UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
      One)R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended July 31, 2008OR£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period from
      _____________ to____________
 
 Commission
File Number 000-23401
 
 GAMETECH
INTERNATIONAL, INC.
 (Exact
name of registrant as specified 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 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. YesRNo£
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” ” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large accelerated filer£
              Accelerated filerRNon-accelerated
      filer   £
              Smaller
      reporting company£
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes£NoR
 
 On
September 5, 2008, the registrant had 12,041,222 outstanding shares of its
Common Stock, par value $0.001 per share.
 
  
 
  
  
  
  
  
 GAMETECH
INTERNATIONAL, INC.
 QUARTERLY
REPORT ON FORM 10-Q
 FOR
THE QUARTERLY PERIOD ENDED JULY 31, 2008
 INDEX
 
 PageNo.Part
      I. Financial Information:Item
      1. Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of July 31, 2008, (Unaudited) and October
      31, 2007
              3Unaudited
      Condensed Consolidated Statements of Operations for the Three and Nine
      months Ended July 31, 2008, and 2007
              4Unaudited
      Condensed Consolidated Statements of Cash Flows for the Nine months Ended
      July 31, 2008, and 2007
              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
              19Item
      4. Controls and Procedures
              19Part
      II. Other Information:Item
      1. Legal Proceedings
              20Item
      1A. Risk Factors
              20Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              20Item
      3. Defaults Upon Senior Securities
              21Item
      4. Submission of Matters to a Vote of Security Holders
              21Item
      5. Other Information
              21Item
      6. Exhibits
              21Signatures
              23
     PART
1. FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
Thousands, except shares and per share amounts)
  July
      31,
              
              
              October
      31,2008
              
              
              2007(Unaudited)
              
              
              (Note
      1)Assets:Current
      assets:Cash
      and cash equivalents
              
              $
              9,636
              
              
              $
              3,630Short-term
      investments
              
              
              -
              
              
              
              7,763Accounts
      receivable, less allowance of $774 in 2008 and $2,429 in
    2007
              
              
              6,497
              
              
              
              8,585Inventory
              
              
              4,578
              
              
              
              4,298Deposits
              
              
              135
              
              
              
              14Prepaid
      expenses and other current assets
              
              
              1,270
              
              
              
              702Prepaid
      taxes
              
              
              600
              
              
              
              76Current
      portion of notes receivables
              
              
              116
              
              
              
              116Deferred
      income taxes
              
              
              2,888
              
              
              
              2,651Total
      current assets
              
              
              25,720
              
              
              
              27,835Bingo
      equipment, furniture and other equipment, net
              
              
              16,403
              
              
              
              19,902Goodwill,
      net
              
              
              36,680
              
              
              
              36,680Intangibles,
      less accumulated amortization of $5,835 in 2008 and $4,634 in
      2007
              
              
              6,565
              
              
              
              7,766Restricted
      cash
              
              
              519
              
              
              
              502Notes
      receivables, net of current portion
              
              
              36
              
              
              
              132Deferred
      income taxes, long term
              
              
              227
              
              
              
              226Debt
      acquisition costs, net
              
              
              797
              
              
              
              839Investments
              
              
              2,797
              
              
              
              -Total
      assets
              
              $
              89,744
              
              
              $
              93,882Liabilities
      and stockholders’ equity:Current
      liabilities:Accounts
      payable
              
              $
              1,080
              
              
              $
              2,094Accrued
      payroll and related obligations
              
              
              1,566
              
              
              
              1,074Accrued
      loss contingencies
              
              
              4,022
              
              
              
              4,022Current
      portion of long term debt
              
              
              4,441
              
              
              
              4,462Deferred
      revenue
              
              
              3,482
              
              
              
              767Other
      accrued liabilities
              
              
              1,471
              
              
              
              1,463Total
      current liabilities
              
              
              16,062
              
              
              
              13,882Long
      term debt, net of current portion
              
              
              22,034
              
              
              
              25,297Deferred
      income taxes
              
              
              228
              
              
              
              224Total
      liabilities
              
              $
              38,324
              
              
              $
              39,403Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders’
      equity:Common
      stock, $0.001 par value: 40,000,000 shares authorized; 14,472,732
      sharesissued
      at July 31, 2008, and 14,472,732 shares issued at October 31,
      2007.
              
              $
              14
              
              
              $
              14Additional
      paid in capital
              
              
              51,413
              
              
              
              51,355Retained
      earnings
              
              
              11,662
              
              
              
              11,706Treasury
      stock, at cost: 2,431,510 shares at July 31, 2008, and 1,855,325
      sharesat
      October 31, 2007.
              
              
              (11,669
              )
              
              
              (8,096
              )Related
      party receivable
              
              
              -
              
              
              
              (500
              )Total
      stockholders’ equity
              
              
              51,420
              
              
              
              54,479Total
      liabilities and stockholders’ equity
              
              $
              89,744
              
              
              $
              93,882
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -
3 -
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
Thousands, except per share amounts)
 (Unaudited)
  Three
      Months
              
              
              Nine
      MonthsEnded
      July 31,
              
              
              Ended
      July 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenue
              
              $
              13,362
              
              
              $
              16,637
              
              
              $
              42,416
              
              
              $
              42,065Cost
      of revenue
              
              
              6,815
              
              
              
              7,764
              
              
              
              19,584
              
              
              
              18,539Gross
      profit
              
              
              6,547
              
              
              
              8,873
              
              
              
              22,832
              
              
              
              23,526Operating
      expenses:General
      and administrative
              
              
              2,503
              
              
              
              2,713
              
              
              
              7,817
              
              
              
              6,776Sales
      and marketing
              
              
              2,625
              
              
              
              2,528
              
              
              
              7,876
              
              
              
              8,059Research
      and development
              
              
              1,430
              
              
              
              1,064
              
              
              
              4,261
              
              
              
              2,451Loss
      contingencies
              
              
              -
              
              
              
              31
              
              
              
              -
              
              
              
              124Total
      operating expenses
              
              
              6,558
              
              
              
              6,336
              
              
              
              19,954
              
              
              
              17,410Income
      (loss) from operations
              
              
              (11
              )
              
              
              2,537
              
              
              
              2,878
              
              
              
              6,116Interest
      expense
              
              
              (768
              )
              
              
              (977
              )
              
              
              (2,150
              )
              
              
              (1,332
              )Impairment
      of investments
              
              
              (102
              )
              
              
              -
              
              
              
              (1,079
              )
              
              
              -Other
      income (expense), net
              
              
              111
              
              
              
              214
              
              
              
              280
              
              
              
              539Income
      (loss) before income taxes
              
              
              (770
              )
              
              
              1,774
              
              
              
              (71
              )
              
              
              5,323Provision
      (benefit) for income taxes
              
              
              (282
              )
              
              
              695
              
              
              
              (27
              )
              
              
              1,965Net
      income (loss)
              
              $
              (488
              )
              
              $
              1,079
              
              
              $
              (44
              )
              
              $
              3,358Net
      income (loss) per share:Basic
              
              $
              (0.04
              )
              
              $
              0.09
              
              
              $
              0.00
              
              
              $
              0.27Diluted
              
              $
              (0.04
              )
              
              $
              0.08
              
              
              $
              0.00
              
              
              $
              0.26Shares
      used in calculating net income per share:Basic
              
              
              12,079
              
              
              
              12,580
              
              
              
              12,244
              
              
              
              12,552Diluted
              
              
              12,289
              
              
              
              12,890
              
              
              
              12,485
              
              
              
              13,029
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -
4 -
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited,
In Thousands)
  Nine
      Months Ended July 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (44
              )
              
              $
              3,358Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              7,695
              
              
              
              8,635Obsolescence
      and loss on disposal of bingo terminals and related
    equipment
              
              
              609
              
              
              
              16Loss
      on disposal of furniture and other equipment
              
              
              9
              
              
              
              64Loss
      on investment impairment
              
              
              1,079
              
              
              
              -Stock
      compensation expense
              
              
              58
              
              
              
              (69
              )Deferred
      income taxes
              
              
              (234
              )
              
              
              (436
              )Amortization
      of debt acquisition costs
              
              
              42
              
              
              
              -Interest
      on investments
              
              
              (271
              )
              
              
              (281
              )Interest
      on restricted cash
              
              
              (11
              )
              
              
              (15
              )Change
      in operating assets and liabilities:Accounts
      receivable, net
              
              
              2,088
              
              
              
              (1,537
              )Deposits
              
              
              (121
              )
              
              
              3Inventory
              
              
              (358
              )
              
              
              (379
              )Prepaid
      taxes
              
              
              (524
              )
              
              
              64Prepaid
      expenses and other assets
              
              
              (514
              )
              
              
              (470
              )Notes
      receivable
              
              
              90
              
              
              
              40Accounts
      payable
              
              
              (1,014
              )
              
              
              (1,638
              )Accrued
      payroll and related obligations
              
              
              492
              
              
              
              187Accrued
      loss contingencies
              
              
              -
              
              
              
              148Income
      taxes payable
              
              
              -
              
              
              
              (288
              )Deferred
      revenues
              
              
              2,715
              
              
              
              767Other
      accrued liabilities
              
              
              8
              
              
              
              (432
              )Net
      cash provided by operating activities
              
              
              11,794
              
              
              
              7,737Cash
      flows from investing activities:Proceeds
      from sale of short-term investments
              
              
              10,158
              
              
              
              18,037Payments
      for purchase of short-term investments
              
              
              (6,000
              )
              
              
              (15,515
              )Capital
      expenditures for bingo equipment, furniture, and other
      equipment
              
              
              (3,537
              )
              
              
              (5,234
              )Payment
      for the acquisition of Summit Amusement & Distributing,
      Ltd.
              
