FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of June, 2005.
Commission File Number 0-30456
Chartwell Technology Inc.
(Translation of registrant's name into English)
Suite 400, 750 - 11th Street SW
Calgary, Alberta
Canada T2P 3N7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the
laws of the jurisdiction in which the registrant is incorporated, domiciled
or legally organized (the registrant's "home country"), or under the rules
of the home country exchange on which the registrant's securities are
traded, as long as the report or other document is not a press release, is
not required to be and has not been distributed to the registrant's
security holders, and, if discussing a material event, has already been the
subject of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ________
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.
signed "Don Gleason"
---------------------------------------
Don Gleason, CFO
Date: October 19, 2005
EXHIBIT INDEX
-------------
1. Press Release dated June 14, 2005
2. Press Release dated June 14, 2005
5. Chartwell Technology Inc. Interim Consolidated Financial Statements for the
Three and Six Months Ended April 30, 2005
5. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended April 30, 2005 and 2004.
EXHIBIT 1
[CHARTWELL LOGO]
C h a r t w e l l T e c h n o l o g y I n c .
CHARTWELL TECHNOLOGY TO ANNOUNCE EARNINGS JUNE 14TH &
ANALYST/SHAREHOLDER CONFERENCE CALL
Chartwell Technology Inc. TSX:CWH
Calgary, Canada, June 14, 2005, Chartwell Technology Inc. (TSX:CWH), a leading
provider of gaming software systems to the online and remote gaming industry
announces that operating results will be released after market hours on June
14th 2005 for the period ending April 30th 2005 and will be followed by an
Analyst/Shareholder conference call to be held June 15th at 8:30am EST.
To participate in the call please dial the appropriate number below 5 minutes
prior to call commencement. You will be requested to provide your name,
telephone and corporate affiliation (if applicable).
Date: June 15th 2005
Time: 8:30 am EST
Local Access: 416-695-9702
Toll-free North America: 1-877-323-2091
Audio playback will be available after the call and will remain accessible until
June 29th, 2005.
Instant Replay Access Information:
Local Access: 416-695-5275
Toll-free Access: 1-888-509-0082
ABOUT CHARTWELL
Chartwell Technology Inc. specializes in the development of leading-edge gaming
applications and entertainment content for the Internet and wireless platforms
and other remote access devices. Chartwell's Java and Flash based software
products and games are designed for deployment in gaming, entertainment,
advertising and promotional applications. Chartwell does not participate in the
online gaming business of its clients. Chartwell's team of highly trained
professionals is committed to delivering the highest quality software and
maintaining its leading edge through continuous development and unparalleled
customer support.
Chartwell invites you to preview and play our games
at www.chartwelltechnology.com
For further information, please contact:
Chartwell Technology Inc. Chartwell Technology Inc.
Darold Parken, President and CEO David Bajwa, Investor Relations
(877) 261-6619 or (403) 261-6619 (877) 669-4180 or (604) 669-4180
dhp@chartwelltechnology.com info@chartwelltechnology.com
The TSX does not accept responsibility for the adequacy
or accuracy of this release.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical fact are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in
the forward-looking statements, including, but not limited to, certain delays
in testing and evaluation of products, regulation of the online gaming
industry, and other risks detailed from time to time in Chartwell's filings
with the Securities & Exchange Commission. We assume no responsibility for
the accuracy and completeness of these statements and are under no duty to
update any of the forward-looking statements contained herein to conform these
statements to actual results. This is not an offer to sell or a solicitation of
an offer to purchase any securities.
EXHIBIT 2
[CHARTWELL LOGO]
C h a r t w e l l T e c h n o l o g y I n c .
PRESS RELEASE
CHARTWELL ANNOUNCES FINANCIAL RESULTS FOR THE THREE MONTHS
AND SIX MONTHS ENDED APRIL 30, 2005
- Revenue growth of 33%, EBITDA of $1,581K, Net Income of $0.05 per share -
Chartwell Technology Inc. TSX: CWH
Calgary, Canada, June 14, 2005, Chartwell Technology Inc. (TSX:CWH) a leading
provider of gaming software systems and entertainment content to the online and
remote gaming industry, announces unaudited financial results for the three and
six months ended April 30, 2005.
Highlights of the quarter included:
o Total revenue of $3,877K compared with $2,916K during the same period
in 2004;
o Software license fees of $3,630K compared to $2,699K during the same
period in 2004;
o EBITDA (earnings before depreciation, amortization and interest) of
$1,582K compared to $958K during the same period in 2004;
o Operating margins of 40.7% compared to 31.9% during the same period in
2004;
o Net earnings of $934K or $0.05 per diluted share compared with net
earnings of $964K or $0.06 per diluted share during the same period in
2004;
o Positive cash flow from operations of $1,728K compared to $276K during
the same period in 2004;
o Total assets of $29.3M compared to $11.8M in the same period of 2004;
o Tenth consecutive quarter of profitability;
o Acquisition of MICROPOWER Corporation;
o Expanded customer base;
o Increased profile in the financial community;
o U.K. gambling legislation.
"I am pleased to report another quarter of growth and profitability", states Don
Gleason, Chief Financial Officer. "Our second quarter and year to date results
are consistent with our financial objectives for the year. We are continuing to
focus on profitability while strategically investing in key areas of our
business. The addition of new clients coupled with an improved poker offering
through the acquisition of MICROPOWER positions us well for continued growth."
THREE MONTHS ENDED APRIL 30, 2005
Compared to the same period of 2004, total revenue increased by 32.9%, software
license fees increased by 34.5%, EBITDA increased by 65.1%, operating margins
increased to 40.7% and net earnings decreased by 3.1%.
Total revenue increased to $3,877K from $2,916K in the comparative quarter of
2004. Software license fees, which represent approximately 94% of total revenue,
increased to $3,630K from $2,699K in the comparative quarter of 2004.
Total operating expenses, which include foreign currency gains, increased to
$2,300K from $1,985K in the comparative quarter of 2004. The increase in
operating expenses is within plan and continues to reflect the Company's
investment program which began in fiscal 2004 and is continuing in fiscal 2005.
