
    1,743
    
    
    
    2,469Note payable and other obligations
    
    
    275
    
    
    
    111Total current liabilities
    
    
    3,555
    
    
    
    3,891Non-current employment obligations
    
    
    448
    
    
    
    420Deferred income taxes
    
    
    3,551
    
    
    
    3,551Commitments and contingenciesStockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 13,592,764 shares issued at October
31, 2003 and 13,621,764 shares issued at April
30, 2004
    
    
    14
    
    
    
    14Capital in excess of par value
    
    
    46,655
    
    
    
    46,742Retained earnings
    
    
    14,048
    
    
    
    12,330Less: Treasury stock, at cost: 1,855,325 shares
at October 31, 2003 and at April 30, 2004
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    52,621
    
    
    
    50,990Total liabilities and stockholders equity
    
    $
    60,175
    
    
    $
    58,852
 See accompanying notes. 3




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,2003
    
    2004
    
    2003
    
    2004(Unaudited)
    
    (Unaudited)Revenue
    
    $
    13,322
    
    
    $
    13,359
    
    
    $
    26,520
    
    
    $
    25,973Cost of revenue
    
    
    5,600
    
    
    
    5,822
    
    
    
    10,864
    
    
    
    11,697Gross profit
    
    
    7,722
    
    
    
    7,537
    
    
    
    15,656
    
    
    
    14,276Operating expenses:General and administrative
    
    
    3,098
    
    
    
    2,957
    
    
    
    6,001
    
    
    
    5,736Sales and marketing
    
    
    3,201
    
    
    
    3,397
    
    
    
    6,395
    
    
    
    6,431Research and development
    
    
    882
    
    
    
    1,056
    
    
    
    1,877
    
    
    
    2,013Total operating expenses
    
    
    7,181
    
    
    
    7,410
    
    
    
    14,273
    
    
    
    14,180Income from operations
    
    
    541
    
    
    
    127
    
    
    
    1,383
    
    
    
    96Interest and other income (expense), net
    
    
    20
    
    
    
    (26
    )
    
    
    27
    
    
    
    (20
    )Income before provision for income taxes
    
    
    561
    
    
    
    101
    
    
    
    1,410
    
    
    
    76Provision for income taxes
    
    
    335
    
    
    
    43
    
    
    
    662
    
    
    
    32Net income
    
    $
    226
    
    
    $
    58
    
    
    $
    748
    
    
    $
    44Basic net income per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.00Diluted net income per share
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.00Shares used in the calculation of net income per
share:Basic
    
    
    11,727,439
    
    
    
    11,756,828
    
    
    
    11,656,765
    
    
    
    11,747,027Diluted
    
    
    11,734,428
    
    
    
    11,818,104
    
    
    
    11,870,472
    
    
    
    11,819,875Cash dividends per common share
    
    
    
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.15
 See accompanying notes. 4




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Six Months EndedApril 30,2003
    
    2004(unaudited)Cash flows from operating activities:Net income
    
    $
    748
    
    
    $
    44Adjustments to reconcile net income to net cash provided by operating
activities net of effects of acquired business:Depreciation, amortization and obsolescence
    
    
    5,082
    
    
    
    5,901Loss on disposals of furniture and other equipment
    
    
    42
    
    
    
    27Deferred income taxes
    
    
    
    
    
    
    32Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (18
    )
    
    
    261Deposits
    
    
    550
    
    
    
    (9
    )Refundable income taxes
    
    
    3,885
    
    
    
    34Prepaid expenses and other current assets
    
    
    (24
    )
    
    
    (288
    )Accounts payable
    
    
    32
    
    
    
    (238
    )Accrued payroll and related obligations
    
    
    (11
    )
    
    
    12Other accrued liabilities
    
    
    (285
    )
    
    
    759Non-current employment obligations
    
    
    (10
    )
    
    
    (61
    )Net cash provided by operating activities
    
    
    9,991
    
    
    
    6,474Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    3,125
    
    
    
    1,750Payments for purchase of short-term investments
    
    
    (693
    )
    
    
    (1,493
    )Capital expenditures for bingo equipment, furniture and equipment
    
    
    (4,890
    )
    
    
    (6,155
    )Payment for the acquisition of International Gaming Systems, Inc.
    
    
    (3,469
    )
    
    
    Payments for buy out of distributor agreements
    
    
    (396
    )
    
    
    Payments for acquisitions of intangible assets and capitalized costs
of developed software
    
    
    
    
    
    
    (448
    )Net cash used in investing activities
    
    
    (6,323
    )
    
    
    (6,346
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (114
    )
    
    
    (164
    )Payment of dividends
    
    
    
    
    
    
    (1,760
    )Proceeds from sales of common stock
    
    
    501
    
    
    
    87Net cash provided by (used in) financing activities
    
    
    387
    
    
    
    (1,837
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,055
    
    
    
    (1,709
    )Cash and cash equivalents at beginning of period
    
    
    4,233
    
    
    
    10,202Cash and cash equivalents at end of period
    
    $
    8,288
    
    
    $
    8,493Supplemental disclosure of non-cash investing activities:Purchase of intangible assets through the incurrence of long-term debt
    
