| GAMETECH INTERNATIONAL INC Item 1A Risk Factors The following factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating our company and our business |
| We depend on the bingo and electronic bingo industry |
| Our future revenue and profits depend upon continued market acceptance of our products and services, the continued penetration of electronic bingo into bingo halls nationwide, and various other factors, many of which are beyond our control |
| For example, we depend on the continued popularity of bingo as a leisure activity and as a means of charitable fundraising |
| The bingo industry in North America is a mature industry and has declined |
| We anticipate continuing declines in the future as a result of an increase in competing forms of entertainment, including those resulting from developments in online gaming and the continued expansion of the legalization of casino gaming, such as riverboat gaming and gaming on Native American lands |
| Our success depends on our ability to respond to rapid market changes and product enhancements |
| Our products utilize hardware components developed primarily for the personal computer industry, which is characterized by rapid technological change and product enhancements |
| Should any of our current or potential competitors succeed in developing a better electronic bingo system, those competitors could be in a position to outperform us in our ability to exploit developments in microprocessor, video technology, or other multimedia technology |
| The emergence of an electronic bingo system that is superior to ours in any respect could substantially diminish our revenue and limit our ability to grow |
| Any failure of our company to respond to rapid market changes and product enhancements could have a material adverse effect on our business, results of operations, and financial condition |
| To compete successfully, we must retain and extend our existing contracts with customers and secure new customers |
| We derive all of our revenue and cash flow from our portfolio of contracts to lease electronic bingo products to customers |
| Our contracts are primarily for terms ranging from one to three years and not all contracts preclude customers from using electronic bingo products of our competitors |
| Upon the expiration of a contract, a customer may decide to use a competitive bidding process to award a new contract |
| We may be unsuccessful in winning the new contract or be forced to reduce the pricing structure in the new contract |
| Our inability to renew or materially alter a significant number of contracts, could, depending on the circumstances, have a material adverse effect on our business, results of operation, and financial condition |
| Some of our customers may terminate agreements with us on relatively short notice |
| Some of our agreements with customers may permit termination by the customers upon relatively short notice to us and without penalty, and do not designate us as the customer’s exclusive electronic bingo system provider |
| Some contract terms may not be memorialized in writing |
| 9 _________________________________________________________________ [63]Table of Contents Our compliance with several governmental and other regulations is costly and subjects our company to significant risks |
| We must maintain the existing licenses and approvals necessary to operate in our existing markets and obtain the necessary licenses, approvals, findings of suitability, and product approvals in all additional jurisdictions in which we intend to distribute our products |
| The licensing and approval processes can involve extensive investigation into our company and our products, officers, directors, certain personnel, significant stockholders, and other associated parties, all of which can require significant expenditures of time and resources |
| We must also comply with applicable regulations for our activities in any international jurisdiction into which we expand |
| We may not receive licensing or other required approvals in a timely manner in the jurisdictions in which we are currently seeking such approval |
| The regulations relating to company and product licensing are subject to change or change in interpretation, and other jurisdictions, including the federal government, may elect to regulate or tax bingo |
| We cannot predict the nature of any such changes or the impact that such changes would have on our business |
| The loss of a license in a particular jurisdiction may prohibit us from generating revenue in that jurisdiction, may prohibit us from installing or maintaining our terminals in other jurisdictions, and may have a material adverse effect on our business, results of operations, and financial condition |
| We may need additional cash resources to support our existing operations and execute our growth strategy and such cash resources may not be available |
| Our financial resources have decreased during fiscal 2005 and we have experienced a downward trend in our cash flows from operating activities |
| Our cash, cash equivalents, and short-term investments have decreased over each of the last two fiscal years |
| As of October 31, 2005, we had cash, cash equivalents, and unrestricted short-term investments of dlra6dtta8 million, and as of October 31, 2004, we had cash, cash equivalents, and unrestricted short-term investments of dlra8dtta7 million |
| We have a dlra2dtta5 million line of credit with Wells Fargo Bank, NA that expires April 2, 2006 |
| There was no outstanding balance as of October 31, 2005 |