Software development and support and sales and marketing are the principal
beneficiaries of this investment program. Software development and support
expenses ("SWD") increased by 31.1% to $1,319K compared to $1,006K in
the comparative quarter of 2004. Sales and marketing expenses increased by 90.7%
to $551K compared to $289K in the comparative quarter of 2004. General and
administrative ("G&A) expenses decreased by 68.2% to $227K compared to $716K in
the comparative quarter of 2004.
The increased expenditure level in operating expenses is expected to continue
throughout the remainder of the year in order to sustain and fuel continued
growth.
Despite planned increases in costs, operating margins increased to 40.7%
compared to 31.9% in the comparative period of 2004 and EBITDA increased by
65.1% to $1,581K compared to $958K in the comparative quarter of 2004.
Net income decreased by 3.1% to $934K compared to $963K in the comparative
period of 2004. The decrease in net income is the result of a tax expense of
$643K compared to a tax recovery of $35K in the comparative quarter of 2004. The
decrease in diluted earnings per share to $0.05 from $0.06 is the result of an
increase in the Company's issued shares resulting from the December private
placement and the dilutive affect of stock options.
SIX MONTHS ENDED APRIL 30, 2005
Compared to the same six-month period of 2004, total revenue increased by 70.0%,
software license fees increased by 77.9%, EBITDA increased by 177.9%, operating
margins increased to 43.9%, earnings increased by 79.3% and earnings per share
diluted increased by 33.3%.
Total revenue increased to $8,692K from $5,113K in the comparative six-month
period in 2004. License fees increased by 77.9% to $8,251K from $4,639K in the
comparative six-month period of 2004.
Total operating expenses increased by 29.9% to $4,876K from $3,752K in the same
period of 2004. SWD expense increased by 31.7% to $2,645K compared to $2,008K in
the same period of 2004. Sales and marketing expenses increased by 98.4% to
$1,151K compared to $580K in the same period of 2004. G & A expenses decreased
by 42.7% to $685K compared to $1,195K in the same period of 2004.
EBITDA increased by 177.9% to $3,836K compared to $1,380K in the same period of
2004.
Net income increased by 79.3% to $2,420K compared to $1,350K in the same period
of 2004. Diluted EPS increased by 33.3% to $0.12 compared to $0.09 in the same
period of 2004.
BALANCE SHEET STRENGTH
The Company continued to strengthen its balance sheet through positive cash
generation and strong earnings performance. At April 30, 2005, the Company's
total assets increased to $29,328K and working capital increased to $23,793K.The
Company had no debt and an aggregate cash balance, including short-term
investments, of $21,754K.
Operating cash flow was $1,728K for the quarter and $2,948K year to date. This
increase was primarily attributable to positive earnings in both the first and
second quarters. Cash provided by financing was $349K for the quarter and was
due to the exercise of stock options. Cash used in investing activities was
$6,328K for the quarter. Investing activities consisted of the purchase of
short-term investments and property and equipment in the amounts of $5,106K and
$309K and a deposit on the MICROPOWER acquisition in the amount of $913K.
ACQUISITION OF MICROPOWER CORPORATION
The online poker industry continues to enjoy strong momentum with significant
growth expected to continue. Chartwell recognized that in order to capitalize on
this growth opportunity its Poker software capabilities needed significant
enhancement. To address this issue, Chartwell, subsequent to quarter end,
acquired MICROPOWER Corporation of Gibraltar. MICROPOWER, one of the premier
online poker software development companies, has quickly established a brand
that is synonymous with multi-player poker. The acquisition satisfies the need
for a
significantly enhanced poker product and provides Chartwell with greatly
increased poker development capabilities. Chartwell now has a very competitive
poker offering that positions us to capture a meaningful market share in this
rapidly growing sector of the gaming industry.
EXPANDED CUSTOMER BASE
Chartwell expanded its customer base with the addition of two major clients in
the second quarter, Sportingbet plc and Bingo.com. Sportingbet is regarded as
the largest online gaming company in the world with betting turnover of over
$2-billion (U.S.) from a player base that exceeds 2.2 million customers in over
100 countries and currently averages over 13 bets per second. Bingo.com is one
of the world's largest online bingo destinations, with a player base of over one
million registered players and attracts over 30,000 visitors each day. These two
top tier additions to the Chartwell client base will contribute additional
revenue streams in two new areas, soft gaming and bingo.
INCREASED PROFILE IN THE FINANCIAL COMMUNITY
The Company's profile in the financial community has been increased with
additional research coverage now being provided by GMP Securities Ltd. and
Paradigm Capital Inc. This brings to four the number of firms covering the
Company.
U.K. GAMBLING LEGISLATION
In April, 2005 the U.K. government passed legislation to regulate online
gambling in the United Kingdom. The Gambling Act will establish world-class
standards for a safe, secure and regulated environment for players in a key
market and may provide the impetus for similar regulatory advancements in other
jurisdictions, including elsewhere in Europe. In anticipation of the regulatory
changes in the U.K the Company invested significantly in Europe with its office
in London and the development of responsible gaming functionality and
certification capabilities for its software systems.
2005 SECOND QUARTER ANALYST CALL
- --------------------------------
Chartwell will host an Analyst/Investor conference call review 2nd quarter 2005
results. To participate in the call please dial the appropriate number below 5
minutes prior to call commencement. You will be requested to provide your name,
telephone and corporate affiliation (if applicable).
Date: June 15th 2005
Time: 8:30 am EDT
Local/International Access: 416-695-9702
Toll-free North America: 1-877-323-2091
Audio playback will be available after the call and will remain accessible until
June 29th, 2005.
Instant Replay Access Information:
Local/International Access: 416-695-5275
Toll-free Access: 1-888-509-0082
ABOUT CHARTWELL
Chartwell Technology Inc. specializes in the development of leading edge gaming
applications and entertainment content for the Internet and wireless platforms
and other remote access devices. Chartwell's Java and Flash based software
products and games are designed for deployment in gaming, entertainment,
advertising and promotional applications. Chartwell does not participate in the
online gaming business of its clients. Chartwell's team of highly trained
professionals is committed to delivering the highest quality software and
maintaining its leading edge through continuous development and unparalleled
customer support.
For further information, please contact: Chartwell Technology Inc.