    $
    537
    
    
    $
    
 See accompanying notes. 5




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GAMETECH INTERNATIONAL, INC. 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2004
(UNAUDITED)
 NOTES TO FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements as
of April 30, 2004 have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three- and six-month periods ended April
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending October 31, 2004. The balance sheet at October 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included
in our annual report on Form 10-K for the year ended October 31, 2003. Certain amounts in the prior periods condensed consolidated financial
statements have been reclassified to conform to the current periods
presentation. NOTE B. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue is recognized for bingo terminals placed in bingo halls under
contracts based on (1) a fixed fee per use per session; (2) a fixed weekly fee
per terminal; or (3) a percentage of the revenue generated by each terminal.
Our revenue recognition is a key component of our results of operations, and
determines the timing of certain expenses, such as commissions and royalties.
We recognize revenue when all of the following factors exist: (a) evidence of
an arrangement with the customer; (b) play or availability of the bingo
terminals; (c) a fixed or determinable fee; and (d) collectibility is
reasonably assured. We exercise judgment in assessing the credit worthiness of
our customers to determine whether collectibility is reasonably assured.
Should changes in conditions cause us to determine the factors are not met for
future transactions, revenue recognized for future reporting periods could be
adversely affected. ALLOWANCE FOR DOUBTFUL ACCOUNTS We estimate the possible losses resulting from non-payment of outstanding
accounts receivable. Our customer base consists primarily of entities operating
in charitable, Native American, and commercial bingo halls located throughout
the United States. In some jurisdictions, the billing and collection function
is performed as part of a distributor relationship, and in those instances, we
maintain allowances for possible losses resulting from non-payment by both the
customer and distributor. We perform ongoing evaluations of customers and
distributors for credit worthiness, economic trends, change in customer payment
terms, and historical collection experience when evaluating the adequacy of our
allowance for doubtful accounts. We also reserve a percentage of our accounts
receivable based on aging category. In determining these percentages, we review
historical write-offs of our receivables, payment trends, and other available
information. While such estimates have been within our expectations and the
provisions established, a change in financial condition of specific customers
or in overall trends experienced may result in future adjustments of our
estimates of recoverability of our receivables. 6




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




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the best information available at the time. As additional information
becomes available, we reassess the potential liability related to our pending
claims and litigation and may revise our estimates. Such revisions in the
estimates of the potential liabilities could have a material impact on our
consolidated results of operations and financial position. See Note E of Notes
to these Condensed Consolidated Financial Statements for a description of our
material legal proceedings. PRO FORMA STOCK  BASED COMPENSATION INFORMATION Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure,and has been determined as if we had accounted for
our employee stock options under the fair value method of that statement. Our pro forma information follows: (In thousands, except per share amounts) Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,2003
    
    2004
    
    2003
    
    2004Net income, as reported
    
    $
    226
    
    
    $
    58
    
    
    $
    748
    
    
    $
    44Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method, net
of related tax effects
    
    
    (106
    )
    
    
    (108
    )
    
    
    (218
    )
    
    
    (176
    )Pro forma net income (loss)
    
    $
    120
    
    
    $
    (50
    )
    
    $
    530
    
    
    $
    (132
    )Net income (loss) per share:Basic  as reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.00Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.05
    
    
    
    (0.01
    )Diluted  as reported
    
    $
    0.02
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.00Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.01
    )
 NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 00-21, Multiple-Deliverable Revenue Arrangements(Issue
00-21). Issue 00-21 addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to
use assets. The consensus mandates how to identify whether goods or services or
both that are to be delivered separately in a bundled sales arrangement should
be accounted for separately because they are separate units of accounting.
The guidance can affect the timing of revenue recognition for such
arrangements, even though it does not change rules governing the timing or
pattern of revenue recognition of individual items accounted for separately.
The final consensus will be applicable to agreements entered into in fiscal
years beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The
adoption of Issue 00-21 did not have a material impact on our financial
position, cash flows or results of operations. In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities  an
Interpretation of ARB No. 51(FIN 46). In December 2003, FIN 46 was revised
to clarify certain provisions and effective dates for application. FIN 46
addresses consolidation by business enterprises of variable interest entities
that have certain characteristics. Transferors to qualifying special-purpose
entities and grandfathered qualifying special-purpose entities subject to the
reporting requirements of 8




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SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,are excluded from the scope of FIN 46. FIN
46 is applicable no later than the end of the first interim or annual reporting
period ending after March 15, 2004, unless we have an interest in a special
purpose entity, which the effective date for application is no later than the
end of the first interim or annual reporting period ending after December 15,
2003. We currently have no contractual relationship or other business
relationship with a variable interest entity. However, if we entered into any
such arrangement with a variable interest entity in the future, our financial
position, cash flows or results of operations may be adversely impacted. NOTE C. ACQUISITION OF ASSETS On November 7, 2002, we acquired certain assets of International Gaming
Systems, Inc. for a cash purchase price of $3.5 million, which included
approximately $69,000 of acquisition costs. The transaction was accounted for
as a purchase of a business in accordance with SFAS No. 141, Business
Combinations, and accordingly, the operating results have been included in our
consolidated financial statements since the date of acquisition. The total purchase price of the transaction has been allocated to the
identifiable intangible assets and tangible assets acquired, based on their
estimated fair values at the date of acquisition, with any residual amount
allocated to goodwill as follows: (In thousands) Acquired assets:Bingo equipment
    