              
              -
              
              
              
              (2,437
              )Payment
      for the acquisition of intangible assets
              
              
              -
              
              
              
              (50
              )Net
      cash provided by (used in) investing activities
              
              
              621
              
              
              
              (5,199
              )Cash
      flows from financing activities:Tax
      benefit from stock options exercised
              
              
              -
              
              
              
              167Payments
      on long-term debt
              
              
              (3,336
              )
              
              
              (3
              )Repurchase
      of treasury stock
              
              
              (3,073
              )
              
              
              -Proceeds
      from issuance of common stock
              
              
              -
              
              
              
              271Net
      cash (used in) provided by financing activities
              
              
              (6,409
              )
              
              
              435Net
      increase in cash and cash equivalents
              
              
              6,006
              
              
              
              2,973Cash
      and cash equivalents at beginning of period
              
              
              3,630
              
              
              
              5,411Cash
      and cash equivalents at end of period
              
              $
              9,636
              
              
              $
              8,384Supplemental
      cash flow information:Cash
      paid during the period for:Interest
              
              $
              2,105
              
              
              $
              1,286Income
      taxes
              
              $
              757
              
              
              $
              2,148Non-cash
      investing and financing activities:Acquisition
      of assets included in accounts payable
              
              $
              485
              
              
              $
              762Settlement
      of related party receivable in the company's common stock
              
              $
              500
              
              
              $
              -Issuance
      of note payable for insurance
              
              $
              53
              
              
              $
              -Notes
      payable for the acquisition of Summit Amusement &
      Distributing
              
              $
              -
              
              
              $
              38,945Notes
      payable for the acquisition of patent
              
              $
              -
              
              
              $
              200The
      Company purchased Summit for $40.9 million. In conjunction with the
      acquisition, liabilities were assumed as follows:Fair
      value of assets acquired
              
              $
              -
              
              
              $
              7,570Goodwill
      and intangibles
              
              $
              -
              
              
              $
              32,560Notes
      payable
              
              $
              -
              
              
              $
              (38,945
              )Liabilities
      assumed
              
              $
              -
              
              
              $
              (1,185
              )
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -
5 -
 GAMETECH
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  
  NOTES TO FINANCIAL STATEMENTS
 
   1.
BASIS OF PRESENTATION
   The
accompanying unaudited condensed consolidated financial statements and related
disclosures as of July 31, 2008, have been prepared in accordance with generally
accepted accounting principles in the United States (“GAAP”) applicable to
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In our
opinion, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of our financial position and interim results
have been included. Operating results for the three and nine month periods ended
July 31, 2008, are not necessarily indicative of the results that may be
expected for the current fiscal year or any other period.
   The
balance sheet at October 31, 2007, has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements. These condensed
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes, as well as other
information included in our Annual Report on Form 10-K and Form 10-K/A for the
year ended October 31, 2007, and any other of our filings with the Securities
and Exchange Commission.
   USE
OF ESTIMATES
   The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Allowance for doubtful
accounts, obsolescence, impairment of goodwill, loss contingencies, provision
for income taxes, and stock-based compensation are significant estimates made by
us. Actual results could ultimately differ from those estimates.
   RECLASSIFICATIONS
   There are
certain prior period reclassifications made to conform to classifications in the
current period.
     2. SIGNIFICANT ACCOUNTING
POLICIES
   REVENUE
RECOGNITION
   We
recognize revenue when the following criteria are met:
  ·
              Persuasive
      evidence of an arrangement between us and our customer
    exists,·
              Delivery
      has occurred or services have been rendered,·
              The
      price is fixed or determinable, and·
              Collectability
      is reasonably assured.
  We earn
our revenue in a variety of ways. We offer our products for lease or sale. We
also sell service and software updates for equipment previously sold or
leased.
   Bingo
Equipment
   Revenue
is recognized for bingo terminals and bingo systems installed as a single
element 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. Revenue recognition is a
key component of our results of operations, and determines the timing of certain
expenses, such as commissions. 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) collectability is reasonably assured. We exercise
judgment in assessing the credit worthiness of customers to determine whether
collectability 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.
   VLT
and Slot Machine Equipment
   Our
product sales revenues are generated from the sale of video lottery terminals
(“VLT’s”), conversion kits, content fees, license fees, participation fees,
equipment, and services (collectively referred to as “Box Equipment”). Revenues
are recorded in accordance with the American Institute of Certified Public
Accounts’ (“AICPA”) Statement of Position (“SOP”) No 97-2 Software Revenue
Recognition and are reported net of discounts, sales taxes and other taxes of a
similar nature. Revenues related to contracted production are recognized as the
related work is delivered. We recognize license fee revenues over the term of
the associated agreement unless the fee is in exchange for products delivered or
services performed that represent the culmination of a separate earnings
process. Amounts received prior to completing the earnings process are deferred
until revenue recognition criteria are met. Our sales
   -
6 -
  credit
terms are predominately 30 days. In certain limited circumstances, we may
extend credit terms up to 160 days.
   ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
   Accounts
receivable are recorded when revenue is recognized in accordance with our
revenue recognition policy and represent claims against third parties that will
be settled in cash. The carrying value of our receivables, net of allowances,
represents our estimated net realizable value. The balance of accounts
receivable is $7.3 million with an allowance for doubtful accounts totaling $0.8
million, for net accounts receivable of $6.5 million.
   Bingo
Equipment
   We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the lease of our bingo units. Our customer base consists
primarily of entities operating in charitable, Native American, and commercial
bingo halls located throughout United States, Canada, Mexico, and the United
Kingdom. 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 our customers and
distributors for credit worthiness, economic trends, changes in our 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.
   Box
Equipment
   We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the sale of video lottery terminals and related
equipment. Our customer base consists of casinos located in various states and
Native American territories. We perform ongoing evaluations of our customers and
distributors for credit worthiness, economic trends, changes in our customer
payment terms, and historical collection experience when evaluating the adequacy
of our allowance for doubtful accounts.
   INVENTORIES
   Inventories
are stated at the lower of cost or market. Our raw material is valued using the
first-in, first-out method and our finished goods are valued using standard
costing that approximates the first-in, first-out method. Management
periodically reviews inventory balances, using recent and future expected sales
to identify slow-moving or obsolete items. Inventories consist of the following
at July 31, 2008 (in thousands):
  July
      31, 2008Inventory
      – parts
              
              $
              2,804Inventory
      – equipment
              
              
              1,774Total
      Inventory
              
              $
              4,578
  BINGO EQUIPMENT, FURNITURE AND OTHER
EQUIPMENT
   Bingo
equipment includes portable and fixed-base player terminals, file servers,
caller units, point-of-sale units, and other support equipment. We record bingo
equipment, furniture, and other equipment at cost and depreciate these over the
estimated useful lives of the assets using the straight-line method. The
estimated useful lives are as follows:
  Bingo
      equipment
              3-5
      yearsOffice
      furniture and equipment
              3-7
      yearsLeasehold
      improvements
              Remaining
      Life of Lease
  We
provide reserves for excess or obsolete bingo terminals on hand that we do not
expect to use. The reserves are based upon several factors, including estimated
forecast of bingo terminal demand for placement into bingo halls. The estimates
of demand for future bingo terminal may prove to be inaccurate, in which case we
may have understated or overstated the provision required for excess and/or
obsolete bingo terminals. Although we attempt to assure the accuracy of these
estimated forecasts, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of bingo
terminals, results of operations, and financial condition.
   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 capitalize qualified costs of software developed
for new products and 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 becomes available for
general release. The achievement of technological feasibility and the
estimate of the product’s economic life require judgments. 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.
   -
7 -
   GOODWILL
   We are
required to perform an annual goodwill impairment review, and depending upon the
results, the recorded goodwill may be written down and charged to income from
operations when its carrying amount exceeds its estimated fair value. Goodwill
is reviewed for possible impairment annually or more frequently 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 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 be
recognized for long-lived assets and identifiable intangible assets, other than
goodwill, used in operations. The losses are recognized when indicators of
impairment are present and the estimated undiscounted cash flow of the asset are
not sufficient to recover the asset’s 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 claims and legal proceedings (see Note 7 Legal
Proceedings). Periodically, we review the status of each matter and assess the
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, we base accruals on 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 these estimates. Such revisions in the estimates of the potential
liabilities could have a material impact on the results of operations and
financial condition.
   STOCK-BASED
COMPENSATION
   We
generally grant stock options to our employees for a fixed number of shares with
an exercise price equal to the fair value of the shares on the date of the
grant.
   We have
adopted the Financial Accounting Standards Board (“FASB”) SFAS No. 123(R), Share
Based Payment. This statement is a revision of SFAS No. 123, and supersedes APB
Opinion No. 25, and its related implementation guidance. SFAS No. 123(R)
addresses all forms of share-based payment awards including shares issued under
employer stock purchase plans, stock options, restricted stock, and stock
appreciation rights. Under SFAS No. 123(R), share-based payment awards result in
a cost that will be measured at fair value on the award’s grant date. Stock
options exercised in future periods will result in an adjustment within the
Consolidated Statement of Cash Flows depicting increase in net cash provided by
financing activities related to the cash received and an incremental tax
benefit. In the fourth quarter of the fiscal year 2005, our Board of Directors
approved the acceleration of the vesting of all unvested stock options awarded
under the 1997 Incentive Stock Plan. As a result, all options outstanding at
October 31, 2005, were fully vested and no compensation cost for such options
will be recognized in any future periods.
   For the
three-month period ended July 31, 2008, we recognized compensation costs of
$87,900 and a related tax benefit of $33,666 for a net cost of $54,234. This
includes an additional compensation expense of $64,524 for two stock option
settlements for fully vested equity shares. For the nine months then ended, we
recognized a compensation expense of $96,183 and a related tax benefit of
$36,838 for a net cost of $59,345. For the three and nine month periods ended
July 31, 2008, there was no effect to either the basic and diluted earnings per
share as a result of recognizing the share-based compensation expense, net of
tax.
   For
the three-month period ended July 31, 2007, we recognized compensation expense
of $111,003 and a related tax benefit of $37,416 for a net cost of $73,587. For
the nine-month period ended July 31, 2007, we recognized a compensation credit
of $69,654 and a related tax benefit reversal of $25,801 for a net credit of
$43,853. For the three-month period ended July 31, 2007, both basic and diluted
earnings per share were reduced by $0.01 as a result of recognizing the
share-based compensation expense, net of tax. For the nine-month period ended
July 31, 2007, both basic and diluted earnings per share were increased by less
than $0.01 as a result of recognizing the share-based compensation credit, net
of tax. The stock option compensation reversal due to the change in accounting
estimate is included in these totals.
   As of
July 31, 2008, the total compensation cost related to unvested stock-based
awards granted to employees under our stock option plans but not recognized was
$235,822. The cost of each award will be amortized on a straight-line basis over
its term, which range from two to four years, and will be adjusted for
subsequent changes in estimated forfeitures.
   During
the three and nine months ended July 31, 2008, no options were granted. For the
three and nine months ended July 31, 2007, we granted 50,000 and 300,000
options, respectively.
   During
the three and nine months ended July 31, 2008, we granted 30,000 and 65,000
restricted shares, respectively, to various employees that vest over a
three-year period. The shares were valued at market on the grant date. The
awards will be amortized on a straight-line basis over the term of the grants.
We recognized expense for the three and nine months ended July 31, 2008, of
$23,761 and $36,284, respectively, and a related tax benefit of $9,100 and
$13,897, respectively, for a net cost of $14,661 and $22,387, respectively. As
of July 31, 2008, the compensation related to unvested restricted stock awards
granted to employees under our stock option plan but not yet recognized was
$315,722. The cost will be adjusted for subsequent changes in estimated
forfeitures.
   -
8 -
   On
November 10, 2005,, the FASB issued Staff Position No. SFAS 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards. We
have elected to adopt the alternative transition method provided in this FASB
Staff Position for calculating the tax effects of share-based compensation
pursuant to SFAS No. 123(R). The alternative transition method includes a
simplified method to establish the beginning balance of the additional paid-in
capital pool related to the tax effects of employee share-based compensation,
which is available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS No. 123(R).
   Under
SFAS No. 123(R) stock-based compensation cost is measured at the grant date
based on the estimated fair value of the award and recognized over the stated
vesting period. We continue to utilize the Black-Scholes option-pricing model to
estimate the fair value of employee stock-based compensation at the date of
grant, which requires the use of accounting judgment and financial estimates.
The expected life of the options used in this calculation is the period of time
the options are expected to be outstanding, and is determined by the simplified
method outlined in Staff Accounting Bulletin 107, which states, “The midpoint of
the average vesting period and contractual life is an acceptable expected life
assumption.” Expected stock volatility is based on the historic volatility of
the stock for a period equal to the length of time we have been public. Expected
option exercises, the period of time the options are held, forfeitures, employee
terminations and other criteria are based on previous experiences. The risk-free
rates for periods within the contractual life of the options are based on United
States Treasury Note rates in effect at the time of the grant for the period
equal to the expected life. Application of alternative assumptions could produce
significantly different estimates of the fair value of stock-based compensation
and consequently, the related amounts recognized in the Condensed Consolidated
Statements of Income.
   RECENT
ACCOUNTING PRONOUNCEMENTS
   In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to elect to
measure eligible financial instruments, commitments and certain arrangements at
fair value at specified election dates, with changes in fair value recognized in
earnings at each subsequent reporting period. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We are assessing the potential
impact of SFAS No. 159 on our financial position, results of operation, and cash
flow.
   In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Accounting and Reporting of Non-Controlling Interest in
Consolidated Financial Statements, an Amendment of ARB No. 51. These new
standards will significantly change the financial accounting and reporting of
business combination transactions and non-controlling (or minority) interests in
consolidated financial statements. We will be required to adopt SFAS No. 141(R)
and SFAS No. 160 on or after December 15, 2008. We have not yet determined
the effect, if any, that the adoption of SFAS 141(R) and SFAS No. 160 will have
on our consolidated financial statements.
   In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative instruments and
Hedging Activities. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable better understanding of the effects on financial position,
financial performance, and cash flows. The effective date is for fiscal years
and interim periods beginning after November 15, 2008. We have not yet
determined the effect, if any, that the adoption of SFAS No. 161 will have on
our consolidated financial statements.
   In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (“SAB") No. 110 to permit entities, under certain
circumstances, to continue to use the “simplified” method, in developing
estimates of expected term of “plain-vanilla” share options in accordance with
SFAS No. 123 (R) Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit
the use of the “simplified” method beyond December 31, 2007. The adoption of SAB
No. 110 did not materially affect our financial statements.
 