Don Gleason, Chief Financial Officer David Bajwa, Investor Relations
(877) 261-6619 or (403) 261-6619 (877) 669-4180 or (604) 669-4180
dgleason@chartwelltechnology.com info@chartwelltechnology.com
The Toronto Stock Exchange has not reviewed and does not accept
responsibility for the adequacy or accuracy of this release.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical fact are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in
the forward-looking statements, including, but not limited to, certain delays
in testing and evaluation of products, regulation of the online gaming
industry, and other risks detailed from time to time in Chartwell's filings
with the Securities & Exchange Commission. We assume no responsibility for
the accuracy and completeness of these statements and are under no duty to
update any of the forward-looking statements contained herein to conform these
statements to actual results. This is not an offer to sell or a solicitation of
an offer to purchase any securities.
EXHIBIT 3
[CHARTWELL LOGO]
CHARTWELL TECHNOLOGY INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2005
CHARTWELL TECHNOLOGY INC.
Interim Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------
April 30, October 31,
2005 2004
- -------------------------------------------------------------------------------------------------
(unaudited) (audited)
Assets
Current assets:
Cash $ 2,964,176 $ 5,995,863
Short term investments 18,789,885 3,318,286
Accounts receivable 3,086,132 1,916,309
Deferred set-up expense 78,238 58,585
Prepaid expenses and deposits 298,526 230,632
Notes receivable 126,665 117,873
Future income tax asset (note 4) 336,200 115,000
- -------------------------------------------------------------------------------------------------
Total Current Assets 25,679,822 11,752,548
Due from related parties (note 6) 153,373 178,961
Property and equipment 744,399 431,824
Deferred software development costs 490,242 607,900
Deferred set-up expense 126,993 68,186
Deposits - long term 912,975 -
Notes receivable 180,573 180,573
Future Income tax asset (note 4) 228,077 929,964
Goodwill 811,666 811,666
- -------------------------------------------------------------------------------------------------
$ 29,328,120 $ 14,961,622
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 720,149 $ 708,900
Income tax payable 651,378 -
Current portion of obligations under capital lease 16,074 15,640
Deferred revenue 499,285 478,952
- -------------------------------------------------------------------------------------------------
Total Current Liabilities 1,886,886 1,203,492
Deferred revenue 586,116 615,748
Obligations under capital lease 12,646 20,793
Shareholders' equity:
Share capital (note 2 (b)) 27,435,092 16,502,188
Contributed surplus (note 3) 821,808 102,572
Accumulated deficit (1,414,428) (3,483,171)
- -------------------------------------------------------------------------------------------------
Total Shareholders' Equity 26,842,472 13,121,589
- -------------------------------------------------------------------------------------------------
$ 29,328,120 $ 14,961,622
- -------------------------------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
2
CHARTWELL TECHNOLOGY INC.
Interim Consolidated Statements of Income and Deficit
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
Three months ended April 30, Six Months ended April 30,
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
Revenue:
Software license fees $ 3,629,580 $ 2,699,462 $ 8,251,302 $ 4,638,661
Software set-up fees 124,803 190,513 239,533 405,449
Interest and other 122,281 25,658 201,058 69,366
- ---------------------------------------------------------------------------------------------------------------------
3,876,664 2,915,633 8,691,893 5,113,476
Expenses:
Software development and support 1,319,500 1,005,728 2,644,778 2,007,595
General and administrative 226,901 715,516 685,153 1,195,174
Sales and marketing 551,388 288,664 1,151,016 580,110
Stock-based compensation 90,730 - 208,493 -
Depreciation and amortization 67,729 53,431 103,742 87,964
Amortization of deferred software
development costs 58,828 - 117,658 -
Foreign currency gain (15,156) (77,764) (34,874) (119,194)
- ---------------------------------------------------------------------------------------------------------------------
2,299,920 1,985,575 4,875,966 3,751,649
- ---------------------------------------------------------------------------------------------------------------------
Income from operations 1,576,744 930,058 3,815,927 1,361,827
Income taxes:
Current income tax expense (101,447) 431,940 651,378 476,940
Future income tax expense (recovery) 744,159 (465,430) 744,159 (465,430)
- ---------------------------------------------------------------------------------------------------------------------
642,712 (33,490) 1,395,537 11,510
Net income 934,032 963,548 2,420,390 1,350,317
Deficit, beginning of period (2,348,460) (7,118,183) (3,483,171) (7,504,952)
Stock based compensation (note 1(a)) - - (351,647) -
- ---------------------------------------------------------------------------------------------------------------------
Deficit, end of period $(1,414,428) $(6,154,635) $(1,414,428) $(6,154,635)
- ---------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 0.05 $ 0.07 $ 0.14 $ 0.10
Diluted $ 0.05 $ 0.06 $ 0.12 $ 0.09
- ---------------------------------------------------------------------------------------------------------------------
Weighted-average shares basic 18,269,771 13,920,417 17,706,057 13,920,417
Weighted-average shares diluted 20,076,090 15,607,694 19,363,174 15,607,694
See accompanying notes to interim consolidated financial statements.
3
CHARTWELL TECHNOLOGY INC.