    $
    582Intellectual property
    
    
    750Distributor contracts
    
    
    260Trademarks
    
    
    28Goodwill
    
    
    1,849$
    3,469
 The maximum potential contingent payments relating to the acquisition were
$2,043,000, which was placed in escrow pending the outcome of certain events.
The escrow was comprised of the following four components: $900,000 (the New
York Escrow Amount); $413,000 (the Title Transfer Escrow Amount); $230,000
(the Bingo Unit Escrow Amount); and $500,000 (the Holdback Escrow Amount).
The full amount of the Title Transfer Escrow Amount, the Bingo Unit Escrow
Amount and the Holdback Escrow Amount has been released to IGS as a result of
the successful transfer of title of certain assets to us, the verification of
the number of bingo terminals acquired and the satisfaction of certain
representations and warranties made by IGS. These amounts have been included
in the purchase price allocated to the assets acquired. The release of the New
York Escrow Amount is contingent upon the negotiation of new contracts with
IGSs former New York customers or the receipt by us of continuing revenues
from the New York customers. As of April 30, 2004, $784,500 of the New York
Escrow Amount has been released to IGS. The entire amount of the New York
Escrow Amount has been included in the purchase price allocated to the assets
acquired as we currently consider it probable that the remaining funds will be
paid to IGS. NOTE D. NET INCOME PER SHARE OF COMMON STOCK The calculation of the basic and diluted net income per share is the same
except for the dilutive effect of outstanding stock options (determined using
the treasury stock method). The dilution was 6,989 and 61,276 shares for the
three months ended April 30, 2003 and 2004, respectively. The dilution was
213,707 and 72,848 shares for the six months ended April 30, 2003 and 2004,
respectively. NOTE E. LITIGATION On March 22, 2001, we filed a claim in the United States District Court,
District of Arizona, GAMETECH INTERNATIONAL, INC. V. TREND GAMING SYSTEMS, LLC,
CV 01-540 PHX PGR, seeking a declaratory judgment that we are not in material
breach of our November 1, 1999 distribution agreement with Trend Gaming
Systems, LLC and seeking damages for past due payments and wrongful
withholdings by Trend. Trend has counterclaimed, alleging that its payments
are in compliance with its contractual obligations and that it is entitled to
withhold certain monies. Trend also contends that we are in breach of certain
of our contractual obligations to Trend or its customers. On December 16, 2002,
the court entered at our request an order enjoining Trend from using
approximately $540,000 in funds it had collected on our behalf, pending a trial
on our ownership interest in those funds. The money has been placed in a bank
account subject to the courts control and now totals approximately $585,000.
In addition, collections of accounts receivable by Trend, if any, will also be
placed in that account, pending the trial of the case. Trend filed a motion for
summary judgment alleging that the termination of the 9




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distribution agreement was improper. On May 16, 2003, the court dismissed
Trends motion for summary judgment. On December 2, 2003, Trend filed a
renewed motion for summary judgment alleging that we did not have the right to
terminate the distribution agreement based upon Trends failure to insure that
we received our minimum rate of return. The court, on March 19, 2004 denied
Trends renewed motion for summary judgment. A May 10, 2004 trial date has
been rescheduled for October 4, 2004. We have denied the allegations and
intend to vigorously pursue and defend this matter. However, we cannot provide
assurance that we will obtain a favorable outcome. An unfavorable outcome
could have a material adverse effect on our financial position, cash flows and
results of operations. On October 30, 2002, Capital Gaming Supplies filed a claim in the United
States District Court, Southern District of Mississippi, CAPITAL GAMING
SUPPLIES, INC. V. GAMETECH INTERNATIONAL, INC., 3:02 CV 1636 WS, seeking a
judgment that we tortiously interfered with alleged existing and prospective
customer accounts. We have denied the allegations and filed a counter-claim
seeking a judgment that Capital tortiously interfered with our customer
accounts. On April 18, 2003, Capital filed an amended complaint adding other
claims against us and other defendants, including a claim for malicious breach
of contract against IGS, and its principals. In November 2002, we acquired
certain assets of IGS and we assumed certain claims filed by Capital against
IGS and its principals. Capital seeks compensatory and punitive damages from
all defendants. The January 28, 2004 trial date has been postponed
indefinitely. We intend to defend and pursue vigorously this matter. We
believe that Capitals claims are without merit. However, we cannot provide
assurance that we will obtain a favorable outcome. An unfavorable outcome could
have a material adverse effect on our financial position, cash flows and
results of operations. We are involved in various other legal proceedings arising out of our
operations in the ordinary course of our business. We do not believe that any
of those proceedings will have a material adverse effect on our financial
position, cash flows or results of operations. However, if settlement is not
reached and the lawsuits proceed to trial, an unfavorable outcome could have a
material adverse effect on our financial position, cash flows and results of
operations. NOTE F. CREDIT AGREEMENTS Effective April 2, 2004, we renewed our revolving line-of-credit agreement
with a bank. The maximum amount available under the terms of the agreement is
$5.0 million, and borrowings bear interest based on the banks prime rate or
LIBOR plus 2.0 percent, at our option. Interest is payable monthly and the
agreement expires on April 2, 2005. The agreement is secured by substantially
all our assets. The agreement contains certain restrictive covenants, which
among other things require that specified financial balances and ratios be
maintained, profitability be maintained on a rolling four quarter basis, and
restrict the incurrence of additional indebtedness. At April 30, 2004, there
was no outstanding balance under the line-of-credit. NOTE G. INCOME TAXES Our income tax provision was recorded at an effective rate of 42.9% for
the six-months ended April 30, 2004 compared to 47.0% for the six months ended
April 30, 2003. The actual effective tax rate is different from the expected
federal rate of 35% due to certain permanent differences between financial and
tax accounting and state income taxes. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto included elsewhere in this
report, as well as our audited consolidated financial statements for the fiscal
year ended October 31, 2003 contained in our annual report on Form 10-K. The
following discussion contains certain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from the
results anticipated in these forward-looking statements as a result of the
factors set forth in this report and those risk factors included in our annual
report on Form 10-K for the fiscal year ended October 31, 2003. OVERVIEW We design, develop, and market interactive electronic bingo systems. We
currently market portable systems that can be played anywhere within a bingo
hall and a fixed-base system with touchscreen-activated monitors. For our 10




