##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission File Number 000-23401
 GAMETECH INTERNATIONAL, INC.
  DELAWARE
    
    33-0612983(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 900 SANDHILL ROAD, RENO, NEVADA
89521
  þ o
 o o
 o þ




---



GAMETECH
INTERNATIONAL, INC.
 QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005
INDEX
 PageNo.Part I. Financial Information:Item 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of July 31, 2005 (Unaudited) and October 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended July 31, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20Part II. Other Information:Item 1.
    
    Legal Proceedings
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 July 31,
    
    
    October 31,2005
    
    
    2004(Unaudited)
    
    
    (Note A)Assets:Current assets:Cash and cash equivalents
    
    $
    7,435
    
    
    $
    6,101Short-term investments
    
    
    500
    
    
    
    2,605Accounts receivable, less allowance for doubtful
accounts of $2,379 in 2005 and $2,454 in 2004
    
    
    4,014
    
    
    
    3,484Deposits
    
    
    21
    
    
    
    29Refundable income taxes
    
    
    
    
    
    
    100Restricted short-term investment
    
    
    3,432
    
    
    
    Prepaid expenses and other current assets
    
    
    477
    
    
    
    650Deferred income taxes
    
    
    3,414
    
    
    
    2,358Total current assets
    
    
    19,293
    
    
    
    15,327Bingo equipment, furniture and other equipment, net
    
    
    20,883
    
    
    
    23,952Goodwill, net
    
    
    10,184
    
    
    
    10,184Intangibles, less accumulated amortization of $4,203 in
2005 and $3,614 in 2004
    
    
    1,786
    
    
    
    1,766Restricted cash
    
    
    450
    
    
    
    450Total assets
    
    $
    52,596
    
    
    $
    51,679Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    1,071
    
    
    $
    1,343Accrued payroll and related obligations
    
    
    1,889
    
    
    
    1,541Accrued loss contingency
    
    
    3,732
    
    
    
    3,628Income taxes payable
    
    
    
    
    
    
    1,214Other accrued liabilities
    
    
    2,624
    
    
    
    2,392Total current liabilities
    
    
    9,316
    
    
    
    10,118Non-current employment obligations
    
    
    191
    
    
    
    202Deferred income taxes
    
    
    2,186
    
    
    
    689Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 13,730,539 shares issued at July 31,
2005 and 13,700,339 at October 31, 2004
    
    
    14
    
    
    
    14Capital in excess of par value
    
    
    47,281
    
    
    
    47,081Retained earnings
    
    
    1,704
    
    
    
    1,671Less: Treasury stock, at cost: 1,855,325 shares in
2005 and 2004
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    40,903
    
    
    
    40,670Total liabilities and stockholders equity
    
    $
    52,596
    
    
    $
    51,679
  3




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in thousands, except per share amounts)
 (Unaudited)
 Three Months
    
    
    Nine MonthsEnded July 31,
    
    
    Ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    12,444
    
    
    $
    12,916
    
    
    $
    37,510
    
    
    $
    38,889Cost of revenue
    
    
    4,770
    
    
    
    6,108
    
    
    
    15,386
    
    
    
    17,434Gross profit
    
    
    7,674
    
    
    
    6,808
    
    
    
    22,124
    
    
    
    21,455Operating expenses:General and administrative
    
    
    3,687
    
    
    
    2,314
    
    
    
    9,237
    
    
    
    8,051Sales and marketing
    
    
    2,940
    
    
    
    3,028
    
    
    
    9,054
    
    
    
    9,459Research and development
    
    
    888
    
    
    
    1,298
    
    
    
    3,020
    
    
    
    3,681Total operating expenses
    
    
    7,515
    
    
    
    6,640
    
    
    
    21,311
    
    
    
    21,191Income from operations
    
    
    159
    
    
    
    168
    
    
    
    813
    
    
    
    264Interest and other income, net
    
    
    21
    
    
    
    31
    
    
    
    41
    
    
    
    11Income before provision for income taxes
    
    
    180
    
    
    
    199
    
    
    
    854
    
    
    