Interim Consolidated Statements of Cash Flows
(unaudited)
- ------------------------------------------------------------------------------------------------------------------
Three Months ended April 30, Six Months ended April 30,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Funds from operations:
Net income $ 934,032 $ 963,548 $2,420,390 $1,350,317
Depreciation and amortization 67,729 53,431 103,742 87,964
Amortization of deferred software
development costs 58,828 - 117,658 -
Stock-based compensation 90,730 - 208,493 -
Notes receivable (4,324) - (8,792) -
Due from related parties 29,907 - 29,907 -
Interest income capitalized (2,138) (2,035) (4,319) (4,087)
Contracts acquired on acquisition 25,000 25,000
Future income tax reduction (8,666) (33,490) 744,159 11,510
- ------------------------------------------------------------------------------------------------------------------
1,166,098 1,006,454 3,611,238 1,470,704
Change in non-cash working capital:
Accounts receivable 320,792 (492,976) (1,169,823) (180,312)
Due from related parties - 20,000
Deferred set-up expense (91,914) 19,243 (78,460) 48,870
Prepaid expenses and deposits (118,978) (52,728) (67,894) (56,130)
Deferred revenue 5,506 (187,173) (9,299) (279,641)
Accounts payable and accrued liabilities (204,448) (16,752) 11,249 114,793
Income tax payable 651,378 651,378
- ------------------------------------------------------------------------------------------------------------------
562,336 (730,386) (662,849) (332,420)
- ------------------------------------------------------------------------------------------------------------------
1,728,434 276,068 2,948,389 1,138,284
Financing:
Issue of shares for cash 352,424 472,244 11,581,305 587,604
Share issue costs - - (752,777) -
Repayment of lease obligations (3,716) 37,875 (7,713) 35,973
- ------------------------------------------------------------------------------------------------------------------
348,708 510,119 10,820,815 623,577
Investments:
Purchase of short term investments (5,105,829) (19,605) (15,471,599) (1,549,918)
Purchase of property and equipment (308,840) (127,250) (416,317) (312,685)
Deferred software development costs - (175,000) - (175,000)
Deposit for acquisition (912,975) (912,975)
- ------------------------------------------------------------------------------------------------------------------
(6,327,644) (321,855) (16,800,891) (2,037,603)
Increase (decrease) in cash (4,250,502) 464,332 (3,031,687) (275,742)
Cash, beginning of period 7,214,678 2,725,046 5,995,863 3,465,120
Cash, end of period $2,964,176 $3,189,378 $2,964,176 $3,189,378
- ------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash interest received $ 72,128 $ 23,623 $ 187,947 $ 65,279
Cash interest paid 596 826 911 1,123
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to interim consolidated financial statements.
4
CHARTWELL TECHNOLOGY INC.
Notes to Interim Consolidated Financial Statements
For the six months ended April 30, 2005
(unaudited)
- --------------------------------------------------------------------------------
1. Significant accounting policies:
These consolidated interim financial statements have been prepared in
accordance with Canadian generally accepted accounting principles, using
the same accounting policies that were used for the consolidated financial
statements for the year ended October 31, 2004. Certain prior period
figures have been reclassified for consistency of presentation. These
consolidated financial statements do not include all disclosures required
for annual financial statements and should be read in conjunction with the
consolidated financial statements for the year ended October 31, 2004.
Stock based compensation:
Effective November 1, 2004, the Company retroactively adopted, without
restatement, the new Canadian accounting standards for stock based
compensation to employees and directors. In accordance with these
standards, the Company recognizes, at the grant date, the compensation cost
of stock options granted to employees and directors, measured at fair value
and expensed over the option vesting period, with a corresponding increase
to contributed surplus. Upon exercise of the option, consideration received
together with the amount previously recognized in contributed surplus is
recorded as an increase to share capital. The Company has recorded an
adjustment of $351,647 to beginning deficit at November 1, 2004 to reflect
the cumulative effect of the value of the options granted to employees and
directors from November 1, 2002 to October 31, 2004. The Company also
recorded a reduction to contributed surplus of $25,832 representing the
fair value of options exercised in in the second quarter. The fair value of
stock options granted to consultants are being expensed on a straight line
basis over the vesting period of the option grant.
2. Share capital:
(a) Authorized:
100,000,000 common shares without par value.
(b) Issued & outstanding:
-----------------------------------------------------------------------------------------
Number of Shares Amount
-----------------------------------------------------------------------------------------
Balance, October 31, 2004 16,022,966 $ 16,502,188
Issued for cash on Private Placement financing 2,365,592 11,000,002
Issue costs - (752,777)
Income tax effect of issue costs - 263,472
Compensation options issued to Underwriters - (184,928)
Issued for cash on exercise of stock options 398,630 581,303
Contributed surplus of options exercised 25,832
-----------------------------------------------------------------------------------------
2,764,222 $ 10,932,904
-----------------------------------------------------------------------------------------
Balance, April 30, 2005 18,787,188 $ 27,435,092
-----------------------------------------------------------------------------------------
The weighted average number of shares outstanding for the quarter were
18,269,771 (2004 - 13,920,417). Diluted shares of 20,076,090 (2004 -
15,607,694) reflect the dilutive effect of the exercise of the outstanding
options.
5
CHARTWELL TECHNOLOGY INC.
Notes to Interim Consolidated Financial Statements
For the six months ended April 30, 2005
(unaudited)
- --------------------------------------------------------------------------------
(c) Continuity of options:
Weighted average
Number exercise price
--------------------------------------------------------------------------
Outstanding, October 31, 2004 2,355,834 $ 1.49
Granted 428,936 $ 7.71
Exercised (398,630) $ 1.45
--------------------------------------------------------------------------
Outstanding, April 30, 2005 2,386,140 $ 2.61
--------------------------------------------------------------------------
3. Contributed surplus:
----------------------------------------------------------------------------------
Balance, October 31, 2004 $ 102,572
Retroactive application of stock-based compensation expense 351,647
Stock-based compensation expense 208,493
Stock-based compensation expense of options issued to Underwriters 184,928
Contributed surplus of options exercised (25,832)
----------------------------------------------------------------------------------
Balance, April 30, 2005 $ 821,808
----------------------------------------------------------------------------------
4. Future income tax asset:
------------------------------------------------------------------------
Balance, October 31, 2004 $ 1,044,964
Income tax effect of share issue costs 263,472
Future tax expense (744,159)
------------------------------------------------------------------------
Balance, April 30, 2005 $ 564,277
------------------------------------------------------------------------
6
CHARTWELL TECHNOLOGY INC.
Notes to Interim Consolidated Financial Statements
For the six months ended April 30, 2005
(unaudited)
- --------------------------------------------------------------------------------
5. Segmented information:
The Company has aggregated its Canadian, Belize and Malta operating
segments into one reporting segment. The Company's software set-up and
license fees are from domestic and foreign entities and originate from the
following countries of operations:
Three months ended April 30
--------------------------------------------------------------------------------------
2005 Malta Canada Belize Total
--------------------------------------------------------------------------------------
Software set-up fees $ - $ 124,803 $ 124,803
--------------------------------------------------------------------------------------
Software license fees $ 24,949 $3,604,631 $ 3,629,580
--------------------------------------------------------------------------------------
Total assets $ 77,010 $24,037,329 $5,213,781 $29,328,120
======================================================================================
Six months ended April 30
--------------------------------------------------------------------------------------
2005 Malta Canada Belize Total
--------------------------------------------------------------------------------------
Software set-up fees $ - $ 239,533 $ 239,533
--------------------------------------------------------------------------------------
Software license fees $ 49,319 $8,201,983 $ 8,251,302
--------------------------------------------------------------------------------------
Total assets $ 77,010 $24,037,329 $5,213,781 $29,328,120
======================================================================================
Three months ended April 30
--------------------------------------------------------------------------------------
2004 Malta Canada Belize Total
--------------------------------------------------------------------------------------
Software set-up fees $ - $ 190,513 $ 190,513
--------------------------------------------------------------------------------------
Software license fees $ 55,516 $2,643,946 $ 2,699,462
--------------------------------------------------------------------------------------
Total assets $7,028,835 $4,835,583 $11,864,418
======================================================================================
Six months ended April 30
--------------------------------------------------------------------------------------
2004 Malta Canada Belize Total
--------------------------------------------------------------------------------------
Software set-up fees $ - $ 405,449 $ 405,449
--------------------------------------------------------------------------------------
Software license fees $ 112,307 $4,526,354 $ 4,638,661
--------------------------------------------------------------------------------------
Total assets $7,028,835 $4,835,583 $11,864,418
======================================================================================
6. Related party transactions:
For the quarter ended April 30, 2005, the Company incurred legal fees of
$15,000 and consulting fees of $41,250 to certain directors and officers of
the Company in the normal course of business. These transactions were paid
in Canadian dollars and recorded in general and administrative and sales
and marketing expenses. Amounts due from related parties of $153,373
consist of amounts due from certain Company officers, directors and
employees. Of this amount $151,235 bears 6% interest, is secured by 189,200
common shares of the Company and has no set terms of repayment.
7
CHARTWELL TECHNOLOGY INC.
Notes to Interim Consolidated Financial Statements
For the six months ended April 30, 2005
(unaudited)
- --------------------------------------------------------------------------------
7. Subsequent event:
On May 20, 2005, the Company acquired all of the issued and outstanding
shares of MICROPOWER Corporation of Gibraltar ("MICROPOWER") for
approximately $4,000,000 in cash and additional contingent consideration
not to exceed $500,000 in cash and 55,000 shares of the Company. The
contingent consideration is performance based and subject to the
achievement of certain new MICROPOWER sales opportunities.
8
EXHIBIT 4
[CHARTWELL LOGO]
CHARTWELL TECHNOLOGY INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended April 30, 2005 and 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 2005 AND 2004.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") for the three and six months ended April 30,
2005, dated June 13, 2005, should be read in conjunction with Chartwell
Technology Inc.'s ("Chartwell" or the "Company") audited consolidated financial
statements and the accompanying notes for the year ended October 31, 2004, which
have been prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"). Additional information relating to the Company is
available on SEDAR at www.sedar.com under Chartwell Technology Inc. and on the
Company's website at www.chartwelltechnology.com.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which reflect
Management's expectations regarding the Company's growth, results of operations,
performance and business prospects and opportunities.
Statements about the Company's future plans and intentions, results, levels of
activity, performance or achievements or other future events constitute
forward-looking statements. Whenever possible, words such as "anticipate',
"estimate", "may", "will", "should", "could", "expect", "plan", "intend",
"believe", "estimate", or "potential" or similar words, have been used to
identify these forward-looking statements.
Forward-looking statements involve significant risk, uncertainties and
assumptions. Many factors could cause actual results to differ materially from
the results discussed or implied in the forward-looking statements. These
factors should be considered carefully and readers should not place undue
reliance on the forward-looking statements.
Factors which could cause results or events to differ from current expectations
include; among other things: the impact of government legislation; the impact of
price competition; the ability of the Company to retain and attract qualified
professionals; the impact of rapid technological and market change; loss of
business or credit risk with current and prospective major customers; general
industry and market conditions and growth rates; currency rate fluctuations and
the impact of consolidations in the on-line gaming industry. Chartwell disclaims
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. No assurance
can be given that actual results, performance or achievement expressed in, or
implied by, forward-looking statements within this disclosure will occur, or if
they do, that any benefits may be derived from them.
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is not a recognized measure under Canadian generally
accepted accounting principles ("GAAP"). Management believes however that EBITDA
is a useful supplementary measure as it provides indication of the results of
Chartwell's typical business operations without regard to how these activities
were financed or how these results were taxed. Chartwell's method of calculating
EBITDA may differ from those of other companies, and accordingly EBITDA may not
be directly comparable to measures used by other companies.
Cash flow is defined as cash flow from operations before changes in non-cash
working capital items. Cash flow is not a recognized measure under GAAP.
Management believes that cash flow is a useful supplementary measure as it
provides an indication of cash flow generated by operations before working
capital adjustments.
2
SUMMARY OF FINANCIAL RESULTS
Comparative Quarterly Operating Results
($000s CAD except per share data)
2005 Q2 2004 Q1 2004 Q4 2004 Q3 2004 Q2 2004Q1 2003 Q4 2003 Q3
Revenue
License fees 3,630 4,622 3,237 3,393 2,699 1,939 1,847 1,693
Set-up fees 125 115 208 184 191 215 247 241
-----------------------------------------------------------------------------------------------------
3,755 4,737 3,445 3,577 2,890 2,154 2,094 1,934
Interest 122 78 44 21 26 44 22 32
-----------------------------------------------------------------------------------------------------
Total Revenue 3,877 4,815 3,489 3,598 2,916 2,198 2,116 1,966
Operating Exp.