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three most recent fiscal years ended October 31, 2001, 2002 and 2003, our
portable terminals generated approximately 77%, 77% and 73% of our revenues,
respectively, while, during those same years, our fixed-base terminals
generated the balance of our revenues. For the three- and six-months ended
April 30, 2004, portable terminals accounted for 75% of our revenues and
fixed-based terminals accounted for 25% of our revenues. As of April 30, 2004,
we had systems in service in 35 states and in five foreign countries. We generate revenue by placing electronic bingo systems in bingo halls
under contracts based on (1) a fixed fee per use per session; (2) a fixed
weekly fee per terminal; or (3) a percentage of the revenues generated by each
terminal. Revenue growth is affected by player acceptance of electronic bingo
as an addition or an alternative to paper bingo, and our ability to expand
operations into new markets. Fixed-base bingo terminals generate greater
revenue per terminal than portable bingo terminals, but also require a greater
initial capital investment. We typically install our electronic bingo systems at no charge to our
customers, and we capitalize the costs. We record depreciation of bingo
equipment over a three- and five-year estimated useful life using the
straight-line method of depreciation. Our expenses consist primarily of (a) cost of revenue, consisting of
expenses associated with technical and operational support of the bingo systems
within bingo halls, depreciation of bingo systems, repair, refurbishment, and
disposals of bingo terminals and related support equipment, and excess or
obsolescence reserve; (b) general and administrative, consisting of activities
associated with management of our company and related support, which includes
finance and accounting, legal, compliance, information systems, and human
resources; (c) sales and marketing, consisting primarily of commissions paid to
distributors for promoting and supporting our products and an internal sales
force with a focus upon generating new customers and upgrades for existing
customers; and (d) research and development, consisting of company sponsored
research and development activities to provide players with new or enhanced
products. During the first six months of fiscal 2004, the following events occurred
that affected, or may in the future affect, our results of operations or
liquidity and capital resources. We have incurred significant expenses in aggressively defending or
pursuing certain legal issues, including defense of a patent infringement
lawsuit in Nevada, our litigation with a former distributor in Texas, and
litigation with a former distributor for IGS in Mississippi. The terms of the
terminated distributor agreement with the former Texas distributor contain
certain contingent commission liabilities, which if a final judgment were
rendered unfavorable to us, could have an adverse effect on our financial
position, results of operations and liquidity. The contingent commission
liabilities, only if determined at trial to be payable, would be calculated
based on terms included in the terminated distributor agreement. Assuming
revenues for the three-year period following termination of the distributor
agreement remained constant at the rate earned over the first 20 months
following termination of the distributor agreement, the contingent liability
would amount to approximately $2.1 million. Regarding the patent infringement
matter, an unfavorable outcome at trial could result in substantial damages and
payment of the plaintiffs fees and costs. The Mississippi distributor lawsuit
could result in a punitive damages award which could be materially adverse to
the company. However, because we do not currently believe it probable that
there will be unfavorable outcomes in any of these matters, we have not accrued
any amount related to these contingent liabilities or the other potential
lawsuits. We are involved in various other legal proceedings arising out of the
ordinary course of our business. While we do not believe that any of those
proceedings will have a material adverse effect on our financial position, cash
flows or results of operations, they do sometimes result in significant
expenses in defending or pursuing our legal position. One such matter
involving a terminated distributor in Virginia and Kentucky went to trial
during February 2004. On March 2, 2004 the jury rendered a unanimous verdict
in our favor awarding compensatory and punitive damages against the defendants
in the total amount of approximately $1.5 million, subject to approval of the
court and entry of judgment. We have petitioned the court for an award against
the defendants for our legal fees and costs. We can make no assurances that
the court, when entering its final judgment will not reduce the damages
awarded, or whether we will be able to collect any award from the defendants. While this particular matter appears to be resolved, we anticipate that
our legal expenses will continue at an elevated level as trial dates in two
other proceedings have been set for fiscal 2004 and the trial date in a third
matter, originally scheduled for January 2004, has been postponed but could be
rescheduled to take place in fiscal 2004. We have significantly increased the staffing in our research and
development and quality assurance departments. We expect to maintain a high
level of expenditures in these areas as we focus on new product development and
new features that can be added to our existing equipment. 11