   3.
INVESTMENTS
   Investments
at July 31, 2008, consisted of $3.9 million of principal invested in Auction
Rate Securities (“ARS”) at cost. The ARS held are private placement securities
with long-term nominal maturities with the interest rates reset through a Dutch
auction each month. The monthly auctions historically have provided a liquid
market for these securities. Our investments in ARS represent interests in
collateralized debt obligations supported by pools of residential and commercial
mortgages, credit cards, insurance securitizations, and other structured
credits, including corporate bonds. Some of the underlying collateral for the
ARS we hold consists of sub-prime mortgages.
   Consistent
with our investment policy guidelines, the ARS investments held had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in
global credit and capital markets, the ARS held by us at July 31, 2008, have
experienced multiple failed auctions as the amount of securities submitted for
sale exceeded the amount of purchase orders. In addition, during 2008 Moody’s
downgraded some ARS credit ratings and placed others on credit watch. All of our
ARS investments retained at least a B2 rating as of July 31, 2008.
   The
estimated market value of our ARS holdings at July 31, 2008, was $2.8 million,
which reflects an approximate adjustment of $0.1 million and $1.1 million for
the three and nine months ended July 31, 2008, respectively, to the principal
value of $3.9 million. Although the ARS continue to pay interest according to
their stated terms, based on the fair value of the investments and an analysis
of other-than-temporary impairment factors, we recorded a pre-tax impairment
charge of approximately $0.1 million and $1.1 million for the three and nine
months ended July 31, 2008.
   In prior
periods, we classified the amount invested in ARS as marketable securities in
the current assets listed on the balance sheet. Given the failed auctions, our
ARS are illiquid until there is a successful auction for them. Accordingly, we
reclassified the entire balance of the ARS from short-term to non-current
investments.
   -
9 -
   4.
ACQUISITION
   On
March 28, 2007, we acquired essentially all of the assets of Summit Amusement
& Distributing, Ltd. (“Summit”) for $40.9 million in cash. Summit is a
leading developer and manufacturer of entertainment driven gaming devices,
including primarily video lottery terminal equipment and related software,
headquartered in Billings, Montana.
   Under the
purchase method of accounting, the total purchase price is allocated to Summit’s
tangible and intangible assets based on their fair values as of the date of the
closing of the acquisition. We are in disagreement with the seller regarding
approximately $1.0 million of the purchase price regarding the total working
capital at the date of closing. We are working with the seller to settle this
matter through arbitration. The purchase price may change based on the outcome
of that arbitration. The purchase price, including the disputed working capital,
has been allocated as described below.
   The
total purchase price is as follows (in thousands):
  Cash paid for Summit
              
              $
              39,745Direct
      transaction costs
              
              
              1,115Total
      cash purchase price
              
              $
              40,860
  The
allocation of the purchase price and estimated useful lives and first year
amortization associated with certain assets is as follows (in
thousands):
  Accounts receivable
              
              $
              2,645Prepaid
      expenses and other assets
              
              
              211Inventory
              
              
              3,312Property
      plant and equipment
              
              
              1,598Identifiable
      depreciable intangibles assets
              
              
              7,720Trade
      name
              
              
              1,600Goodwill
              
              
              24,896Accounts
      payable and other accrued expenses
              
              
              (1,122
              )Total
      preliminary purchase price
              
              $
              40,860
  Unaudited
pro forma results of operations, assuming the acquisition of Summit had been
completed at the beginning of each period are summarized below. The results
reflect adjustments to amortization, interest expense, and income tax expense.
The interest rates used in determining the pro forma adjustments are related to
the credit facility and approximate a blended average rate of 9.54% for the
three and nine months ended July 31, 2007. The pro forma adjustment for the
income tax expense is based on our effective rate of 40%. The pro forma earnings
per share are based on our shares outstanding since we did not issue shares for
the acquisition (in thousands, except for share amounts).
  
 Nine
      Months EndedJuly
      31, 2007Net
      sales
              
              $
              49,760Net
      earnings
              
              
              1,310Basic
      earnings per share
              
              $
              0.10Diluted
      earnings per share
              
              $
              0.10
  In the above
acquisition, we acquired various intangible assets listed below:
  Acquired Intangible
Assets (in thousands):
  July
      31, 2008Net
      FairFair
      Market
                
                Estimated
                
                Accumulated
                
                
                MarketValue
                
                Lives
                
                Amortization
                
                
                ValueAmortized
      Intangible AssetsCustomer
      relationships
                
                $
                3,600
                
                5
      years
                
                $
                960
                
                
                $
                2,640Patent
      application
                
                
                520
                
                10
      years
                
                
                69
                
                
                
                451Game
      library
                
                
                3,600
                
                10
      years
                
                
                480
                
                
                
                3,120Total
      amortizable intangible assets
                
                $
                7,720
                
                
                
                $
                1,509
                
                
                $
                6,211Unamortized
      Intangible AssetsGoodwill
                
                $
                24,896Summit
      trade name
                
                
                1,600Total
                
                $
                26,496
   Amortization
expense related to the acquisition of Summit for the three and nine months ended
July 31, 2008, is $283,000 and $849,000, respectively. Estimated future
aggregate amortization expense for intangible assets associated with the Summit
acquisition subject to amortization as of July 31, 2008, is as follows (in
thousands):
   -
10 -
   
  2008
              
              $
              2832009
              
              
              1,1322010
              
              
              1,1322011
              
              
              1,1322012
              
              
              712After
      2012
              
              
              1,820$
              6,211
   5.
NET INCOME PER SHARE
   Basic net
income per share is computed by dividing reported net income by the weighted
average number of common shares outstanding each period. Diluted net income per
share is computed by using the weighted average number of common shares and
other common equivalent shares outstanding during each period. Diluted common
shares are calculated in accordance with the treasury stock method, which treats
the proceeds from the exercise of all warrants and options as if they were used
to reacquire stock at market value.
   (In
thousands, except per share amounts)
  Three
      Months Ended
              
              
              Nine
      Months EndedJuly
      31,
              
              
              July
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (loss), as reported
              
              $
              (488
              )
              
              $
              1,079
              
              
              $
              (44
              )
              
              $
              3,358Weighted
      average number of shares outstanding
              
              
              12,079
              
              
              
              12,580
              
              
              
              12,244
              
              
              
              12,552Incremental
      shares from the assumed exercise of dilutive stock options
              
              
              210
              
              
              
              310
              
              
              
              241
              
              
              
              477Dilutive
      weighted shares
              
              
              12,289
              
              
              
              12,890
              
              
              
              12,485
              
              
              
              13,029Net
      income (loss) per share:Basic
              
              $
              (0.04
              )
              
              $
              0.09
              
              
              $
              0.00
              
              
              $
              0.27Diluted
              
              $
              (0.04
              )
              
              $
              0.08
              
              
              $
              0.00
              
              
              $
              0.26
  
   6.
TREASURY STOCK
   On
September 4, 2007, the Board of Directors authorized expending up to $5.0
million in a share-repurchase program, which expired September 3, 2008. During
the fiscal year ended October 31, 2007, we advanced $0.5 million to a member of
our Board of Directors to repurchase stock on our behalf and accounted for this
as a related party receivable for financial statement reporting purposes. During
the quarter ended January 31, 2008, the director settled the receivable by
repurchasing common stock. As of July 31, 2008, we had acquired 576,185 shares
of our common stock at a cost of approximately $3.6 million (including the
shares received from the related party) pursuant to our repurchase
program.
 
   7.
LEGAL PROCEEDINGS
   On March
22, 2001, we filed GameTech International, Inc. v. Trend Gaming Systems, LLC,
CIV 01-0540 PHX LOA, a claim in the United States District Court for the
District of Arizona, seeking a declaratory judgment that we are not in material
breach of our November 1, 1999. Distribution Agreement with Trend Gaming
Systems, LLC (“Trend”), and seeking damages for past due payments and wrongful
withholdings by Trend. Trend counterclaimed, alleging that its payments were in
compliance with its contractual obligations. Trend also contended that we were
in breach of certain of our contractual obligations to Trend, including that we
had wrongfully terminated Trend. 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 was placed in two bank accounts/constructive trusts, subject to
the court’s control. The sums in those accounts now total approximately
$646,000. In addition, collections of accounts receivable by Trend, if any, are
also being placed in that account, pending the resolution of the case. We have
posted a $450,000 deposit with the court as a bond, which is presented as
restricted cash on our condensed consolidated balance sheets. The accounts
receivable from Trend were fully reserved. During the quarter ended April 30,
2008, we wrote off all receivables and related reserves. Trial in this matter
commenced October 4, 2004. On November 1, 2004, the jury returned a verdict
in favor of Trend against us in the amount of $3.5 million in compensatory
damages. The jury also awarded us $735,000 in compensatory damages against Trend
for funds Trend collected on our behalf but failed to remit to us. The court
denied all of our post-trial motions, except that it maintained the injunction
imposing a constructive trust, pending resolution of the issues on appeal. The
court setoff the jury awards and entered an amended judgment for Trend on March
12, 2005, in the amount of $2.8 million, plus interest on that sum at the rate
of 3.31% per annum beginning March 30, 2005.
   -
11 -
   We
appealed to the United States Court of Appeals for the Ninth Circuit on April 8,
2005. We posted a supersedeas bond on April 8, 2005, in the court-appointed
amount of $3.4 million, which bond stayed any action by Trend to collect on the
judgment, pending appeal. Trend initially sought an award of $810,000 in legal
fees and $26,000 in expenses and costs. In an amended request, Trend sought an
award of $1.4 million in legal fees and $61,000 in expenses and costs. The court
awarded Trend $909,000 in legal fees, expenses and costs plus interest of 3.77%
per annum beginning August 5, 2005. We appealed the fee award to the United
States Court of Appeals for the Ninth Circuit on August 5, 2005. We posted an
additional supersedeas bond with the court on August 18, 2005, in the amount of
$1.1 million, thereby staying any action by Trend to collect the fees, pending
appeal. Any cash used in the collateralization of the bonds was accounted for as
restricted short-term investments on our consolidated balance sheets. On April
19, 2007, a three-judge panel of the United States Court of Appeals for the
Ninth Circuit heard oral arguments for the appeal.
   On May
16, 2007, the United States Court of Appeals for the Ninth Circuit issued its
ruling in our favor upholding each of the items we appealed, reversing the trial
court’s rulings and remanding the matter back to the trial court for a new
trial. Currently, there is no set date as to when the matter will be returned to
the control of the lower court. Additionally, as a result of this decision, the
supersedeas bonds we posted prior to filing the appeal were released by the
lower court as of August 18, 2007. Upon receipt of the released supersedeas
bonds from the court we terminated the supporting insurance polices and had the
letters of credit released giving us access to the certificates of deposit,
which had served as the cash security for the supersedeas bonds.
   For
the year ended October 31, 2004, we recorded an estimated loss contingency in
the Trend litigation of $2.8 million, which was estimated based on the amounts
of the judgment described above. We recorded an additional loss contingency of
$0.9 million in the third quarter of fiscal 2005 to account for the increased
total award to Trend for legal fees and expenses and costs. In addition, we
recorded a loss of $313,000 through October 31, 2007, for the interest accrued
on the Trend judgment. With the United States Court of Appeals for the Ninth
Circuit ruling upholding each of the items we appealed, reversing the trial
court’s rulings and remanding the matter back to the trial court for a new
trial, we believe there is no further justification at this time for continuing
to accrue loss contingencies. This matter is now pending retrial.
   On March
2, 2004, a jury rendered a verdict in our favor and against Trend Gaming, LLC, a
Kentucky LLC (“Trend Gaming”) (involving a prior distribution agreement in
Virginia) awarding compensatory and punitive damages in the total amount of
approximately $1.5 million. The jury also returned a verdict against Steven W.
and Rhonda Hieronymus awarding compensatory and punitive damages of $1.0
million. The court reduced compensatory damages against Trend Gaming to $1.1
million. The court affirmed $150,000 in punitive damages against Trend Gaming
and awarded us fees and costs of suit against Trend Gaming in the amount of
$650,000. Compensatory damages against Mr. and Mrs. Hieronymus have been reduced
to $762,000 but the punitive damage award against them in the amount of $150,000
remains unchanged. Of the total compensatory damages of $1.1 million awarded to
us, $762,000 represents compensation for lost profits. We can only collect such
damages from one of the defendants to avoid a double recovery. Defendants
appealed the judgment against them. On March 5, 2007, the Appellate Court
entered its ruling affirming the judgment of the lower court in our favor. On
June 16, 2008, the Ninth Circuit Court of Appeals awarded attorney fees in the
amount of $139,177 in favor of GameTech and jointly and severally against Trend
Gaming L.L.C., Steven W. Hieronymous, and the marital estate of Steven W.
Hieronymous and Rhonda Hieronymous. We have not recorded an estimated gain
contingency, as we can give no assurances whether we will be able to collect any
award from the defendants.
   We are
involved in various other legal proceedings arising in the ordinary course of
our business. We do not believe that any of those proceedings will have a
material adverse effect on our business, results of operations, or financial
condition.
   8.
INCOME TAXES
   We
recorded our income tax provision at an effective rate of 38.3% for the nine
months ended July 31, 2008, compared with 36.9% for the nine months ended July
31, 2007. The actual effective tax rate is different from the expected federal
rate of 34%, reflecting certain permanent differences between financial
accounting and tax accounting, and state and foreign tax
provisions.
   In
July 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of SFAS No. 109, which
creates a single model to address uncertainty in income tax positions and
prescribes the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also provides guidance
on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 was
effective for fiscal years beginning after December 15, 2006, and
accordingly, we adopted FIN No. 48 beginning on November 1, 2007. As a result of
the implementation of FIN 48, no material amounts were recognized during the
three and nine months ended July 31, 2008.
   We file
numerous consolidated and separate income tax returns in the United States
federal jurisdiction and in many state and foreign jurisdictions. With few
exceptions, we are no longer subject to United States federal income tax
examinations for years before 2003 and are no longer subject to state and local,
or foreign income tax examinations for years before 2002.
   9.
CREDIT AGREEMENT and ACQUISITION OF REAL PROPERTY
   On March
28, 2007, we entered into a credit facility related to the acquisition of
Summit. This credit facility consisted of a term note for $30.0 million and a
revolving line of credit for $10.0 million. The interest rate for the term note
was prime rate plus 1.75%, or LIBOR plus 4.75%, with a minimum annual rate of
9.75%. As of July 31, 2008, the interest rate was 10.75% and the balance of the
term note was $18.7 million. Interest payments were due monthly and starting
January 1, 2008, principal payments of $1.1 million were due quarterly through
the maturity date of March 28, 2012. The interest rate for the revolving line of
credit was prime rate plus 0.50%, or LIBOR plus 3.5%, with a minimum annual rate
of 8.50%. As of July 31, 2008, the
interest rate was 9.50% and the outstanding balance of the revolving line of
credit was $7.4 million. The revolving line of credit required monthly payments
of interest only and the outstanding balance was due upon maturity of the credit
facility on March 28, 2012. Our obligations under the agreement were secured by
substantially all of our assets. The estimated fair value of this debt was the
carrying value of the debt. On August 22, 2008, we terminated this credit
facility concurrent with the refinancing transaction as described below. We
incurred approximately $0.4 million in prepayment penalties to Ableco Finance
LLC, which was funded by the proceeds of the refinance transaction.
   On August
22, 2008, we entered into a Senior Secured Credit Facility (the “New Credit
Facility”) with U.S. Bank N.A. as lender, lead arranger and administrative
agent, and Bank of the West as lender (collectively “Lenders”) that provides up
to $40.0 million of financing for the Company. U.S. Bank N.A. will hold up to
$25.0 million of the New Credit Facility and Bank of the West will hold up to
$15.0 million. The New Credit Facility will be used (i) to refinance our
existing credit facility as described earlier in this note, (ii) acquire real
estate and real property as described below, and (iii) for general corporate
purposes. Our obligations under the New Credit Facility are secured by first
priority security interest in all of our assets, including a first deed of trust
on real estate and property purchased concurrently with closing of New Credit
Facility, and future cash flows. We incurred arrangement, up front, document and
other fees of approximately $0.3 million payable to Lenders, and the fees were
funded by the proceeds of the New Credit Facility.
   The New
Credit Facility provides a Senior Secured Revolving Credit Facility (the
“Revolver”) of $2.0 million, maturing on August 31, 2010, with monthly
interest-only payments due on the last day of each month beginning September 30,
2008. We select the interest rate calculation for each advance under the
Revolver from two allowable interest rate calculations. The first allowed
interest rate calculation, called the Base Rate, is the higher of the Agent’s
prime rate or the Federal Funds rate plus 0.50%. The second allowed interest
rate calculation is the 1, 2, 3, 6, or 12-month LIBOR rate plus 2.0%. As of
September 1, 2008, there were no outstanding borrowings under the
Revolver.
   The New
Credit Facility also provides for a Senior Secured Term Credit Facility (the
“Term Loan”) of $38.0 million that requires monthly interest payments beginning
September 30, 2008, and quarterly principal payments of approximately $1.1
million beginning October 31, 2008, until its maturity on August 28, 2013, when
the balance will be due in full. The interest rate for the term loan varies
based upon the one-month LIBOR rate plus 2.80%. In connection with the Term Loan
agreement, we also entered into an interest rate swap agreement with U.S. Bank
N. A., which exchanged the variable one-month LIBOR rate of the Term Loan
for a fixed LIBOR rate of 3.99% per annum effective August 22, 2008,
through the maturity of the Term Loan. As of September 1, 2008, there was $38.0
million outstanding under the Term Loan,at an average interest rate of
6.79%.
   Under the
New Credit Facility, we must comply with various financial and non-financial
covenants. The financial covenants include a cash flow leverage ratio, fixed
charge coverage ratio, working capital requirement of $7.5 million, and
liquidity requirement of $2.25 million. The non-financial covenants include
restrictions on asset divestitures; liens; transactions with related parties;
limitations on additional indebtedness; mergers, acquisitions and
consolidations; cash dividends; redemptions of stock (other than the existing
stock repurchase program publicly announced on September 4, 2007); and change of
control. The New Credit Facility provides for a mandatory prepayment of
principal equal to 50% of free cash flow when a collateral shortfall is present,
measured on an annual basis beginning October 31, 2009. A collateral shortfall
will exist if the outstanding principal balance of the New Credit Facility
exceeds the sum of (i) 100% of cash held in a control account, (ii) 80% of
accounts receivable, (iii) 50% of net book value of finished goods and raw
materials, (iv) 75% of the net book value of land, buildings, and property
improvements, and (v) 50% of the net book value of all other fixed assets. Free
cash flow is defined as the sum of EBITDA less the sum of (i) unfinanced capital
expenditures, (ii) cash paid interest, (iii) cash paid taxes, (iv) the change in
working capital, and (v) debt amortization under New Credit
Facility.
   On August
22, 2008, and concurrent with the closing of the New Credit Facility, we
purchased from RKD Holdings, L.L.C. certain real estate and real property in
southwest Reno, Nevada for an aggregate purchase price of $7.2 million. The real
property includes approximately a 100,000 square foot building that will be used
as our new headquarters. Pursuant to the New Credit Facility, we will invest
approximately $2.6 million of additional improvements to the interior of the
building to add office space, and provide for the manufacturing and assembly
needs of bingo, VLT and slot equipment. The building improvements are being
funded by proceeds from the New Credit Facility, and the proceeds are being held
in a construction control account with U.S. Bank N.A. The New Credit Facility
provides for the release of said funds to cover payments for the construction of
the additional improvements. Any funds remaining in the construction control
account will be returned to us upon satisfactory completion of the building
improvements. We expect to complete the building improvements and relocate to
our new corporate headquarters by the end of our first fiscal quarter in
2009.
   10. BUSINESS SEGMENT
INFORMATION
   During
the fiscal quarter, ended July 31, 2007, management reviewed our operating
segments in accordance with SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. Because of our acquisition of Summit in
March 2007, management determined that a new operating segment was appropriate.
The segment discussion outline below represents the adjusted segment structure
as determined by management in accordance with SFAS No. 131.
   Management
has identified two operating segments. Each operating segment is considered a
reporting segment, which is described as follows: the design, development, and
marketing of interactive electronic bingo systems consisting of portable and
fixed-based systems and the manufacturing and sale of gaming
equipment.
   The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies. We evaluate the performance of
these segments based on many factors including sales, sales trends, margins, and
operating performance.
   -
12 -
   