Software dev. & sup. 1,319 1,325 1,238 1,172 1,006 1,002 405 1,024
General & admin. 227 458 657 353 715 480 475 257
Sales & marketing 551 600 303 411 289 291 187 216
Stock-based comp. 91 118 103 - - - - -
Deprec. & amort. 68 36 53 103 53 35 68 26
Amort. of deferred
software dev. costs 59 59 59 39 - - 26 28
FX (gain) loss (15) (20) 247 105 (78) (41) 211 201
-----------------------------------------------------------------------------------------------------
Total Operating Exp. 2,300 2,576 2,660 2,183 1,985 1,767 1,372 1,752
Operating Income 1,577 2,239 829 1,415 931 431 744 214
Taxes 643 753 (631) 204 (33) 45 (630) -
-----------------------------------------------------------------------------------------------------
Net Income 934 1,486 1,460 1,211 964 386 1,374 214
=====================================================================================================
Earnings per share
Basic $ 0.05 $ 0.09 $ 0.10 $ 0.08 $ 0.07 $ 0.03 $ 0.10 $ 0.02
Diluted $ 0.05 $ 0.08 $ 0.08 $ 0.07 $ 0.06 $ 0.03 $ 0.10 $ 0.02
====================================================================================================
EBITDA $ 1,582 $ 2,256 $ 897 $ 1,536 $ 958 $ 422 $ 816 $ 236
Total Assets $29,328 $27,502 $14,962 $12,952 $11,864 $9,718 $9,219 $7,730
L.T. Liabilities $ 599 $ 555 $ 637 $ 1,121 $ 730 $ 890 $ 984 $1,134
OVERVIEW
Chartwell develops, markets, implements and supports gaming applications and
entertainment content for the Internet and wireless platforms. Chartwell's JAVA
and Flash based software products and games are designed for deployment in
gaming, entertainment and promotional applications. Chartwell does not operate a
gaming site nor do we operate our clients' gaming sites.
3
RESULTS OF OPERATIONS
Three and six months ended April 30, 2005 compared to three and six months ended
April 30, 2004.
HIGHLIGHTS
Chartwell realized strong top line growth in the three and six months ended
April 30, 2005 compared to the same periods of 2004. Total revenue increased to
$3,877 thousand and $8,692 thousand compared to $2,916 thousand and $5,114
thousand; net income decreased slightly to $934 thousand and increased to $2,420
thousand compared to $964 thousand and $1,350 thousand with diluted earnings per
share of $0.05 and $0.12 compared to $0.06 and $0.09.
Operating margins improved to 40.7% and 43.9% for the three and six months ended
April 30, 2005 compared to 31.9% and 26.6% for the same period of 2004.
Chartwell also continued to strengthen its balance sheet in the six months ended
April 30, 2005. Cash and short-term investments increased to $21,754 thousand
compared to $9,314 thousand at October 31, 2004 and working capital improved to
$23,793 thousand. The Company's strong cash position is the result of continued
positive cash flow from operations and a private placement financing in December
for net proceeds of $10,247 thousand.
In fiscal 2005, the Company continues to invest in key areas of its business
specifically related to product development and support and sales and marketing.
To sustain and build for long term growth increased expenditures will continue
to be necessary throughout fiscal 2005.
REVENUE
Substantially all of Chartwell's revenue is of a recurring nature in the form of
software license fees. Chartwell's licensees pay an ongoing fee for the
licensing and support of our software. The license fee is calculated as a
percentage of each licensee's level of activity. Additional sales revenue is
derived from software set-up fees, which are one time costs on new customer
installations. Subsequent to October 31, 2003, the Company revised its
accounting policy for the recognition of set-up fee revenue and related set-up
costs. The Company's contractual agreements with licensees provide for the
provision of graphics, web design, software implementation services, licensing
of the software and provision of software upgrades over the fixed term of the
contract. Set-up fee revenue and related costs are recognized ratably over the
term of the contract. Prior to the revision of its policy, the Company
recognized set-up fees and related set-up costs using the completed contract
method of accounting. The accounting change was adopted retroactively.
In the three and six months ended April 30, 2005, total revenue increased by
32.9% and 70.0% to $3,877 thousand and $8,692 thousand compared to $2,916
thousand and $5,113 thousand in the same period of 2004. The growth in total
revenue was attributable to both the continued strength of existing major
licensees and to new customers who began generating revenue in the last quarter
of fiscal 2004.
SOFTWARE LICENSE FEE
Software license fees continue to show year over year growth. Software license
fees increased by 34.5% and 77.9% to $3,630 thousand and $8,251 thousand for the
three and six months ended April 30, 2005 compared to $2,699 thousand and
$$4,639 thousand in the same period of 2004. Substantially all of the Company's
software licensing revenue is presently derived form our core Internet casino
products.
4
SOFTWARE SET-UP FEES
Software set-up fees decreased by 34.5% and 40.7% to $125 thousand and $240
thousand for the three and six months ended April 30, 2005 compared to $191
thousand and $405 thousand in the same period of 2004. Software set-up fees, as
a percentage of total sales revenue, decreased to 3.4% and 2.8% from 6.6% and
8.0% in the same period of 2004.
We expect that software set-up fees will continue to represent a progressively
smaller percentage of the Company's sales revenue as we continue to build our
recurring license fee base.
INTEREST & OTHER INCOME
Interest and other income increased by 369.2% and 187.1% to $122 thousand and
$201 thousand in the three and six months ended April 30, 2005, compared to $26
thousand and $70 thousand in the same period of 2004. The increase was
attributable to significantly higher cash and investment balances resulting from
increased cash flow from operations and the private placement in December of
2004.
OPERATING EXPENSES
Total operating expenses increased by 15.9% and 29.9% to $2,300 thousand and
$4,876 thousand for the three and six months ended April 30, 2005 compared to
$1,986 thousand and $3,752 thousand for the same period of 2004. Operating
margins increased to 40.7% and 43.9% compared to 31.9% and 26.6% for the same
period of 2004. The increase in total operating expenses reflects the impact of
the Company's investment program began in fiscal 2004 and continuing in 2005.
The 2005 results also reflect the expensing of stock options effective November
1, 2004. There were no comparable expenses in the same period of 2004.
During the three and six months ended April 30, 2005, increased expenses were
incurred for continued development of new casino and soft games and our poker
community, enhancements to our back-office system, project management and
quality assurance and testing. This increased expenditure level is expected to
continue in order to sustain growth.
SOFTWARE DEVELOPMENT & SUPPORT
Software development and support costs include compensation costs of software
development, quality assurance, and customer implementation and support teams
working on the continuing enhancement and support of our products as well as
quality assurance and testing activities. These expenses also include
independent contractors and consultants, recruitment costs, deferred set-up
expenses and allocated operating expenses.
Software development and support costs increased by 31.1% and 31.7% to $1,319
thousand and $2,645 thousand for the three and six months ended April 30, 2005
compared to $1,006 thousand and $2,008 thousand for the same period of 2004.