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On January 16, 2004, we paid our first ever cash dividend. The one-time
special dividend of $0.12 per share aggregated approximately $1.4 million.
Additionally, on March 31, 2004, a regular quarterly dividend of $0.03 per
share was paid to stockholders of record as of March 22, 2004 and aggregated
approximately $353,000. During the first six-month period of fiscal 2004, our capital expenditures
were approximately $6.2 million, $5.5 million of which represented investments
in bingo and related support equipment. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
balance sheet date and reported amounts of revenue and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition, bad debts, bingo terminal
depreciation, goodwill impairment, and contingencies and litigation. We base
our estimates and judgments on historical experience and on various other
factors that are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. These estimates and assumptions are affected by the application of our
significant accounting policies. Our significant accounting policies are
described in Note B to the Condensed Consolidated Financial Statements
contained elsewhere in this report. Critical accounting policies are those that require management to make the
most difficult, subjective, or complex judgments, often as a result of
inherently uncertain matters that may change in subsequent periods. Our
critical accounting policies include revenue recognition, allowance for
doubtful accounts, reserves for bingo terminal obsolescence, capitalization of
software development costs, impairment of assets, and assessment and evaluation
of litigation and contingencies. Changes in internal or external conditions could cause actual results to
differ from our estimates and could cause future reporting periods to be
adversely affected. If changes in conditions lead us to believe that our
criteria for revenue recognition are not met for future transactions, revenue
recognized for future reporting periods could be significantly less. Changes
in financial conditions of specific customers or in overall collection trends
may result in adjustments to our reserves for doubtful accounts. Changes in
technology, our competitors offerings, market conditions or other factors
affecting our business prospects, could result in an increase in reserves for
bingo terminal obsolescence or in an impairment to the carrying value of
goodwill, other intangible assets or the capitalized cost of developed
software. As additional information becomes available and we reassess our
potential liability related to litigation or other contingencies, we may revise
our estimates and such revisions could have an adverse effect on our financial
position, cash flows and results of operations. RESULTS OF OPERATIONS Three Months Ended April 30, 2004 Compared with Three Months Ended April 30,
2003 REVENUE. We generated revenue of $13.4 million for the three months ended
April 30, 2004 compared to $13.3 million for the comparable prior-year period.
The modest increase in revenue from the second quarter of fiscal 2003 was due
to growth in the installed base of terminals and revenue per terminal in
certain geographical markets and, to a lesser degree, the contribution from the
growing deployment of our Pay-N-Play feature. These factors were sufficient
to offset a decline in the installed base in other geographical markets and the
effects of competitive pricing pressure in certain markets. On an overall
basis, our average installed base of terminals for the second quarter of fiscal
2004 declined slightly from the average installed base for the second quarter
of fiscal 2003, however, our revenue per terminal improved. COST OF REVENUE. Cost of revenue increased $222,000, or 4.0%, to $5.8
million for the three months ended April 30, 2004 from $5.6 million for the
comparable prior-year period. Cost of revenue as a percent of revenue for the
current three-month period increased to 43.6% compared to 42.0% for the three
months ended April 30, 2003. The increase in cost of revenue over the prior
year second quarter was the result of an increase of nearly $290,000 in
depreciation and amortization expense, primarily due to our investment in TED 2
C portable color 12