| If cash generated from our operations is insufficient to fund our business and if additional financing is not available to us, we will have to implement additional measures to conserve cash and reduce costs, which may include, among other things, making additional cost reductions, reducing the scale of our operations, reducing our investment in research and development, and reducing our sales force |
| However, we cannot assure you that such measures would be successful |
| Our failure to raise required additional funds or to maintain or obtain increases in our line of credit would adversely affect our ability to • maintain, develop, or enhance our product offerings; • take advantage of future opportunities; • respond to competitive pressures; • expand operations; or • execute our growth strategy |
| In the event our efforts to reduce costs are unsuccessful, we will likely need additional sources of financing in order to carry on our operations as presently conducted |
| Any financing may include bank borrowings or public or private offerings of equity or debt securities |
| We cannot assure you that such additional sources of financing will be available on acceptable terms, if at all |
| We depend on a limited number of manufacturers and suppliers for components of our products |
| The hardware portion of our Traveler terminals are assembled by Western Electronics, an Idaho-based manufacturer |
| We would need to locate a replacement contract manufacturer if Western Electronics ceased doing business with us |
| Although we believe that we could locate a substitute contract manufacturer, any such replacement could involve some delay, and we may not be able to procure, substitute, or produce our terminals 10 _________________________________________________________________ [64]Table of Contents without significant interruption or price increase |
| Any failure of our company to receive new terminals could have a material adverse effect on our business, results of operations, and financial condition |
| We depend on our relationships with our distributors |
| We derive a significant portion of our revenue from customers serviced through distributors |
| Our distributors place our products with our customers and often maintain the primary relationship with the bingo halls |
| Generally, we or our distributors enter into one- to three-year agreements with customers for the use of our systems and terminals |
| We rely on our distributors to a significant degree in the states in which the law requires us to place our systems and terminals through qualified distributors |
| The loss of our relationship with one or more of our distributors may require us to develop our internal sales force or engage new distributors to place our systems and terminals, which could be time consuming and expensive |
| The loss of one or more of our significant distributors may have a material adverse effect on our business, results of operations, and financial condition |
| We depend on Native American laws in the operation of a portion of our business |
| Our terminals are operated in many bingo halls located on Native American reservations in the United States |
| State and federal laws governing the business or other conduct of private citizens generally do not apply on Native American lands |
| We may have limited recourse if any Native American tribe operating a particular bingo hall seized the terminals or barred entry onto the reservation in the event of a contract or other dispute |
| However, any seizure of our terminals is likely to result in a capital loss and loss of revenue to our company and could, were it to occur on a large scale, have a material adverse effect on our business, capital resources, results of operations, and financial condition |
| If our games were classified as Class III games under the Indian Gaming Regulatory Act, we may not be able to obtain the necessary approvals to operate our business, or we may have to modify our systems to be classified as Class II games |
| Our operations in Native American gaming halls, which generated approximately 20prca of our revenue during fiscal 2005, are subject to Native American and federal regulation under IGRA, which established the National Indian Gaming Commission, or NIGC The NIGC has the authority to adopt rules and regulations to enforce certain aspects of IGRA and to protect Native American interests |
| Under IGRA, electronic bingo devices similar to ours have previously been determined by the NIGC to be Class II products that are subject solely to Native American regulation as approved by the NIGC We believe our electronic bingo systems meet all of the requirements of a Class II game |
| We cannot provide assurance that the NIGC will not enact future regulations or reinterpret existing regulations in such a manner so as to limit the authority of tribes to self-regulate Class II gaming or to change the definition of Class II gaming in such a manner that our electronic bingo systems are classified as a Class III game under IGRA If classified as Class III games, our electronic bingo systems could become subject to federal and state regulation through the Johnson Act and through tribal-state compacts required for Class III games played on Native American lands |
| In that event, or in the event other federal laws are enacted or interpreted differently that would subject our operations on Native American lands to state regulation, we may not be able to modify our electronic bingo systems to be classified as Class II games, or we may not obtain the necessary state approval and licenses to continue our operations in Native American gaming halls |