Salaries and consulting fees continue to represent the largest expenditure area
and accounted for 91.7% and 87.6% of total software development expenses for the
three and six months ended April 30, 2005. Salary and consulting expenses
increased 30.5% in the three months ended April 30, 2005 compared to the same
period of 2004 and increased by 8.6% over the previous quarter (Q1FY05). The
increased salary expenses reflect the addition of approximately 18 development
and technology related staff since November 1, 2004.
As a percentage of sales revenue, software development and support expenses were
35.1% and 31.1% for the three and six months ended April 30, 2005 compared to
34.8% and 39.8% % for the same period of 2004. Expenses are planned and in-line
with the Company's growth strategies.
Due to the increasing demands for new gaming products and the Company's product
development and support initiatives, we anticipate adding technical resources
throughout the remainder of fiscal 2005, which
5
will result in a corresponding increase in software development expenses. The
acquisition of MICRPOWER Corporation (May) will also add seventeen staff and
result in a corresponding increase in expenses of approximately $270 thousand
per quarter for the remainder of the year.
SALES AND MARKETING
Sales and marketing expenses include compensation of sales and marketing
personnel, advertising, trade shows, marketing materials and facility lease
costs.
Sales and marketing expenses increased by 90.7% and 98.4% to $551 thousand and
$1,151 thousand for the three and six months ended April 30, 2005 compared to
$289 thousand and $580 thousand for the same period of 2004. The increase is
attributable to the additional sales and marketing headcount and the operating
costs for the London, U.K. sales office, which was opened in the second quarter
of fiscal 2004. Prior to that time the Company's sales and marketing efforts
were handled by personnel based in Canada.
As a percentage of sales revenue, sales and marketing expenses increased to
14.6% and 13.6% for the three and six months ended April 30, 2005 compared to
10.0% and 11.5% for the same period of 2004.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) expenses include the salaries and benefits for
corporate personnel, legal and professional fees associated with the Company's
public filings and annual audit fees, bad debt expenses and all costs associated
with investor relations. Our corporate staff includes finance and accounting,
investor relations, IT support and corporate administrative staff.
G&A expenses decreased by 68.2% and 42.7% to $227 thousand and $685 thousand for
the three and six months ended April 30, 2005 compared to $716 thousand and
$1,195 thousand for the same period of 2004. The decrease in expenses is
primarily attributable to a reduction in the provision for doubtful accounts of
$132 thousand compared to an equivalent expense in the second quarter of 2004 of
$209 thousand.
It is expected that with the planned increase in the number of technical
personnel and the growth of the business in general that G& A expenses will
increase over the next two quarters.
As a percentage of sales revenue, G & A expenses decreased to 6.0% and 8.1% for
the three and six months ended April 30, 2005 compared to 24.7% and 23.7% for
the same period of 2004.
AMORTIZATION OF DEFERRED SOFTWARE DEVELOPMENT COSTS
Amortization expenses for the three and six months ended April 30, 2005 were $59
thousand and $118 thousand. There were no comparative expenses for the same
period of 2004. In fiscal 2003 and fiscal 2004 the Company deferred $531
thousand and $175 thousand, respectively, of software development costs relating
to the development of the Company's Community Poker product. Management has
estimated that the appropriate amortization period would be three years. The
Company began amortizing these costs on a straight line basis in the third
quarter of fiscal 2004.
STOCK BASED COMPENSATION
The Company recorded $91 thousand and $208 thousand of stock-based compensation
expense for the three and six months ended April 30, 2005. There was no
comparative expense for the same period of 2004. The expense relates to the
amortization of the fair value of stock options granted to employees, directors
and consultants. Expenses are amortized over the vesting period of three to five
years.
DEPRECIATION & AMORTIZATION
Depreciation and amortization expenses increased by 28.3% and 18.2% to $68
thousand and $104 thousand for the three and six months ended April 30, 2005
compared to $53 thousand and $88 thousand
6
for the same period of 2004. The increase was the result of investments in
computer hardware and software required to support an expanding infrastructure
and growing organization. As a percentage of sales revenue, depreciation and
amortization expenses decreased to 1.8% and 1.2% for the three and six months
ended April 30, 2005 compared to 1.8% and 1.7% for the same period of 2004. It
is expected that continued investment in computer hardware and software will be
required as the Company continues to grow but that depreciation and amortization
will remain constant as a percentage of revenue.
FOREIGN EXCHANGE
The Company realized a foreign currency gain of $15 thousand and $35 thousand
for the three and six months ended April 30, 2005 compared to a foreign currency
gain of $78 thousand and $119 thousand for the same period in 2004. The Company
does not utilize any hedges or forward contracts to mitigate foreign currency
risk.
PROVISION FOR INCOME TAXES
Income taxes for the three and six months ended April 30, 2005 were $643
thousand and $1,396 thousand compared to a tax recovery of $33 thousand and a
tax expense of $12 thousand for the comparative period of 2004. Tax expense in
the current quarter reflects the non-deductibility of stock based compensation
and other non-deductible expenses. The provision for income taxes for the
remainder of the fiscal year will use a tax rate of 33.62%.
At October 31, 2004 the Company had no valuation allowance remaining and it is
expected to be cash taxable in 2005.
EBITDA
EBITDA increased by 65.1% and 177.9% to $1,581 thousand and $3,836 for the three
and six months ended April 30, 2005 compared to $958 thousand and $1,380
thousand for the same period of 2004.
NET INCOME
Net income decreased slightly by 3.1% to $934 thousand and increased by 79.3% to
$2,420 thousand for the three and six months ended April 30, 2005 compared to
$964 thousand and $1,350 thousand in the same period of 2004.
Diluted earnings per share were $0.05 and $0.12 for the three and six months
ended April 30, 2005 compared to $0.06 and $0.09 in the same period of 2004. The
decrease in the diluted earnings per share in the current quarter reflects the
impact of the additional shares issued in the private placement financing closed
in December of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Positive cash generation continued to add to a strong balance sheet. At April
30, 2005 the Company had no debt, $21,754 thousand in cash and short term
investments and working capital of $23,793 thousand.
OPERATING ACTIVITIES
Operating cash flow for the three and six months ended April 30, 2005 was $1,728
thousand and $2,948 thousand. The increase was due primarily to the Company's
strong bottom line performance in the first and second quarters, a reduction in
accounts receivable and an increase in accounts payable and income taxes
payable.