    275Provision for income taxes
    
    
    95
    
    
    
    166
    
    
    
    465
    
    
    
    199Net income
    
    $
    85
    
    
    $
    33
    
    
    $
    389
    
    
    $
    76Basic net income per share
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Diluted net income per share
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Weighted average number of common shares
outstanding (in thousands):Basic
    
    
    11,875
    
    
    
    11,782
    
    
    
    11,865
    
    
    
    11,759Diluted
    
    
    11,880
    
    
    
    11,971
    
    
    
    11,944
    
    
    
    11,924Cash dividends per common share
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.18
  4




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months EndedJuly 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    389
    
    
    $
    76Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    8,818
    
    
    
    8,545Obsolescence
    
    
    381
    
    
    
    896Loss on disposals of furniture and other equipment
    
    
    20
    
    
    
    28Stock compensation expense
    
    
    93
    
    
    
    Deferred income taxes
    
    
    442
    
    
    
    153Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (529
    )
    
    
    (99
    )Deposits
    
    
    8
    
    
    
    3Refundable income taxes
    
    
    100
    
    
    
    49Restricted short-term investments
    
    
    (3,432
    )
    
    
    Prepaid expenses and other current assets
    
    
    173
    
    
    
    (388
    )Accounts payable
    
    
    (272
    )
    
    
    207Accrued payroll and related obligations
    
    
    348
    
    
    
    283Accrued loss contingency
    
    
    104
    
    
    
    Income taxes payable
    
    
    (1,214
    )
    
    
    Other accrued liabilities
    
    
    232
    
    
    
    185Non-current employment obligations
    
    
    (10
    )
    
    
    (68
    )Net cash provided by operating activities
    
    
    5,651
    
    
    
    9,870Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    2,106
    
    
    
    1,750Payments for purchase of short-term investments
    
    
    
    
    
    
    (2,513
    )Capital expenditures for bingo equipment, furniture, and other equipment
    
    
    (5,565
    )
    
    
    (10,932
    )Payments for acquisitions of intangible assets and capitalized costs of
developed software
    
    
    (609
    )
    
    
    (741
    )Net cash used in investing activities
    
    
    (4,068
    )
    
    
    (12,436
    )Cash flows from financing activities:Payments on long-term debt
    
    
    
    
    
    
    (275
    )Payments of dividends
    
    
    (355
    )
    
    
    (2,116
    )Proceeds from exercise of stock options
    
    
    106
    
    
    
    195Net cash used in financing activities
    
    
    (249
    )
    
    
    (2,196
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,334
    
    
    
    (4,762
    )Cash and cash equivalents at beginning of period
    
    
    6,101
    
    
    
    10,202Cash and cash equivalents at end of period
    
    $
    7,435
    
    
    $
    5,440Supplemental disclosure of cash flow informationCash paid for income taxes
    
    $
    1,124
    
    
    $
    
  5




---



##### Table of Contents



GAMETECH INTERNATIONAL, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 JULY 31, 2005
(UNAUDITED)
 NOTES TO FINANCIAL STATEMENTS
 NOTE A. BASIS OF PRESENTATION
   USE OF ESTIMATES
  RECLASSIFICATIONS
  NOTE B. SIGNIFICANT ACCOUNTING POLICIES
 REVENUE RECOGNITION
  ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
   6




---



##### Table of Contents



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




---



##### Table of Contents



LEGAL CONTINGENCIES
   PRO FORMA STOCK-BASED COMPENSATION INFORMATION
 Accounting for Stock-Based Compensation, Accounting
for Stock-Based Compensation  Transition and Disclosure,
   Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    85
    
    
    $
    33
    
    
    $
    389
    
    
    $
    76Add: Stock-based
employee compensation
expense included in
reported net income, net
of related tax benefits
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method, net
of related tax effects
    
    
    (343
    )
    
    
    (56
    )
    
    
    (572
    )
    
    
    (228
    )Pro forma net income (loss)
    
    $
    (258
    )
    
    $
    (23
    )
    
    $
    (90
    )
    
    $
    (152
    )Net income (loss) per share:Basic  as reported
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Basic  pro forma
    
    $
    (0.02
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Diluted  pro forma
    
    $
    (0.02
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 8




---



##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of
Cash Flows
   Exchanges of Non-monetary Assets  an
amendment of Accounting Principles Board (APB) Opinion No. 29, Accounting for Non-monetary
Transactions.
 Accounting Changes and Error Corrections  a
replacement of APB No. 20 and FAS No.3.
 9




---



##### Table of Contents



NOTE C. EARNINGS PER SHARE
    Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    85
    
    
    $
    33
    
    
    $
    389
    
    
    $
    76Weighted average number
of shares outstanding
    
    
    11,875
    
    
    
    11,782
    
    
    
    11,865
    
    
    
    11,759Incremental shares from
the assumed exercise of
dilutive stock options
    
    
    5
    
    
    
    189
    
    
    
    79
    
    
    
    165Dilutive prorated shares
    
    
    11,880
    
    
    
    11,971
    
    
    
    11,944
    
    
    
    11,924Net earnings per share:Basic
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01Diluted
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.01
 NOTE D. LEGAL PROCEEDINGS
 GameTech International, Inc. v. Trend Gaming Systems, LLC
 10




---



##### Table of Contents



Civil Action No. 3:02 CV1636WS
    11




---



##### Table of Contents



NOTE E. CREDIT AGREEMENT
  NOTE F. INCOME TAXES
  NOTE G. STOCK COMPENSATION
   NOTE H. RESTRICTED SHORT TERM INVESTMENT
  NOTE I. SUBSEQUENT EVENTS
 1. Appointment of Independent Director
   12




---



##### Table of Contents



2. Hurricane Katrina
  NOTE J. SEVERANCE AGREEMENT
  NOTE K. NASDAQ NOTIFICATION
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
   OVERVIEW
  13




---



##### Table of Contents




    
    Trend (Texas) Litigation.We continue to engage in litigation with a former Texas
distributor. As we have previously reported, on November 1, 2004, a jury awarded the
former Texas distributor $3.5 million in compensatory damages while awarding our
company $735,000 in compensatory damages. Trend initially sought an award of $810,000
in legal fees and $26,000 in expenses and costs. In an amended request, Trend was
seeking an award of $1.4 million in legal fees and $61,000 in expenses and costs. On
August 5, 2005, Trend was awarded $909,000 in fees and expenses. We have posted
supersedeas bonds to stay collection while we take an appeal to the Ninth Circuit Court
of Appeals. At and for the year ended October 31, 2004 we recorded an estimated loss
contingency in the Trend litigation of $3.6 million.
    
    Texas Lottery Commission.On March 3, 2005 we received an Original Notice of
Opportunity to Show Compliance (the Notice) from the Texas Lottery Commission (the
Commission). The Notice alleged that we engaged in acts prohibited by Sections
2001.553, 2001.556, 2001.206 and 2001.407 of the Texas Bingo Enabling Act (the
Enabling Act). On May 16, 2005, the Commission sent a First Amended Notice of
Opportunity to Show Compliance (the Amended Notice). The Amended Notice reduced the
alleged violations to Sections 2001.553 and 2001.556 of the Enabling Act. On August 15,
2005 in order to avoid the costs of protracted litigation, we entered into an Agreement
in Compromise with the Commission (the Agreement). The Agreement calls for us to pay
the Commission $200,000 plus administrative expenses of $50,000 while admitting no
wrongdoing.
 TM 2 TM
 14




---



##### Table of Contents



APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   REVENUE RECOGNITION
  BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT
  Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
  SOFTWARE DEVELOPMENT CAPITALIZATION
 Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed
 15




---



##### Table of Contents



GOODWILL
  LONG-LIVED ASSETS
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 RESULTS OF OPERATIONS
  Three Months Ended July 31,
    
    
    Nine Months Ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenue
    
    $
    12,444
    
    
    
    100.0
    %
    
    $
    12,916
    
    
    
    100.0
    %
    
    $
    37,510
    
    
    
    100.0
    %
    
    $
    38,889
    
    
    
    100.0
    %Cost of Revenue
    
    
    4,770
    
    
    
    38.3
    %
    
    
    6,108
    
    
    
    47.3
    %
    
    
    15,386
    
    
    
    41.0
    %
    
    
    17,434
    
    
    
    44.8
    %Gross Profit
    
    
    7,674
    
    
    
    61.7
    %
    
    
    6,808
    
    
    
    52.7
    %
    
    
    22,124
    
    
    
    59.0
    %
    
    
    21,455
    
    
    
    55.2
    %Operating expenses:General and administrative
    
    
    3,687
    
    
    
    29.6
    %
    
    
    2,314
    
    
    
    17.9
    %
    
    
    9,237
    
    
    
    24.6
    %
    
    
    8,051
    
    
    
    20.7
    %Sales and marketing
    
    
    2,940
    
    
    
    23.6
    %
    
    
    3,028
    
    
    
    23.4
    %
    
    
    9,054
    
    
    
    24.1
    %
    
    
    9,459
    
    
    
    24.3
    %Research and development
    
    
    888
    
    
    
    7.1
    %
    
    
    1,298
    
    
    
    10.0
    %
    
    
    3,020
    
    
    
    8.1
    %
    
    
    3,681
    
    
    
    9.5
    %Total operating expenses
    
    
    7,515
    
    
    
    60.4
    %
    
    
    6,640
    
    
    
    51.4
    %
    
    
    21,311
    
    
    
    56.8
    %
    
    
    21,191
    
    
    
    54.5
    %Income from operations
    
    
    159
    
    
    
    1.3
    %
    
    
    168
    
    
    
    1.3
    %
    
    
    813
    
    
    
    2.2
    %
    
    
    264
    
    
    
    0.7
    %Interest and other income, net
    
    
    21
    
    
    
    0.2
    %
    
    
    31
    
    
    
    0.2
    %
    
    
    41
    
    
    
    0.1
    %
    
    
    11
    
    
    
    0.0
    %Income before provision for
income taxes
    
    
    180
    
    
    
    1.4
    %
    
    
    199
    
    
    
    1.5
    %
    
    
    854
    
    
    
    2.3
    %
    
    
    275
    
    
    
    0.7
    %Provision for income taxes
    
    
    95
    
    
    
    0.8
    %
    
    
    166
    
    
    
    1.3
    %
    
    
    465
    
    
    
    1.2
    %
    
    
    199
    
    
    
    0.5
    %Net income
    
    $
    85
    
    
    
    0.7
    %
    
    $
    33
    
    
    
    0.3
    %
    
    $
    389
    
    
    
    1.0
    %
    
    $
    76
    
    
    
    0.2
    %
  16




---



##### Table of Contents



Revenue
  Cost of Revenue
  Gross Profit
  Operating Expenses
  17




---



##### Table of Contents



Provision for Income Taxes
  LIQUIDITY AND CAPITAL RESOURCES
   18




---



##### Table of Contents



Contractual
Obligations
  19




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Currency Rate Fluctuations
  Market Risks
    Sensitivity Analysis Market Risks.
 Sensitivity Analysis Foreign Currency Exchange Rate Risk.
 
 ITEM 4. CONTROLS AND PROCEDURES.
  CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
  20




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
 GameTech International, Inc. v. Trend Gaming Systems, LLC
 Civil Action No. 3:02 CV1636WS
 21




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
 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.
 22




---



##### Table of Contents



SIGNATURES
  Signature
    
    Title
    
    Date/S/ Jay M. Meilstrup
    
    Chief Executive Officer and President
    
    September 14, 2005Jay M. Meilstrup
    
    (Principal
Executive Officer)/S/ James C. Wilson
    
    Chief Financial Officer
    
    September 14, 2005James C. Wilson
    
    (Principal
Financial Officer)/S/ Ann D. McKenzie
    
    Corporate Controller
    
    September 14, 2005Ann D. McKenzie
    
    (Principal
Accounting Officer)
 23