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terminals and continuing upgrades to our fixed base installations. We
expect the higher level of depreciation expense to continue as we acquire more
TED 2 C terminals, invest in our new color portable terminal, the Traveler,
and refresh our fixed base installations. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$141,000, or 4.6%, to $3.0 million for the three months ended April 30, 2004
from $3.1 million for the comparable prior-year period. General and
administrative costs as a percent of revenue were 22.1% for the current period,
down from 23.3% for the prior year three-month period. The second quarter of
fiscal 2003 and fiscal 2004 included elevated levels of legal expenses,
including those related to defense of a patent infringement lawsuit in Nevada,
litigation with a former distributor in Texas, litigation with a former
distributor of IGS in Mississippi, and other legal proceedings including our
successful litigation against a former distributor in Virginia and Kentucky and
a Virginia sub-distributor in late 2003. Subject to collectibility and final
judgment, we were awarded nearly $2.5 million in damages in these victories.
The improvement in general and administrative costs came as a result of a
decrease of $265,000 in consulting fees; partially offset by an unfavorable
change of $141,000 in bad debt expense. SALES AND MARKETING. Sales, marketing, and commission expenses increased
$196,000, or 6.1%, to $3.4 million for the three months ended April 30, 2004
from $3.2 million for the comparable prior-year period. Sales, marketing, and
commission expenses as a percent of revenue for the current three-month period
were 25.4% compared to 24.0% for the three months ended April 30, 2003.
Distributor commissions increased $97,000 to $2.3 million for the three months
ended April 30, 2004. Commissions will fluctuate because the mix of revenue
generated by distributors and those customers we serve directly varies. The
balance of the increase in sales and marketing costs was attributable to our
internal sales force, where travel, trade show and other costs, excluding
compensation, increased. RESEARCH AND DEVELOPMENT. Research and development costs increased
$174,000, or 19.7%, to $1.1 million for the three months ended April 30, 2004
from $882,000 for the comparable prior-year period. Research and development
costs as a percent of revenue for the current three-month period were 7.9%
compared to 6.6% for the three months ended April 30, 2003. The emphasis on
new product development and feature enhancements for existing products
continues as a major focus. During the second quarter of fiscal 2004, we capitalized $206,000 of
costs, from our research and development and quality assurance functions,
connected with the internal development of software that meets technological
feasibility and recoverability tests in accordance with FASB Statement No. 86.
We had no such capitalized costs in the second quarter of fiscal 2003. PROVISION FOR INCOME TAXES. Our income tax provision is recorded at an
effective rate of 42.9% for the quarter ended April 30, 2004 compared to 59.7%
for the quarter ended April 30, 2003. Our income tax provision was adjusted
during the second quarter of the prior-year to recognize an expected rate of
47.0% for the six month period ended April 30, 2003. The actual effective tax
rate is different from the expected federal rate of 35% due to certain
permanent differences between financial and tax accounting and state income
taxes. Six Months Ended April 30, 2004 Compared with Six Months Ended April 30, 2003 REVENUE. We generated revenue of $26.0 million for the six months ended
April 30, 2004 compared to $26.5 million for the comparable prior-year period.
The $547,000, or 2.1%, net decrease in revenue from the first six months of
fiscal 2003 occurred during the first quarter of fiscal 2004 and was due to
several factors, including fewer installed terminals in some geographical
markets and price erosion due to competition in others. We believe the
introduction of feature enhancements to existing products and the availability
of new products will provide for future revenue growth. However, the time
required to move newly developed features and products through beta testing and
regulatory approvals, where required, is difficult to predict. Our newest
portable color terminal, the Traveler, began beta testing in December, with
limited nationwide rollout beginning in the third fiscal quarter. COST OF REVENUE. Cost of revenue increased $833,000, or 7.7%, to $11.7
million for the six months ended April 30, 2004 from $10.9 million for the
comparable prior-year period. Cost of revenue as a percent of revenue for the
current six-month period increased to 45.0% compared to 41.0% for the six
months ended April 30, 2003. The increase in cost of revenue over the prior
year six-month period was the result of an increase of $575,000 in
depreciation and amortization expense, primarily due to our investment in TED 2
C portable color terminals and upgrades to fixed base installations, an
increase of $309,000 in service cost due to increased staffing in field and
product support centers and an $83,000 increase in operations expense that
includes our quality assurance function that we have expanded to keep pace with
the development of new features and new products. These increases were 13




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offset slightly by an improvement in the costs associated with the repair,
refurbishment and disposal of bingo terminals and related support equipment. GENERAL AND ADMINISTRATIVE. General and administrative costs decreased
$265,000, or 4.4%, to $5.7 million for the six months ended April 30, 2004 from
$6.0 million for the comparable prior-year period. General and administrative
costs as a percent of revenue for the current six-month period were 22.1%
compared to 22.6% for the prior year six month period. The first six-months of
fiscal 2003 and fiscal 2004 included elevated levels of legal expenses,
including those related to defense of a patent infringement lawsuit in Nevada,
litigation with a former distributor in Texas, litigation with a former
distributor of IGS in Mississippi, and other legal proceedings including our
successful litigation against a former distributor in Virginia and Kentucky and
a Virginia sub-distributor in late 2003. The improvement in general and
administrative costs came as a net result of a decrease of $125,000 in the
accrual for management incentive plan bonuses, a decrease in consulting fees of
$321,000, an increase of $140,000 in outside legal fees and an increase of
$78,000 in bad debt expense. SALES AND MARKETING. Sales, marketing, and commission expenses increased
$36,000, or 0.6%, to $6.4 million for the six months ended April 30, 2004.
Sales, marketing, and commission expenses as a percent of revenue for the
current six-month period were 24.8% compared to 24.1% for the six months ended
April 30, 2003. Distributor commissions decreased $50,000 to $4.4 million for
the six months ended April 30, 2004. Commissions will fluctuate because the mix
of revenue generated by distributors and those customers we serve directly
varies. Costs associated with our internal sales force grew by $87,000 as a
result of increases in non-payroll costs such as travel, marketing, facilities
and property taxes. RESEARCH AND DEVELOPMENT. Research and development costs increased
$136,000, or 7.2%, to $2.0 million for the six months ended April 30, 2004 from
$1.9 million for the comparable prior-year period. Research and development
costs as a percent of revenue for the current six-month period were 7.8%
compared to 7.1% for the six months ended April 30, 2003. The emphasis on new
product development and feature enhancements for existing products continues as
a major focus. During the first six months of fiscal 2004, we capitalized approximately
$350,000 of costs, from our research and development and quality assurance
functions, connected with the internal development of software that meets
technological feasibility and recoverability tests in accordance with FASB
Statement No. 86. We had no such capitalized costs in the first six months of
fiscal 2003. PROVISION FOR INCOME TAXES. Our income tax provision was recorded at an
effective rate of 42.9% for the six months ended April 30, 2004 compared to
47.0% for the six months ended April 30, 2003. The actual effective tax rate
is different from the expected federal rate of 35% due to certain permanent
differences between financial and tax accounting and state income taxes. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $6.5 million of cash for the six months
ended April 30, 2004 compared to $10.0 million for the six months ended April
30, 2003. The $6.5 million consisted primarily of our income of $44,000
adjusted by $5.9 million of non-cash expense for depreciation, amortization,
and obsolescence provisions, and a $529,000 net change in other operating
assets and liabilities. During the six months ended April 30, 2003, the $10.0
million provided by operating activities consisted primarily of net income of
$748,000 adjusted by $5.1 million of depreciation, amortization and
obsolescence reserves, $3.9 million from refunded income taxes plus a net
source of funds of $276,000 from changes in other operating assets and
liabilities. We used approximately $6.3 million of cash in investing activities for the
six months ended April 30, 2004 equal to the $6.3 million of cash invested
during the six months ended April 30, 2003. In fiscal 2004 the $6.3 million
consisted of $6.2 million of capital expenditures ($5.5 million of which was
expended on bingo terminals and associated support equipment), and the purchase
and development of other intangible assets for a total of $448,000; partially
offset with a decrease in short-term investments of $257,000. During fiscal
2003, the $6.3 million consisted of $4.9 million of capital expenditures ($4.6
million of which was expended on bingo terminals and associated support
equipment), the purchase of certain assets of IGS and other intangible assets
for a total of $3.9 million and a decrease in short-term investments of $2.4
million. We used net cash of $1.8 million in financing activities for the six
months ended April 30, 2004 compared to $387,000 provided by financing
activities for the six months ended April 30, 2003. The $1.8 million used for
the six months ended April 30, 2004 was primarily for cash dividends of nearly
$1.8 million, and payments of $164,000 on long-term debt. The $387,000 provided
for the six months ended April 30, 2003 was primarily proceeds from stock
option exercises of $501,000, offset by payments of $114,000 on long-term debt. 14