| Any such event could have a material adverse effect on our business, results of operations, and financial condition |
| Any modifications of our electronic bingo systems would also have the additional risk that such modifications would not appeal to customers or be acceptable to the Native American tribes |
| Nevada Regulation |
| We are currently classified as a manufacturer and distributor of associated equipment pursuant to the provisions of the Nevada Gaming Control Act and regulations promulgated thereunder |
| Associated equipment manufacturers and distributors that sell, transfer, or offer associated equipment for use or play in Nevada may be required to file a licensing application for a finding of suitability at the discretion of the Nevada Gaming 11 _________________________________________________________________ [65]Table of Contents Commission on the recommendation of the Nevada Gaming Control Board |
| We have voluntarily applied for such finding of suitability, but there can be no assurance that we will be found suitable |
| Our associated equipment is subject to evaluation and approval by the state of Nevada prior to product placement or installation |
| Each of our products that are in distribution in Nevada have been submitted to and approved by the state of Nevada |
| If we are denied a Nevada license, we may not be able to place our electronic bingo systems with Nevada customers and, depending upon the reason for the denial, may be required to relocate our operations outside the state, which may have a material adverse effect on our business, results of operations, and financial condition |
| We rely on the Texas market for a significant portion of our revenue |
| The concentration of our revenue in the Texas market, which generated approximately 20prca of fiscal 2005 revenue, potentially heightens the exposure of regulatory changes or market changes that may prevent or impede us from doing business in that state |
| Furthermore, the loss of or inability of our company to find suitable distributors in Texas, where state law requires electronic bingo devices and systems to be placed through qualified distributors, could cause a material adverse effect on our business, results of operations, and financial condition |
| The electronic bingo industry is extremely competitive |
| The electronic bingo industry is characterized by intense competition based on, among other things, the ability to enhance the operations of and to generate incremental sales for bingo operators through product appeal to players, ease of use, ease of serviceability, customer support and training, distribution, name recognition, and price |
| Increased competition may result in price reductions, reduced operating margins, conversion of terminals from lease to sale, and loss of market share, any of which could materially and adversely affect our business, operating results, and financial condition |
| Additionally, many of our competitors do not face the same level of public company costs and administrative costs that we face |
| Furthermore, existing and new competitors may expand their operations in our existing or potential new markets |
| In addition, we compete with other similar forms of entertainment, including casino gaming and lotteries |
| In Native American casinos, competition for space on the casino and bingo room floor is very intense |
| All forms of gaming compete for square footage at Native American casinos |
| We can make no assurances that Native American casinos currently leasing our equipment will not significantly limit the play of bingo or eliminate it entirely |
| Investors may not be able to exercise control over our company as a result of principal stockholders’ ownership |
| The current executive officers and directors of our company beneficially own approximately 29dtta1prca of our outstanding common stock |
| As a result, the executive officers and directors of our company can significantly influence the management and affairs of our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions |
| This concentration of ownership could have the effect of delaying or preventing a change in control of our company, even when such change of control is in the best interests of stockholders |
| This concentration of ownership also might adversely affect the market price of the common stock and the voting and other rights of our company’s other stockholders |
| We must be able to attract and retain skilled employees |
| Our operations depend to a great extent on our ability to retain existing and attract new key personnel |
| Competition is intense for skilled marketing and product research and development employees in particular |
| We may not be successful in attracting and retaining such personnel, and we may incur increased costs in order to attract and retain personnel |
| Although we believe we can locate replacement personnel, the loss of key personnel, were we unable to hire suitable replacements, or our failure to attract additional qualified employees, could have a material adverse effect on our business, results of operations, and financial condition |
| 12 _________________________________________________________________ [66]Table of Contents Acquisitions could divert management’s time and attention, dilute the voting power of existing stockholders, and have a material adverse effect on our business |
| As part of our growth strategy, we may acquire complementary businesses and assets |