   Financial
information for our reporting segments is as follows: (in
thousands):
   
  Three
      months Ended
              
              
              Nine
      months EndedJuly
      31,
              
              
              July
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      RevenueBingo
      Equipment
              
              $
              11,004
              
              
              $
              11,623
              
              
              $
              33,222
              
              
              $
              35,972Box
      Equipment
              
              
              2,358
              
              
              
              5,014
              
              
              
              9,194
              
              
              
              6,093$
              13,362
              
              
              $
              16,637
              
              
              $
              42,416
              
              
              $
              42,065Net
      Cost of RevenueBingo
      Equipment
              
              $
              5,051
              
              
              $
              4,894
              
              
              $
              14,324
              
              
              $
              15,023Box
      Equipment
              
              
              1,764
              
              
              
              2,870
              
              
              
              5,260
              
              
              
              3,516$
              6,815
              
              
              $
              7,764
              
              
              $
              19,584
              
              
              $
              18,539Net
      Income/(Loss)Bingo
      Equipment
              
              $
              250
              
              
              $
              1,166
              
              
              $
              1,731
              
              
              $
              3,871Box
      Equipment
              
              
              (738
              )
              
              
              (87
              )
              
              
              (1,775
              )
              
              
              (513
              )$
              (488
              )
              
              $
              1,079
              
              
              $
              (44
              )
              
              $
              3,358Depreciation
      and AmortizationBingo
      Equipment
              
              $
              2,118
              
              
              $
              2,691
              
              
              $
              6,705
              
              
              $
              8,153Box
      Equipment
              
              
              322
              
              
              
              71
              
              
              
              962
              
              
              
              105$
              2,440
              
              
              $
              2,762
              
              
              $
              7,667
              
              
              $
              8,258Interest
      ExpenseBingo
      Equipment
              
              $
              1
              
              
              $
              2
              
              
              $
              25
              
              
              $
              7Box
      Equipment
              
              
              767
              
              
              
              975
              
              
              
              2,125
              
              
              
              1,325$
              768
              
              
              $
              977
              
              
              $
              2,150
              
              
              $
              1,332
  July
      31,
              
              
              October
      31,2008
              
              
              2007Identifiable
      AssetsBingo
      Equipment
              
              $
              81,194
              
              
              $
              83,131Box
      Equipment
              
              
              8,550
              
              
              
              10,751$
              89,744
              
              
              $
              93,882
  
   ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   The
following discussion should be read in conjunction with our unaudited 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, 2007, contained in our Annual Report on Form 10-K and
Form 10-K/A.
   This
document includes various “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 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 SEC, 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 differ materially 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 under the heading “Risk Factors” in our Annual
Report on Form 10-K and Form 10-K/A for the year ended October 31, 2007, and in
this report. 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.
   OVERVIEW
   We
design, develop, and market several bingo systems, VLT and slot machines
(collectively referred to as “Box business”). We entered into the Box business
in March 2007, with our acquisition of Summit Amusement and Distributing Ltd.
(“Summit”) for $40.9 million in cash. Our revenue comes from the sale or lease
of these products. Our revenue from Box business sales during the third quarter
equaled 17.6% of the total revenue, our revenue from the lease of portable bingo
systems accounted for 66.7% of our total revenue, and lease revenue from
fixed-based bingo units accounted for 15.7% of our total revenue for the
quarter. During the nine months ended July 31, 2008, Box business sales
accounted for 21.7%, lease revenue of portable bingo systems accounted for
63.3%, and lease revenue from fixed-base bingo units accounted for 15.0% of our
total revenue, respectively. As of July 31, 2008, we had
   -
13 -
  bingo
systems in service in 38 states and in three foreign countries and Box sales in
six states, one US territory, and various Native American locations. We are
marketing new server-based wireless gaming systems where users play a range of
games including bingo, video poker, keno and other slot machine games. We
installed our first server-based gaming system in the second fiscal quarter of
2008.
   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
revenue generated by each terminal. Revenue growth for our bingo systems is
affected by player acceptance of electronic bingo as an addition or an
alternative to paper bingo. Additionally, our revenue growth is dependent on our
ability to expand operations into new markets and our ability to increase our
market share in our current markets. Fixed-based 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 capitalize the costs. We record depreciation of bingo equipment over either
a three or five-year estimated useful life using the straight-line method of
depreciation.
   Our Box
business generates revenue from sales of VLT’s (new and used), software
conversions kits, content fees, license fees, participation fees, parts, and
service. For the three and nine months ended July 31, 2008, 96.0% and 95.9%,
respectively, of our Box business sales were from the sales of new and used VLT
equipment, conversion kits, and parts. In some instances, we recognize recurring
participation revenue in lieu of one-time machine sales. Increasing market share
in existing markets and expanding product placement in new markets drives
revenue growth.
   Our Bingo
and Box expenses consist primarily of cost of revenue, general and
administrative expense, sales and marketing expense, and research and
development expense. Cost of revenue consists of expenses associated with
technical and operational support of the bingo systems in bingo halls,
depreciation and amortization of bingo terminals, cost of sales related to
equipment sold, and repair/refurbishment/disposal costs of bingo terminals and
related support equipment. General and administrative costs consist of expenses
associated with management of our company and the related support; including
finance and accounting, legal, compliance, information systems, human resources,
allowance for doubtful accounts receivable, and amortization of intangible
assets acquired from the Summit acquisition. Sales and marketing expenses
consist primarily of commissions paid to distributors for promoting and
supporting our products, and commissions paid to our internal sales force to
generate new customers and sell additional and upgraded equipment to our
existing customers. Research and development costs consist of company-sponsored
activities to provide customers with new or enhanced games or game themes for
our VLT’s and slot machines or improved bingo terminals or to develop and
install new wireless server-based systems.
   We
incurred a net loss of $0.5 million for the three months ended July 31, 2008,
compared to a net profit of $1.1 million for the same period in fiscal 2007.
Revenue for the quarter declined $3.3 million compared to a year ago, with the
decrease in VLT sales in Louisiana and Montana of $2.5 million accounting for
most of this decline. This decline in revenue is due primarily to delays in new
software approvals for Montana, and a softness in the Louisiana market. Due to
the decline in revenue, our gross profit during this period declined by $2.3
million compared to the same period in 2007. General and administrative, sales
and marketing, and research and development expenses increased by a total of
$0.2 million for this three month period compared to the same quarter in 2007.
Because we had a loss for the third quarter our provision for income tax
decreased by $1.0 million from the comparable period in 2007.
   We
incurred a net loss of $44,000 for the nine months ended July 31, 2008, compared
with net income of $3.4 million for the same period in fiscal 2007. Revenue for
the period increased by $0.3 million but was more than offset by an increase in
cost of revenue of $1.0 million, resulting in a decrease of gross profit by $0.7
million. There was an increase in general and administrative expense of $1.0
million, due to increased amortization for the Summit intangible assets
acquired, and increased licensing fees for both corporate licenses and product
testing and licensing. Research and development expense increased $1.8 million
due to higher costs for the design and development of product required for a
major VLT contract scheduled to start delivery in the fourth quarter, plus the
cost for design and development of our Class III slot machine that was approved
by GLI on August 7, 2008, and is expected to start delivery in the fourth
quarter to select Native American casinos within California. Sales and marketing
expense decreased by $0.2 million due to lower commissions from lower sales, and
loss contingency costs declined by $0.1 million. A $1.1 million pre-tax
impairment of the value of our investment in auction rate securities adversely
affected net income for the nine months ended July 31, 2008. During the first
nine months of 2008, we incurred increased interest expenses of $0.8 million due
to increased interest rates and decreased depreciation expense of $1.1 million
as our Traveler equipment become fully depreciated.
   On
September 4, 2007, the Board of Directors authorized expending up to $5.0
million in a share-repurchase program. The shares were acquired through open
market transactions by September 3, 2008. The actual amount and timing of
dollars expended and shares repurchased were subject to business and market
conditions and applicable SEC rules. As of July 31, 2008, we had acquired
576,185 shares at a cost of approximately $3.6 million pursuant to this
program.
   As
previously reported, as of March 12, 2008, Donald Tateishi ended his
relationship with us as our Chief Financial Officer, Secretary and Treasurer.
Mr. Tateishi resigned for personal reasons and not because of any disagreement
with us regarding our operations, policies or practices. Marcia R. Martin
assumed the Chief Financial Officer and Treasurer position on June 10, 2008.
John H. Harvat, our general counsel, assumed the Secretary position on March 26,
2008.
   On August
22, 2008, we terminated our existing credit facility. Concurrently, we entered
into a Senior Secured Credit Facility (the “New Credit Facility”) with U.S. Bank
N.A. as lender, lead arranger and administrative agent, and Bank of the West as
lender (collectively “Lenders”) that provides up to $40.0 million of financing.
U.S. Bank N.A. will hold up to $25.0 million of the New Credit Facility and Bank
of the West will hold up to $15.0 million. The New Credit Facility will be used
(i) to refinance our existing credit facility as described earlier, (ii) acquire
real estate and real property as described below, and (iii) for general
corporate purposes. Our obligations under the New Credit Facility are secured by
a first priority security interest in all assets, including a first deed of
trust on real estate and property purchased concurrently with closing of New
Credit Facility. We incurred fees of approximately $0.3 million to
   -
14 -
  On August
22, 2008, and concurrent with the closing of the New Credit Facility, we
purchased from RKD Holdings, L.L.C. certain real estate and real property in
southwest Reno, Nevada for an aggregate purchase price of $7.2 million. The real
property includes approximately a 100,000 square foot building that will be used
as the Company’s new headquarters. Pursuant to the New Credit Facility, the
Company will invest approximately $2.6 million of additional improvements to the
interior of the building to add office space, and provide for the manufacturing
and assembly needs of bingo, VLT and slot equipment. The building improvements
are being funded by proceeds from the New Credit Facility, and the proceeds
are being held in a construction control account with U.S. Bank N.A. The New
Credit Facility provides for the release of the funds to cover payments for
the construction of the additional improvements. Any funds remaining in the
construction control account will be returned to us upon satisfactory completion
of the building improvements. We expect to complete the building improvements
and relocate to our new corporate headquarters by the end of our first fiscal
quarter in 2009.
   APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss
our condensed consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. 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 dates 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, obsolescence, provision for income taxes, and contingencies and
litigation. We base our estimates and judgments on historical experience and on
various other factors that we believe 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.
   Our
critical accounting policies are those that are both important to the portrayal
of our financial condition and results of operations and require management’s
most difficult, subjective, and complex judgment. These critical accounting
policies are discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our 2007 Form 10-K and Form 10-K/A.
There have been no changes to our critical accounting policies since the filing
of our 2007 Form 10-K and Form 10-K/A.
   RESULTS
OF OPERATIONS
   Three
Months Ended July 31, 2008, compared to the Three Months Ended July 31,
2007
   The
following table sets forth certain selected unaudited condensed consolidated
financial data for the periods indicated:
  Three
      Months Ended July 31,(In
      Thousands)Bingo
      Equipment
              
              
              Box
      Equipment%
      Change
              
              
              
              
              
              
              
              %
      ChangeFavorable/
              
              
              
              
              
              
              
              Favorable/2008
              
              
              2007
              
              
              (Unfavorable)
              
              2008
              
              
              2007
              
              
              (Unfavorable)Net
      Revenue
              
              $
              11,004
              
              
              $
              11,623
              
              
              
              (5.3
              %)
              
              $
              2,358
              
              
              $
              5,014
              
              
              
              (53.0
              %)Cost
      of Revenue
              
              
              5,051
              
              
              
              4,894
              
              
              
              (3.2
              %)
              
              
              1,764
              
              
              
              2,870
              
              
              
              38.5
              %Gross
      Profit
              
              
              5,953
              
              
              
              6,729
              
              
              
              (11.5
              %)
              
              
              594
              
              
              
              2,144
              
              
              
              (72.3
              %)Operating
      Expenses:General
      and administrative
              
              
              1,784
              
              
              
              2,020
              
              
              
              11.7
              %
              
              
              719
              
              
              
              692
              
              
              
              (3.9
              %)Sales
      and marketing
              
              
              2,524
              
              
              
              2,299
              
              
              
              (9.8
              %)
              
              
              102
              
              
              
              229
              
              
              
              55.5
              %Research
      and Development
              
              
              832
              
              
              
              688
              
              
              
              (20.9
              %)
              
              
              598
              
              
              
              376
              
              
              
              (59.0
              %)Loss
      Contingencies
              
              
              -
              
              
              
              31
              
              
              
              100.0
              %
              
              
              -
              
              
              
              -
              
              
              
              0.0
              %Total
      operating expenses
              
              
              5,140
              
              
              
              5,038
              
              
              
              (2.0
              %)
              
              
              1,419
              
              
              
              1,297
              
              
              
              (9.4
              %)Income
      (loss) from operations
              
              
              813
              
              
              
              1,691
              
              
              
              (51.9
              %)
              
              
              (825
              )
              
              
              847
              
              
              
              (197.4
              %)Interest
      Expense
              
              
              (1
              )
              
              
              (
      2
              )
              
              
              50.0
              %
              
              
              (
      767
              )
              
              
              (
      975
              )
              
              
              21.3
              %Impairment
      of investments
              
              
              (102
              )
              
              
              -
              
              
              
              (100.0
              %)
              
              
              -
              
              
              
              -
              
              
              
              0.0
              %Other
      income (expense), net
              
              
              110
              
              
              
              202
              
              
              
              (45.5
              %)
              
              
              1
              
              
              
              11
              
              
              
              (90.9
              )%Income
      (loss) before income taxes
              
              
              820
              
              
              
              1,891
              
              
              
              (56.6
              %)
              
              
              (1,591
              )
              
              
              (117
              )
              
              
              (1259.8
              %)Provision
      (benefit) for income taxes
              
              
              570
              
              
              
              725
              
              
              
              21.4
              %
              
              
              (853
              )
              
              
              (30
              )
              
              
              2743.3
              %Net
      income (loss)
              
              $
              250
              
              
              $
              1,166
              
              
              
              (78.6
              %)
              
              $
              (738
              )
              
              $
              (87
              )
              
              
              (748.3
              %)
  Net
Revenue
   Bingo net
revenue decreased $0.6 million for the three months ended July 31, 2008, or 5.3%
to $11.0 million from $11.6 million compared to the same period in 2007. The
decrease in bingo net revenue is the result of several factors, including the
soft economy, increased regional competition, pricing pressures, and continued
migration of commercial accounts to slot machine style gaming. Although revenue
is down, our more popular product lines continue to show increases. Box net
revenues decreased $2.6 million for the three months ended July 31, 2008, or
53.0% to $2.4 million from $5.0 million compared to the same period in 2007. The
continued softness in the Louisiana market affected VLT sales, as did delays in
obtaining approvals on gaming product submitted in Montana. Financial
results for the Box segment may continue to be volatile from quarter to quarter
until we have broadened our revenue base by
expanding into more VLT markets, and by penetrating into the Class III slot
machine markets, such as California and Nevada.
  -
15 -
   Cost
of Revenue
   Bingo
cost of revenue increased 3.2% to $5.1 million, or 45.9% of net revenue in the
third quarter of 2008, from $4.9 million, or 42.1% of net revenue, for the
comparable quarter in 2007. Bingo equipment depreciation decreased by
approximately $0.5 million primarily due to certain product becoming fully
depreciated, while service labor increased by $0.4 million over the comparable
quarter in 2007 due to existing customers converting to our newer product lines.
In addition, the cost of disposals, slow-moving and obsolete materials increased
as a result of write-off of units and/or parts on older product lines as
customers migrate to the newer product lines.
   Box
business cost of revenue decreased 38.5% to $1.8 million, or 74.8% of net
revenues in the third quarter of 2008, from $2.9 million or 57.2% of net revenue
for the comparable quarter in 2007. The decrease in cost of revenue is related
to the decline in sales. The increase in cost of revenue as a percent of net
revenue is related to a decline in new equipment and software sales, which are
at a higher margin.
   Gross
Profit
   Bingo
gross profit decreased 11.5% to $6.0 million, or 54.1% of net revenue in the
third quarter of 2008, from $6.7 million, or 57.9% of net revenue, for the
comparable quarter in 2007. The decrease in gross profit is directly related to
the decline in net revenue, while the decline in gross margin is related to the
higher than normal write-offs of obsolete and slow moving
inventory.
   Box gross
profit decreased 72.3% to $0.6 million, or 25.2% of net revenue in the third
quarter of 2008, from $2.1 million or 42.8% of net revenue for the same period
in 2007. The decrease is due to the decline of the higher margin new equipment
and software sales in the third quarter of 2008.
   Operating
Expenses
   Bingo
general and administrative costs decreased 11.7% to $1.8 million or 16.2% of net
revenue in the third quarter of 2008, from $2.0 million, or 17.4% of net revenue
for the comparable quarter in 2007. The decrease is due to lower outside legal
fees as the activity on major lawsuits, such as the Trend case, has declined
since 2007, as well as the reclassification of Class III expenses to the Box
division. Box general and administrative costs remained flat at $0.7 million for
the third quarter of 2008 compared to the same period in 2007.
   Bingo
sales and marketing expenses for the third quarter of 2008 increased by $0.2
million or 9.8% over the same period in 2007 to $2.5 million. This increase in
bingo sales and marketing expenses is due to higher distributor commissions as
net revenues from distributors increased for the period. Box sales and marketing
expenses for the third quarter of 2008 decreased to $0.1 million, from $0.2
million for the comparable period in 2007. The decrease is primarily due to
lower sales and distributor commissions due to the decline in
revenue.
   Bingo
research and development expenses increased 20.9% to $0.8 million in the third
quarter of 2008, from $0.7 million for the comparable quarter in 2007. Box
research and development expenses increased by $0.2 million to $0.6 million in
the third quarter of 2008, from $0.4 million for the comparable period in 2007.
The increase in the box business segments is primarily due to costs expended for
developing new product lines, such as the California Keno game approved on
August 7, 2008, new hardware design and software development for a major VLT
contract, and licensing fees as we expand our distributorship to new markets.
The increase in the bingo segment is primarily due to the licensing cost of
expanding to new markets, and the development and testing of new product lines
and content.
   There
were no loss contingencies recorded for the three months ended July 31, 2008,
compared to $31,000 for the comparable three months in 2007.
   Interest
Expense
   Interest
expense was $0.7 million for the quarter ended July 31, 2008, compared to $1.0
million for the comparable period in 2007. The expense was due almost entirely
to interest paid on our debt incurred to purchase Summit. The decrease in
expense is due to lower principal balance, offset in part by higher interest
rates.
    -
16 -
   Nine
Months Ended July 31, 2008, compared to the Nine Months Ended July 31,
2007
   The
following table sets forth certain selected unaudited condensed consolidated
financial data for the periods indicated:
  Nine
      Months Ended July 31,(In
      Thousands)Bingo
      Equipment
              
              
              Box
      Equipment%
      Change
              
              
              
              
              
              
              
              %
      ChangeFavorable/
              
              
              
              
              
              
              
              Favorable/2008
              
              
              2007
              
              
              (Unfavorable)
              
              2008
              
              
              2007
              
              
              (Unfavorable)Net
      Revenue
              
              $
              33,222
              
              
              $
              35,972
              
              
              
              (7.6
              %)
              
              $
              9,194
              
              
              $
              6,093
              
              
              
              50.9
              %Cost
      of Revenue
              
              
              14,324
              
              
              
              15,023
              
              
              
              4.7
              %
              
              
              5,260
              
              
              
              3,516
              
              
              
              (49.6
              %)Gross
      Profit
              
              
              18,898
              
              
              
              20,949
              
              
              
              (9.8
              %)
              
              
              3,934
              
              
              
              2,577
              
              
              
              52.7
              %Operating
      Expenses:General
      and administrative
              
              
              5,443
              
              
              
              5,813
              
              
              
              6.4
              %
              
              
              2,374
              
              
              
              963
              
              
              
              (146.5
              %)Sales
      and marketing
              
              
              7,481
              
              
              
              7,748
              
              
              
              3.4
              %
              
              
              395
              
              
              
              311
              
              
              
              (27.0
              %)Research
      and Development
              
              
              2,317
              
              
              
              1,904
              
              
              
              (21.7
              %)
              
              
              1,944
              
              
              
              547
              
              
              
              (255.4
              %)Loss
      Contingencies
              
              
              -
              
              
              
              124
              
              
              
              100.0
              %
              
              
              -
              
              
              
              -
              
              
              
              0.0
              %Total
      operating expenses
              
              
              15,241
              
              
              
              15,589
              
              
              
              2.2
              %
              
              
              4,713
              
              
              
              1,821
              
              
              
              (158.8
              %)Income
      from operations
              
              
              3,657
              
              
              
              5,360
              
              
              
              (31.8
              %)
              
              
              (779
              )
              
              
              756
              
              
              
              (203.0
              %)Interest
      Expense
              
              
              (25
              )
              
              
              (7
              )
              
              
              (257.1
              %)
              
              
              (2,125
              )
              
              
              (1,325
              )
              
              
              (60.4
              %)Impairment
      of investments
              
              
              (1,079
              )
              
              
              -
              
              
              
              100.0
              %
              
              
              -
              
              
              
              -
              
              
              
              0.0
              %Other
      income (expense), net
              
              
              253
              
              
              
              525
              
              
              
              (51.8
              %)
              
              
              27
              
              
              
              14
              
              
              
              92.9
              %Income
      (loss) before income taxes
              
              
              2,806
              
              
              
              5,878
              
              
              
              (52.3
              %)
              
              
              (2,877
              )
              
              
              (555
              )
              
              
              (418.4
              %)Provision
      (benefit) for income taxes
              
              
              1,075
              
              
              
              2,007
              
              
              
              46.4
              %
              
              
              (1,102
              )
              
              
              (42
              )
              
              
              2523.8
              %Net
      income (loss)
              
              $
              1,731
              
              
              $
              3,871
              
              
              
              (55.3
              %)
              
              $
              (1,775
              )
              
              $
              (513
              )
              
              
              (246.0
              %)
  
   We
acquired substantially all of the assets of Summit on March 28, 2007. Summit net
revenues are included in the Box business segment above, and increases for 2008
are primarily due to having a full nine months of activity compared to only four
months of activity for the comparable period presented above for 2007.
Therefore, the following discussion of the results of operations for the nine
month period will be focused on the Bingo business segment.
   Net
Revenue
   Bingo net
revenue for the nine months ended July 31, 2008, decreased 7.6% to $33.2 million
from $36.0 million compared to the same period in 2007. The decrease in bingo
net revenue for the nine months ended July 31, 2008, is the result of several
factors, including increased regional competition, pricing pressures, and
continued migration of commercial accounts to slot machine style
gaming.
   Cost
of Revenue
   Bingo
cost of revenue decreased 4.7% to $14.3 million, or 43.1% of net revenue in the
nine months ended July 31, 2008, from $15.0 million, or 41.8% of net revenue in
the same period in 2007. This decrease is primarily due to bingo equipment
depreciation decreasing by approximately $1.1 million over the comparable period
in 2007, mainly from Travelers becoming fully depreciated, offset in part by
increased cost of disposals, slow-moving and obsolete materials as a result of
the write-off of units and/or parts on older product lines as customers migrate
to the newer product lines.
   Gross
Profit
   Bingo
gross profit decreased 9.8% to $18.9 million, or 56.9% of net revenue in the
nine months ended July 31, 2008, from $20.9 million or 58.2% of net revenue for
the same period in 2007. The decrease in gross profit is due to the revenue
decline as described above, while the decline in gross margin is due to the
higher than normal write-offs for slow-moving and obsolete parts and
materials.
   Operating Expenses
   Bingo
general and administrative costs decreased 6.4% to $5.4 million for the nine
months ended July 31, 2008, from $5.8 million in the comparable period in 2007.
The decrease is primarily due to lower outside legal fees as the activity on
major lawsuits, such as the Trend case, has declined since 2007, as well as the
reclassification of Class III expenses to the Box division.
   -
17 -
   Bingo
sales and marketing expenses decreased to $7.5 million, or 22.5% of net revenue
in the nine months ended July 31, 2008, from $7.7 million or 21.5% of net
revenue for the comparable period in 2007.
The decrease is primarily due to lower commissions directly related to the
decline in revenue.
   Bingo
research and development expenses increased by $0.4 million to $2.3 million, for
the nine months ended July 31, 2008, from $1.9 million for the comparable period
in 2007. The increase is primarily due to the licensing cost of expanding to new
markets, and the development and testing of new product lines and
content.
   There
were no loss contingencies recorded for the nine months ended July 31, 2008,
compared to $124,000 for the comparable nine months in 2007.
   Interest
Expense
   Interest
expense of $25,000 for the nine months ended July 31, 2008 increased $18,000
over the comparable period in 2007.
   LIQUIDITY
AND CAPITAL RESOURCES
   We have
funded our operations to date primarily through cash from operations and other
capital sources. This capital is for operations, research and development,
capital expenditures of bingo equipment and associated support equipment, and
software. As of July 31, 2008, and October 31, 2007, we had a working capital
balance of $9.7 million and $14.0 million, respectively. As of July 31, 2008,
our principal source of liquidity included cash and cash equivalents of $9.6
million. Current liabilities include an accrued liability of $4.0 million in
connection with a contingent litigation judgment.
   We
financed the acquisition of Summit primarily by a credit facility consisting of
a term loan of $30.0 million and a revolving line of credit with a limit of
$10.0 million. As of July 31, 2008, the interest rate on our term loan was
10.75% and on our revolving credit facility was 9.50%. We incurred interest
expense of approximately $0.7 million and $2.1 million, respectively, for the
three and nine months ended July 31, 2008, compared to $1.0 million and $1.3
million, for the comparable periods in 2007. The interest expense is primarily a
result of the debt incurred in March, 2007, to finance the Summit acquisition.
On August 22, 2008, we terminated this credit facility and prepaid all amounts
outstanding as part of the requirements of our new credit facility.
   Operating
activities provided $11.8 million of cash for the nine-month period ended July
31, 2008, compared with $7.7 million for the nine month period ended July 31,
2007. The $11.8 million consisted of a net loss adjusted for $8.3 million from
depreciation, amortization, obsolescence provisions, and loss on disposal of
equipment, $1.1 million from the loss from impairment of investments, and $2.4
million provided by net changes in operating assets and liabilities. The $7.7
million for the nine-month period ended July 31, 2007, consisted primarily of
our net income of $3.4 million plus $8.6 million of depreciation, amortization,
obsolescence provisions, and loss on disposal of equipment, less $4.3 million
used by net changes in the operating assets and liabilities.
   Investing
activities provided approximately, $0.6 million of cash for the nine-month
period ended July 31, 2008, compared with using approximately $5.2 million of
cash for the nine month period ended July 31, 2007. The $0.6 million consisted
of $3.5 million in capital expenditures for bingo terminals and a net inflow of
$4.1 million from short-term investments. During the nine-month period ending
July 31, 2007, the $5.2 million consisted of $5.2 million in capital
expenditures for bingo terminals and associated support equipment. We used $2.4
million in the acquisition of Summit. In addition, a $2.5 million net change
occurred in the purchasing and selling of short-term investments.
   Financing
activities used approximately, $6.4 million during the nine-month period ended
July 31, 2008, compared with providing $0.4 million for the nine month period
ended July 31, 2007. The $6.4 million included payments on long-term debt of
approximately $3.3 million and the repurchase of our common stock for
approximately $3.1 million. The $0.4 million provided for the nine-month period
ended July 31, 2007, was from the exercise of stock options for $0.3 million and
$0.1 million in the related tax benefits.
   Our New
Credit Facility contains various restrictive covenants that could result in a
curtailment of our capital expenditures including those for bingo devices and
related equipment. In the event we were unable to raise additional capital if
needed, further measures would be necessary, including the delay or reduction of
our operations, research and development and other activities. Certain of these
measures may require third-party consent or approvals, including the banks under
the New Credit Facility, certain regulatory bodies, and others, and there are no
assurances such consent or approvals could be obtained. Management does not
believe that these limitations will adversely affect our operations or our
ability to acquire necessary capital equipment.
   We
believe that cash flows from operations, cash, cash equivalents, and amounts
available under our Revolver will be sufficient to support our operations,
provide for budgeted capital expenditures, and meet liquidity requirements
through the remainder of fiscal 2008. Our long-term liquidity requirements
depend on many factors, including the rate at which we expand our business and
whether we do so internally or through acquisitions. In addition, we may pursue
strategic opportunities that 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
requirements 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 the additional financing will
be available or that, if it is available, it will be on terms acceptable to
us.
   On
September 4, 2007, the Board of Directors authorized expending up to $5.0
million in a share-repurchase program. The shares were acquired through open
market transactions by September 3, 2008.  As of July 31, 2008, we had
acquired 576,185 shares at a cost of approximately $3.6 million pursuant to this
program.
   -
18 -
  Purchase
Commitments
   From time
to time, we enter into commitments with our vendors to purchase equipment or
parts at fixed prices and/or guaranteed quantities. During the nine months
ending July 31, 2008, we entered into various agreements for component parts for
VLT's and bingo equipment. The total amount of purchase commitments as of July
31, 2008 was approximately $4.4 million. All purchases are expected to
occur by the end of the fiscal year.
 
   ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Market
Risks
   We
maintain an investment portfolio with the purchase price of approximately $3.9
million in investment-grade corporate issues, and in auction rate securities.
The values of these investments are subject to changes in interest rates. During
the three and nine months ended July 31, 2008, we recorded impairments of
approximately $0.1 and $1.1 million, respectively, due to the devaluation of our
auction rate securities. We monitor these investments for impairment and make
appropriate reductions in carrying value when necessary.
   There
have been no material changes in market risk to our investment
portfolio resulting from changes in interest rates from that disclosed in
our Form 10-K and Form 10-K/A for the fiscal year ended October 31,
2007.
   On August
22, 2008, we terminated our existing credit facility. Concurrently, we entered
into a Senior Secured Credit Facility (the “New Credit Facility”) with U.S. Bank
N.A. as lender, lead arranger and administrative agent, and Bank of the West as
lender (collectively “Lenders”) that provides up to $40.0 million of financing
for the Company. U.S. Bank N.A. will hold up to $25.0 million of the New Credit
Facility and Bank of the West will hold up to $15.0 million. At September 1,
2008, the balance of the Term Loan was $38.0 million, and there was no
outstanding balance on the Revolver.
   The Term
Loan requires monthly interest payments beginning September 30, 2008, and
quarterly principal payments of approximately $1.1 million beginning October 31,
2008, until its maturity on August 28, 2013, when the balance will be due in
full. The interest rate for the term loan varies based upon the one-month LIBOR
rate plus 2.80%. In connection with the Term Loan agreement, we also entered
into an interest rate swap agreement with U.S. Bank N. A., which exchanged
the variable one-month LIBOR rate of the Term Loan for a fixed LIBOR rate of
3.99% per annum effective August 22, 2008, through the maturity of the Term
Loan. As of September 1, 2008, there is $38.0 million outstanding under the Term
Loan, and the average interest rate is 6.79%.
   Because
the interest rate on the Term Loan is fixed under a LIBOR swap agreement,
increases in interest rates will not affect our cash flow. However, if we find
it necessary to accelerate the amortization of the Term Loan, we could be
required to pay early breakage fees on the LIBOR contracts in the event that
interest rates decrease. Assuming the $38.0 million balance outstanding as of
September 1, 2008, and the effective rate of interest rate of 6.79%, our
breakage fee on the full outstanding balance if LIBOR declined by 50 basis
points would be approximately $0.5 million, and an increase of 100 basis points
would result in a breakage fee of approximately $1.1 million. We do not
anticipate the need to accelerate that amortization of the Term Loan at any time
for the remainder of fiscal 2008.
 
   ITEM
4. CONTROLS AND PROCEDURES
   Disclosure
Controls and Procedures
   We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as
appropriate, to allow timely decisions regarding required
disclosure.
   As of the
end of the period covered by this report, we carried out an evaluation under the
supervision of the management of the Company, including the CEO and CFO, and
with the participation of an independent outside accounting firm, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e). Based on this evaluation,
the CEO and CFO determined that there are significant deficiencies and may be
material weaknesses in our internal control over financial reporting,
particularly regarding sufficient documentation issues found in our initial
review of the internal controls relative to Summit revenue and other controls of
the Company, that require remediation. Management is in the process of
developing the remediation plan and intends to remediate the possible material
weaknesses and the significant deficiencies prior to October 31, 2008, although
no assurances can be given that this effort will be completely successful by
that time. See Item 1A “Risk Factors.”
   Changes
in Internal Control over Financial Reporting
   Other
than as disclosed directly below, there have been no changes in our internal
control over financial reporting during the quarter ended July 31, 2008, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
   In our
Form 10-K and Form 10-K/A for the fiscal year ended October 31, 2007, we
previously reported a significant deficiency in our internal control over
financial reporting related to the revenue recognition procedures for software
contracts with multiple delivery elements. The evaluation of disclosure controls
and procedures as of the end of the period covered by this report, performed
under the supervision of the management of the Company,
   -
19 -
   including
the CEO and CFO, and with the participation of an independent outside accounting
firm, identified significant deficiencies and possible material weaknesses in
this area that require remediation. Management is in the process of developing
the remediation plan and intends to remediate the possible material weaknesses
and significant deficiencies prior to October 31, 2008, although no assurances
can be given that this effort will be completely successful by that time. See
Item 1A “Risk Factors.”
   PART II. OTHER
INFORMATION
   ITEM
1. LEGAL PROCEEDINGS
   For a
discussion of our current litigation, see Note 7 (Legal Proceedings) to our
consolidated financial statements included herein.
   We are
involved in various other legal proceedings arising in the ordinary course of
our business. We do not believe that any of those proceedings will have a
material adverse effect on our business, results of operations, or financial
condition.
 
   ITEM 1A. RISK FACTORS
   Economic
factors beyond our control may adversely affect our investment and we may incur
additional impairment charges to our investment portfolio.
   As of
July 31, 2008, we had $3.9 million of principal invested in Auction Rate
Securities (“ARS”), representing interests in collateralized debt obligations
supported by pools of residential and commercial mortgages or credit cards,
insurance securitizations and other structured credits, including corporate
bonds. Some of the underlying collateral for the ARS held by us consists of
sub-prime mortgages. The estimated market value of our ARS holdings at July 31,
2008, was $2.8 million, which reflects a $1.1 million adjustment to the
principal value of $3.9 million.
   Although
the ARS continue to pay interest according to their stated terms, based on the
fair value of the investments and an analysis of other-than-temporary impairment
factors, we have recorded an impairment charge of approximately $1.1 million in
the nine months ended July 31, 2008. This impairment charge reflects the portion
of ARS holdings that is an other-than-temporary decline in value.
   The
credit and capital markets could continue to deteriorate in 2008. If
uncertainties in these markets continue, these markets deteriorate further or we
experience any additional rating downgrades on any investments in our portfolio
(including ARS), we may incur additional impairments to our investment
portfolio, which could negatively affect our financial condition, cash flow and
reported earnings.
   If
we fail to maintain effective internal controls over financial reporting or
remediate any future material weakness in our internal control over financial
reporting, we may be unable to accurately report our financial results or
prevent fraud, which could have a material adverse effect on our financial
results and our stock price.
  
   In our
Form 10-K and Form 10-K/A for the fiscal year ended October 31, 2007, we
previously reported a significant deficiency in our internal control over
financial reporting related to the revenue recognition procedures related to
software contracts with multiple delivery elements.  As of the end of the
period covered by this report, we determined  that there are
significant deficiencies and possible material weaknesses in our internal
control over financial reporting, including significant deficiencies and
possible material weaknesses, particularly regarding sufficient documentation
issues found in our initial review of the internal controls relative to Summit
revenue and other controls of the Company, that require
remediation.  Management is in the process of developing the
remediation plan and intends to remediate the possible material weaknesses and
the significant deficiencies prior to October 31, 2008, although no assurances
can be given that this effort will be completely successful by that time.
   
   ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Issuer Purchases of
Equity Securities
   -
20 -
   The
following table provides information regarding repurchases of our common stock
made by or on behalf of us, or any “affiliated purchaser” as defined in SEC
rules, of our equity securities registered pursuant to Section 12 of the
Exchange Act, for each month during the third quarter of fiscal year 2008, in
the format required by SEC rules:
  Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs (1)
              
              
              Maximum
      Dollar Amount of Shares (in thousands) That May Yet Be Purchased Under the
      Plans or Programs (1)May
      1, 2008 – May 31, 2008
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              1,610June
      1, 2008 – June 30, 2008
              
              
              34,750
              
              
              
              4.93
              
              
              
              34,750
              
              
              
              1,439July
      1, 2008 – July 31, 2008
              
              
              22,136
              
              
              
              4.70
              
              
              
              22,136
              
              
              
              1,335Total
      repurchased for the quarter
              
              
              56,886
              
              
              $
              4.84
              
              
              
              56,886
              
              
              $
              1,335(1) On
      September 4, 2007, the Board of Directors authorized expending up to $5.0
      million in a share-repurchase program. The shares reported in the table
      were acquired in open market transactions pursuant to this program.
      Approximately $1.4 million remained available for repurchase of our common
      stock related to this program, which expired September 3,
      2008.
  
   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
  2.1
              Asset
      Purchase Agreement dated August 30, 2006, between GameTech International,
      Inc. and Summit Amusement & Distributing Ltd. (1)3.1
              Certificate
      of Incorporation of the Registrant, as amended (2)3.2
              Certificate
      of Designation of Series A Junior Participating Preferred Stock of the
      Registrant (3)3.3
              Second
      Amended and Restated Bylaws of the Registrant (4)4.1
              GameTech
      International, Inc. Registration Rights
  Agreement (5)4.2
              Rights
      Agreement, dated as of March 7, 2003, between GameTech International, Inc.
      and Mellon Investor Services, LLC, as rights agent (6)4.3
              Specimen
      Common Stock Certificate (7)10.1
              Letter
      Agreement by and between the Registrant and Marcia R. Martin, dated as of
      May 1, 2008 (8)10.2
              Purchase
      and Sale Agreement for the purchase of Real Property
(9)10.3
              First
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      (9)10.4
              Financing
      agreement dated August 22, 2008, by and among GameTech International, Inc.
      and the lenders named herein, and
                U.S. Bank N. A, as
      collateral and administrative agent (11)10.5
              Second
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      (10)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.
  -
21 -
  
 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.
   (1)
              Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      dated August 30, 2006 as filed with the Commission on or about August 31,
      2006.(2)
              Incorporated
      by reference to Exhibits 2.1 and 10.1 to the Registrant’s Registration
      Statement on Form S-1 (Registration No. 333-34967) as filed with
      the Commission on or about September 4, 1997.(3)
              Incorporated
      by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 2003, as filed with
      the Commission on or about March 17, 2003; Commission file No.
      000-23401.(4)
              Incorporated
      by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarterly period ended July 31, 2004, as filed with the
      Commission on or about March 16, 2004; Commission file No.
      000-23401.(5)
              Incorporated
      by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
      Registration Statement on Form S-1 (Registration No. 333-34967)
      as filed with the Commission on or about October 17,
      1997.(6)
              Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
      dated March 7, 2003, as filed with the Commission on or about March 10,
      2003; Commission file No. 000-23401.(7)
              Incorporated
      by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 2003, as filed with
      the Commission on or about March 17, 2003; Commission file No.
      000-23401(8)
              Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K dated June 9, 2008, as filed with the Commission on or about June 12,
      2008.(9)
              Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K dated June 5, 2008, as filed with the Commission on or about June 5,
      2008.(10)
              Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K dated July 28, 2008, as filed with the Commission on or about July 31,
      2008.(11)
              Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K dated August 22, 2008, as filed with the Commission on or about August
      28, 2008.
 
  -
22 -
  
 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/ Jay M. Meilstrup
              
              Chief
      Executive Officer and PresidentJay
      M. Meilstrup
              
              (Principal
      Executive Officer)
              
              September  9,
      2008/S/ Marcia R. Martin
              
              Chief
      Financial OfficerMarcia
      R. Martin
              
              (Principal Financial
      and Accounting Officer)
              
              September  9,
      2008
  
  -
23 -