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As of April 30, 2004, we had cash and cash equivalents and short-term
investments of approximately $10.0 million. In addition to our cash and cash
equivalents and short-term investments, we have a $5.0 million line of credit
with Wells Fargo Bank, N.A., which has an interest rate based on the prime rate
or London InterBank Offered Rate (LIBOR) plus 2.0%, at our option, on which
there was no outstanding balance at April 30, 2004. The revolving credit
facility expires on April 2, 2005. We believe that cash flows from operations
and cash, cash equivalents, and short-term investments on hand will be
sufficient to support our operations, provide for budgeted capital
expenditures, make dividend payments, and meet liquidity requirements through
the remainder of fiscal 2004. Our long-term liquidity requirements will depend
on many factors, including the rate at which we expand our business, and
whether we do so internally or through acquisitions. In addition, strategic
opportunities we may pursue could require us to fund our portion of operating
expenses of such ventures and may require us to advance additional amounts
should any partners in such ventures be unable to meet unanticipated capital
calls or similar funding events. To the extent that the funds generated from
the sources described above are insufficient to fund our activities in the long
term, we may be required to raise additional funds through public or private
financing. No assurance can be given that additional financing will be
available or that, if it is available, it will be on terms acceptable to us. Contractual Obligations The following table summarizes information on contractual obligations as
of April 30, 2004: (In thousands) Payments Due by YearOctober 31,RemainingTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterOperating Leases
    
    $
    4,003
    
    
    $
    419
    
    
    $
    727
    
    
    $
    714
    
    
    $
    587
    
    
    $
    545
    
    
    $
    1,011Other Long Term Obligations
    
    
    813
    
    
    
    131
    
    
    
    44
    
    
    
    45
    
    
    
    46
    
    
    
    47
    
    
    
    500Total Contractual Cash
Obligations
    
    $
    4,816
    
    
    $
    550
    
    
    $
    771
    
    
    $
    759
    
    
    $
    633
    
    
    $
    592
    
    
    $
    1,511
 Purchase Commitments From time to time, we enter into commitments with our vendors to purchase
terminals and support equipment at fixed prices or guaranteed quantities. We
have entered into such an agreement with one of our vendors to provide
approximately $5.2 million in Traveler terminals, with the majority of the
terminals to be delivered by the end of the current fiscal year. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We maintain an investment portfolio in available-for-sale debt securities
of the U.S. Government and its agencies, and from time to time in investment
grade corporate issues. The values of these investments are subject to changes
in interest rates. However, because these investments are short-term and are
generally allowed to mature, we do not believe that any risk inherent in our
portfolio is likely to have a material effect on expected cash flows. We
monitor these investments for impairment and make appropriate reductions in
carrying value when necessary. Our revolving credit facility with Wells Fargo is a $5.0 million line of
credit with an interest rate based on the prime rate or LIBOR plus 2.0%, at our
option. The agreement contains certain restrictive covenants, which among
other things require that specified financial balances and ratios be
maintained, quarterly profitability be maintained and restrictions on the
incurrence of additional indebtedness. The line of credit expires on April 2,
2005. Because the interest rate on the revolving credit facility is variable,
our cash flow may be affected by increases in interest rates, in that we would
be required to pay more interest in the event that both the prime and LIBOR
interest rates increase. We do not believe, however, that any risk inherent in
the variable-rate nature of the loan is likely to have a material effect on our
interest expense or available cash. We currently maintain a zero balance on the
revolving credit facility. Sensitivity Analysis.Assuming we had a $2.0 million balance
outstanding as of April 30, 2004, the rate of interest calculated using the
prime rate option would be 4.0%. Our monthly interest payment, if the rate
stayed constant, would be $6,667. If the prime rate rose to 8.0%, which assumes
an unusually large increase, our monthly payment would be $13,333. A more
likely increase of 1.0% or 2.0%, given the recent trend of decreasing or 15