| Acquisitions that we may make in the future could result in the diversion of time and personnel from our business |
| We also may issue shares of common stock or other securities in connection with acquisitions, which could result in the dilution of the voting power of existing stockholders and could dilute earnings per share |
| Any acquisitions would be accompanied by other risks commonly encountered in such transactions, including the following: • difficulties integrating the products, operations, and personnel of acquired companies; • the additional financial resources required to fund the operations of acquired companies; • the potential disruption of our business; • our ability to maximize our financial and strategic position by the incorporation of acquired technology or businesses with our product offerings; • the difficulty of maintaining uniform standards, controls, procedures, and policies; • the potential loss of key employees of acquired companies; • the impairment of employee and customer relationships as a result of changes in management; • significant expenditures to consummate acquisitions; and • difficulties in meeting applicable regulatory requirements |
| As a part of our acquisition strategy, we may engage in discussions with various businesses regarding their potential acquisition |
| In connection with these discussions, we may exchange confidential operational and financial information with each potential acquired business and each of us may conduct due diligence inquiries and consider the structure, terms, and conditions of the potential acquisition |
| In certain cases, the prospective acquired business may agree not to discuss a potential acquisition with any other party for a specific period of time, may grant us certain rights in the event the acquisition is not completed, and may agree to take other actions designed to enhance the possibility of the acquisition |
| Potential acquisition discussions may take place over a long period of time, may involve difficult business integration and other issues, and may require solutions for numerous family relationships, management succession, and related matters |
| As a result of these and other factors, potential acquisitions that from time to time appear likely to occur may not result in binding legal agreements and may not be consummated |
| Our acquisition agreements may contain purchase price adjustments, rights of setoff, and other remedies in the event that certain unforeseen liabilities or issues arise in connection with an acquisition |
| These remedies, however, may not be sufficient to compensate us in the event that any unforeseen liabilities or other issues arise |
| Our failure to manage effectively our growth could impair our business |
| Our growth plans may require full use of our current financial, managerial, and other resources as well as substantial expansion of those resources |
| In order to manage effectively any significant future growth, we may have to perform various tasks, including the following: • expand our facilities and equipment and further enhance our operational, financial, and management systems; • design, develop, produce, and receive products from third-party suppliers on a timely basis; • develop new and maintain existing distribution channels in order to maximize revenue and profit margins; • effectively manage regulatory risks in various jurisdictions; • successfully hire, train, retain, and motivate additional employees; and • integrate successfully the operations of any acquired businesses with our operations |
| 13 _________________________________________________________________ [67]Table of Contents We plan to expand within our existing markets and into foreign and domestic bingo markets in which we have no previous operating experience |
| We may not be able to maintain profitability or manage successfully the aggressive expansion of our existing and planned business |
| Our failure to manage growth effectively could have a material adverse effect on our business, results of operations, and financial condition |
| Sales of additional shares of common stock, or the potential for such sales, could have a depressive effect on the market price of our common stock |
| As of January 13, 2006, we had outstanding 11cmam921cmam157 shares of common stock |
| Approximately 8dtta8 million of such shares are eligible for resale in the public market without restriction or further registration |
| The remaining approximately 3dtta1 million shares of common stock outstanding are held by affiliates of our company and may be sold only in compliance with the volume and other limitations of Rule 144 |
| Sales of substantial amounts of common stock by stockholders in the public market, or even the potential for such sales, are likely to adversely affect the market price of the common stock and could impair our ability to raise capital by selling equity securities |
| Moreover, the shares of common stock issuable upon exercise of outstanding options will be freely tradable without restriction unless acquired by affiliates of our company |
| The issuance of such freely tradable shares will result in additional outstanding shares of common stock and will create additional potential for sales of additional shares of common stock in the public market |
| We have limited protection of our intellectual property |
| We regard our products as proprietary and rely primarily on a combination of patent law, copyrights, trademarks, trade secret laws, licensing agreements, and employee and third-party non-disclosure agreements to protect our proprietary rights |