7
FINANCING ACTIVITIES
Cash flows from financing activities was $349 thousand and $10,821 thousand for
the three and six months ended April 30, 2005. The Company's financing
activities consisted primarily of the issuance of shares for cash resulting from
the exercise of stock options and the issuance of shares from a private
placement financing in December of 2004. In the three months ended April 30,
2005, the Company realized net proceeds of $352 thousand from the exercise of
207 thousand stock options at an average price of $1.71. in the six months ended
April 30, 2005, the Company realized $581 thousand form the exercise of 399
thousand stock options at an average price of $1.45 and net proceeds of $10,247
thousand from the issuance of 2,366 thousand shares from treasury at a price of
$4.65 per share. In the three and six months ended April 30, 2004 the Company
realized proceeds of $472 thousand and $588 thousand from the exercise of stock
options. There were no other significant financing activities in 2004.
INVESTING ACTIVITIES
The Company's investing activities consisted primarily of the purchase of short
term investments, property and equipment which include computers and software
for internal use and furniture and fixtures. Total cash used for investing
purposes was $6,328 thousand and $16,802 thousand for the three and six months
ended April 30, 2005 compared to $322 thousand and $2,038 thousand for the same
period of 2004. Cash used from investing activities for the three months ended
April 30, 2005 was attributable to the purchase of $5,106 thousand of short-term
investments, $309 thousand of property and equipment and a deposit on the
MICROPOWER acquisition in the amount of $913 thousand. For the six months ended
April 30, 2005, cash used in investing activities was attributable to the
purchase of $15,472 thousand of short term investments, $416 thousand in
property and equipment and the deposit on the MICROPWER acquisition of $913
thousand.
CRITICAL ACCOUNTING ESTIMATES
In the opinion of management, the only material accounting estimates in the
financial statements contained herein, involve the recoverability of deferred
software development costs, amortization periods for property and equipment,
provision for doubtful accounts, deferred set-up fee expenses and stock based
compensation. Actual results could differ from management's best estimates and
underlying assumptions as additional information becomes available in the
future.
RISKS AND UNCERTAINTIES
Chartwell operates in a rapidly changing environment that involves numerous
risks and uncertainties, many of which are beyond our control and which could
have a material affect on our business, revenue, operating results and financial
condition. The following discussion highlights some of these risks and
uncertainties.
GOVERNMENT REGULATION
Our licensees are subject to applicable laws in the jurisdictions in which they
operate. Some jurisdictions have introduced regulations attempting to restrict
or prohibit online gaming, while other jurisdictions have taken the position
that online gaming is legal and have (or are in the process of considering)
legislation to regulate online gaming. As companies and consumers involved in
online gaming are located around the world, including our licensees and their
players, there is uncertainty regarding the future legislative landscape for
online gaming. There is a risk that proposed legislation supporting online
gaming may not be passed or existing legislation supporting online gaming may be
changed. Changes to the regulatory framework could have an adverse affect on the
Company's revenue and financial condition.
8
COMPETITION
Some of the Company's competitors have significantly greater financial,
technical, marketing and sales resources and they may be able to respond more
quickly to changes in customer needs. In addition, these competitors may be able
to devote a greater number of resources to the enhancement, promotion, and sale
of their games and gaming systems. Our success is dependant on our ability to
win our share of sales against these larger competitors. Failure to do so could
result in an adverse material effect on the Company's revenue, results of
operation and financial condition.
DEPENDENCE ON MARKET GROWTH
The online gaming market has experienced and is expected to continue to
experience significant growth. There can be no assurance that the market for the
Company's gaming solutions will continue to grow, that customers will continue
to adopt the Company's solutions, or that the Company will be successful in
selling into new and existing markets. If the markets in which the Company's
products compete fail to grow, or grow more slowly that the Company currently
anticipates, the Company's business, operating results and financial condition
could be materially adversely affected.
RENEWAL OF SOFTWARE LICENSE AGREEMENTS
Substantially all of the Company's revenue is of a recurring nature in the form
of software license fees. Licensees pay an ongoing fee for the licensing and
support of the Company's software under a software licensing agreement, which
typically has a three to five year term. The license fee, or royalty, is
calculated as a percentage of each licensee's level of activity. There is no
assurance that the Company will be able to renew agreements with existing
clients or that the Company will be able to renew agreements under similar
financial and other terms. Failure to renew agreements or failure to renew
agreements under similar financial and other terms could have a significant
adverse effect on the Company's revenue, operating results and financial
condition.
FAILURE TO MANAGE GROWTH SUCCESSFULLY
The company's business has grown rapidly in the last three years. The
accelerated growth of the Company's revenue places a strain on managerial and
financial resources. In addition, the Company's recent expansion has resulted in
a substantial growth in the number of its employees, the scope of its
infrastructure and the geographic area of its operation, resulting in increased
responsibility for existing and new management personnel. The Company's ability
to successfully manage this growth depends in large part upon our ability to:
o retain and attract qualified management;
o attract and retain technical personnel to continue to develop reliable
solutions that respond to evolving customer needs; and
o retain, attract and train sales and marketing personnel to create an
expanding presence in the rapidly growing marketplace for the
Company's products.
Chartwell's inability to achieve any of these objectives could harm the
Company's business, financial condition and operating results.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is largely dependant on the performance of its key
management and technical personnel. Competition for highly skilled technical and
management personnel is intense. Failure to retain key employees and to attract
and retain additional key employees with the necessary skills could have an
adverse material effect upon the Company's growth and profitability.
9
LENGTHY SALES CYCLE
The Company's sales cycle, beginning with an interested customer and culminating
in entering into a commercial agreement with the customer, typically ranges from
6 to 12 months and may be longer. This lengthy sales cycle limits the Company's
ability to forecast the timing of new sales in a specific quarter. Any extension
in the length of the sales cycle could have a material adverse effect on
revenues and financial condition.
RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS
The majority of the Company's revenue is realized in foreign currencies, while
the majority of the Company's expenses is incurred in Canadian dollars.
Fluctuations in the exchange rate between the Canadian dollar and other
currencies, particularly the U.S. dollar, may have a material adverse affect on
the Company's operating results and financial condition.
10