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relatively low interest rates, would result in a monthly payment of $8,333 or
$10,000, respectively. We do not believe the risk resulting from such
fluctuations is material or that the payment required would have a material
effect on cash flow. 
 ITEM 4. CONTROLS AND PROCEDURES We have evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of April 30, 2004. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have each concluded that our disclosure
controls and procedures are effective to ensure that we record, process,
summarize, and report information required to be disclosed by us in our
quarterly reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.
During the quarterly period covered by this report, there have not been any
changes in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document includes various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Sections
21E of the Securities Exchange Act of 1934, as amended, which represent our
expectations or beliefs concerning future events. Statements containing
expressions, such as believes, anticipates, or expects, used in our press
releases and periodic reports on Forms 10-K and 10-Q filed with the Commission,
are intended to identify forward-looking statements. All forward-looking
statements involve risks and uncertainties. Although we believe our
expectations are based upon reasonable assumptions within the bounds of our
knowledge of our business and operations, there can be no assurances that
actual results will not materially differ from expected results. We caution
that these and similar statements included in this report are further qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements. Such factors include those discussed
in our annual report on Form 10-K for the year ended October 31, 2003. Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date thereof. We undertake no obligation to publicly
release any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On March 22, 2001, we filed a claim in the United States District Court,
District of Arizona, GAMETECH INTERNATIONAL, INC. V. TREND GAMING SYSTEMS, LLC,
CV 01-540 PHX PGR, seeking a declaratory judgment that we are not in material
breach of our November 1, 1999 distribution agreement with Trend Gaming
Systems, LLC and seeking damages for past due payments and wrongful
withholdings by Trend. Trend has counterclaimed, alleging that its payments
are in compliance with its contractual obligations and that it is entitled to
withhold certain monies. Trend also contends that we are in breach of certain
of our contractual obligations to Trend or its customers. On December 16, 2002,
the court entered at our request an order enjoining Trend from using
approximately $540,000 in funds it had collected on our behalf, pending a trial
on our ownership interest in those funds. The money has been placed in a bank
account subject to the courts control and now totals approximately $585,000.
In addition, collections of accounts receivable by Trend, if any, will also be
placed in that account, pending the trial of the case. Trend filed a motion for
summary judgment alleging that the termination of the distribution agreement
was improper. On May 16, 2003, the court dismissed Trends motion for summary
judgment. On December 2, 2003, Trend filed a renewed motion for summary
judgment alleging that we did not have the right to terminate the distribution
agreement based upon Trends failure to insure that we received our minimum
rate of return. The court, on March 19, 2004 denied Trends renewed motion for
summary judgment. A May 10, 2004 trial date has been rescheduled for October
4, 2004. We have denied the allegations and intend to vigorously pursue and
defend this matter. However, we cannot provide assurance that we will obtain a
favorable outcome. An unfavorable outcome could have a material adverse effect
on our financial position, cash flows and results of operations. On October 30, 2002, Capital Gaming Supplies filed a claim in the United
States District Court, Southern District of Mississippi, CAPITAL GAMING
SUPPLIES, INC. V. GAMETECH INTERNATIONAL, INC., 3:02 CV 1636 WS, seeking a
judgment that we tortiously interfered with alleged existing and prospective
customer 16




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accounts. We have denied the allegations and filed a counter-claim seeking
a judgment that Capital tortiously interfered with our customer accounts. On
April 18, 2003, Capital filed an amended complaint adding other claims against
us and other defendants, including a claim for malicious breach of contract
against IGS, and its principals. In November 2002, we acquired certain assets
of IGS and we assumed certain claims filed by Capital against IGS and its
principals. Capital seeks compensatory and punitive damages from all
defendants. The January 28, 2004 trial date has been postponed indefinitely.
We intend to defend and pursue vigorously this matter. We believe that
Capitals claims are without merit. However, we cannot provide assurance that
we will obtain a favorable outcome. An unfavorable outcome could have a
material adverse effect on our financial position, cash flows and results of
operations. We are involved in various other legal proceedings arising out of our
operations in the ordinary course of our business. We do not believe that any
of these proceedings will have a material adverse effect on our financial
condition, cash flows or results of operations. However, if settlement is not
reached and the lawsuits proceed to trial, an unfavorable outcome could have a
material adverse effect on our financial position, cash flows and results of
operations. 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES. Not Applicable 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 
 ITEM 5. OTHER INFORMATION Not Applicable 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS:  31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. b) REPORTS ON FORM 8-K We filed a current report on Form 8-K on March 1, 2004 reporting our
financial results for our first fiscal quarter ended January 31, 2004, and
announcing a special cash dividend. 17




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Signature
    
    Title
    
    Date/S/ Clarence H. Thiesen

Clarence H. Thiesen
    
    Chief Executive Officer
(Principal Executive Officer)
    
    June 14, 2004/S/ John P. Hewitt

John P. Hewitt
    
    Chief Financial Officer,
(Principal Financial Officer)
    
    June 14, 2004/S/ Ann D. McKenzie

Ann D. McKenzie
    
    Corporate Controller,
(Principal Accounting Officer)
    
    June 14, 2004
 18