| Defense of intellectual property rights can be difficult and costly, and we may not be able to protect our technology from misappropriation by competitors or others |
| In addition, the protections offered by trademark, copyright, and trade secret laws may not prevent a competitor from designing electronic bingo systems having appearance and functionality that closely resemble our systems |
| As the number of electronic bingo terminals in the industry increases and the functionality of these products further overlaps, we may become subject to infringement claims, with or without merit |
| Intellectual property-related claims or litigation can be costly and can result in a significant diversion of management’s attention |
| Any settlement of such claims or adverse determinations in such litigation could also have a material adverse impact on our business, results of operations, and financial condition |
| Our Stockholders’ Rights Plan may adversely affect existing stockholders |
| Our Stockholders’ Rights Plan may have the effect of deterring, delaying, or preventing a change in control that might otherwise be in the best interests of our stockholders |
| Under the Rights Plan, we issued a dividend of one Preferred Share Purchase Right for each share of our common stock held by stockholders of record as of the close of business on March 17, 2003 |
| In general, subject to certain limited exceptions, the stock purchase rights become exercisable when a person or group acquires 15prca or more of our common stock or a tender offer or exchange offer for 15prca or more of our common stock is announced or commenced |
| After any such event, our other stockholders may purchase additional shares of our common stock at 50prca of the then-current market price |
| The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors |
| The rights may be redeemed by us at dlra0dtta01 per stock purchase right at any time before any person or group acquires 15prca or more of our outstanding common stock |
| The rights should not interfere with any merger or other business combination approved by our board of directors |
| Our operating results could differ materially from the forward-looking statements included in this report |
| Some of the statements and information contained in this report concerning future, proposed, and anticipated activities of our company, anticipated trends with respect to our revenue, operating results, capital resources, and liquidity or with respect to the markets in which we compete or the bingo industry in general, and other statements contained in this report regarding matters that are not historical facts are forward- 14 _________________________________________________________________ [68]Table of Contents looking statements, as that term is defined in the securities laws |
| Forward-looking statements, by their very nature, include risks and uncertainties, many of which are beyond our control |
| Accordingly, actual results may differ, perhaps materially, from those expressed in or implied by such forward-looking statements |
| Factors that could cause actual results to differ materially include those discussed elsewhere under this Item 1A, “Risk Factors |
| ” We depend on our controls to prevent and detect misstatements on a timely basis |
| Our financial disclosure controls and procedures are designed to provide reasonable assurances of achieving their objectives |
| An internal control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis |
| In preparing our tax provision for fiscal 2005, we identified certain adjustments to our tax liability accounts and related income tax provision |
| Remediation efforts, including engaging an independent public accounting firm to assist us, increasing our skill level in the area, and other steps are being implemented to correct the deficiencies |
| Although no other deficiencies have been noted, there can be no absolute assurances that a deficiency may exist or occur which might, in the future, prevent or detect misstatements on a timely basis |
| Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending October 31, 2007, we will be required to furnish a report by our management on our internal control over financial reporting |
| We were not subject to these requirements for the fiscal year ended October 31, 2005 |
| The internal control report must contain (i) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (iii) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (iv) a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of internal control over financial reporting |
| In order to achieve compliance with Section 404 within the prescribed period, beginning in the current fiscal year, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging |
| In this regard, we will need to dedicate internal resources, engage outside consultants, and adopt a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented, and (iv) implement a continuous reporting and improvement process for internal control over financial reporting |
| Despite our efforts, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions as of October 31, 2007 with respect to the effectiveness of our internal control over financial reporting under Section 404 |
| There is a risk that neither we nor our independent registered public accounting firm will be able to conclude at October 31, 2007 that our internal controls over financial reporting are effective as required by Section 404 |
| This may result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements |