GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1996
U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ...................... to .......................
Commission file number 0-23626
GAME FINANCIAL CORPORATION
(Exact name of issuer as specified in its charter)
Minnesota 41-1684452
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10911 West Highway 55, Suite 205, Plymouth, MN 55441-6114
(Address of principal executive offices)
(612) 544-0062
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes__X__ No____
APPLICABLE ONLY TO CORPORATE ISSUERS: As of August 1, 1996, the Corporation had
4,504,573 shares of its $.01 par value common stock outstanding.
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30,
1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 1996 and
June 30, 1995 4
Condensed Consolidated Statements of Income for the
Six Months Ended June 30, 1996 and
June 30, 1995 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996 and
June 30, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Exhibit 11 - Computation of Earnings Per Share 12
Exhibit 27 - Financial Data Schedule 13
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
AS OF:
JUNE 30, DECEMBER 31,
1996 1995
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,351,287 $ 868,903
Marketable securities 2,934,568 3,795,164
Receivables 256,195 209,482
Other 248,106 139,283
---------- ----------
TOTAL CURRENT ASSETS 6,790,156 5,012,832
---------- ----------
EQUIPMENT
Furniture, fixtures, and equipment 2,077,038 1,492,028
Less accumulated depreciation 649,253 438,949
---------- ----------
1,427,785 1,053,079
---------- ----------
MARKETABLE SECURITIES 253,865 565,487
---------- ----------
$8,471,806 $6,631,398
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 943,430 $ 425,460
Payable to customers 18,360 19,662
Accrued expenses 175,767 239,181
Deferred revenue 304,288 91,225
---------- ----------
TOTAL CURRENT LIABILITIES 1,441,845 775,528
---------- ----------
DEFERRED INCOME TAXES 48,000 49,400
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common stock 45,045 34,781
Additional paid-in capital 4,717,690 4,192,796
Retained earnings 2,219,226 1,576,662
Unrealized gain on investments -- 2,231
---------- ----------
6,981,961 5,806,470
---------- ----------
$8,471,806 $6,631,398
========== ==========
See notes to condensed consolidated financial statements
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED:
JUNE 30, JUNE 30,
1996 % 1995 %
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenue $4,636,898 100% $2,119,144 100%
Cost of Revenue 3,208,793 69% 1,305,105 62%
---------- ----------
Gross Margin 1,428,105 31% 814,039 38%
Sales, Marketing, General And
Administrative Expenses 870,352 19% 443,263 21%
---------- ----------
Operating Income 557,753 12% 370,776 17%
Other Income 34,040 1% 42,717 2%
---------- ----------
Income Before Taxes 591,793 13% 413,493 20%
Income Tax Expense 233,000 5% 155,248 7%
---------- ----------
Net Income $ 358,793 8% $ 258,245 12%
========== ==========
Net Income Per Share $ 0.08 $ 0.06
========== ==========
Weighted Average Shares Outstanding 4,715,004 4,441,313
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED:
JUNE 30, JUNE 30,
1996 % 1995 %
----------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue $7,825,059 100% $3,821,347 100%
Cost of Revenue 5,241,014 67% 2,272,747 59%
---------- ----------
Gross Margin 2,584,045 33% 1,548,600 41%
Sales, Marketing, General And
Administrative Expenses 1,598,484 20% 879,700 23%
---------- ----------
Operating Income 985,561 13% 668,900 18%
Other Income 65,113 1% 85,918 2%
---------- ----------
Income Before Taxes 1,050,674 13% 754,818 20%
Income Tax Expense 408,000 5% 278,849 7%
---------- ----------
Net Income $ 642,674 8% $ 475,969 12%
========== ==========
Net Income Per Share $ 0.14 $ 0.11
========== ==========
Weighted Average Shares Outstanding 4,669,680 4,418,309
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED:
JUNE 30, JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 642,674 $ 475,970
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 210,304 96,632
Amortization of investment premiums
and discounts 38,062 63,236
Changes in operating assets and liabilities:
Receivables (46,713) 42,821
Other current assets (108,823) (50,511)
Accounts payable 517,970 (43,879)
Payable to customers (1,302) (21,385)
Accrued expenses (63,414) (319,434)
Deferred revenue 213,063 (147,418)
----------- -----------
Net cash provided by
operating activities 1,401,821 96,032
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities of marketable securities 1,924,032 835,275
Purchases of marketable securities (793,507) (843,056)
Purchases of equipment (585,010) (504,029)
----------- -----------
Net cash provided (used) by investing activities 545,515 (511,810)
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 25,048 --
Proceeds from exercise of underwriter warrants 510,000 --
----------- -----------
Net cash provided by financing activities 535,048 --
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,482,384 (415,778)
CASH AND CASH EQUIVALENTS
Beginning of period 868,903 896,243
----------- -----------
End of period $ 3,351,287 $ 480,465
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------- -----------
Cash Paid for Taxes $ 500,075 $ 230,400
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - BASIS OF PRESENTATION - In the opinion of the Company, these unaudited
condensed consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial position
as of June 30, 1996 and December 31, 1995, and the results of operations for the
three months and six months ended June 30, 1996 and 1995. The results of
operations for the three months and six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1996, or any other period. For further information, refer to the
consolidated financial statements and footnotes included in the registrant
Company's annual report on Form 10-KSB for the year ended December 31, 1995.
NOTE 2. - REVENUE RECOGNITION - The Company has certain financial service
agreements which provide for decreasing rates of fees based on the attainment of
specified dollar amounts of transactions processed. Revenue on these contracts
are recorded using the actual transactions processed during the period at the
overall projected fee rate to be earned under the contract. The estimated fees
to be earned under these contracts are reviewed on a regular basis. The
cumulative impact of changes to these estimates are recorded in the month of the
revision.
NOTE 3. - CASINO LOCATIONS - The Company operates its funds transfer facilities
pursuant to agreements with the operators of the host casinos. Such agreements
typically have initial terms of one to three years with renewal clauses. The
following table summarizes the contract activity since 1992.
<TABLE>
<CAPTION>
--------------------------LOCATIONS-----------------
NUMBER CREDIT CHECK CASHING
OF CARD OR ATM AND CREDIT
STATES ONLY CARD OR ATM TOTAL
----------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1992 1 0 5 5
Locations Opened 1 1 2
Locations Discontinued (1) (1)
----------------------------------------------------
December 31, 1993 3 1 5 6
Locations Opened 4 2 6
Locations Discontinued (2) (2)
----------------------------------------------------
December 31, 1994 5 5 5 10
Locations Opened 18 4 22
Locations Discontinued (4) (4)
----------------------------------------------------
December 31, 1995 14 19 9 28
Locations Opened 4 6 10
Locations Discontinued
----------------------------------------------------
March 31, 1996 14 23 15 38
Locations Opened 14 3 17
Locations Discontinued (1) 0 (1)
----------------------------------------------------
June 30, 1996 16 36 18 54
====================================================
Contracted Locations Opening after June 30, 1996 11 0 11
==========================================
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REVENUE
The Company derives revenue from fees charged for financial services,
principally making cash advances on credit cards, cashing checks and providing
ATM services to customers in gaming establishments.
Revenue for the quarter ended June 30, 1996 was $4,637,000, a 119% increase
over $2,119,000 for the same period in 1995. Revenue for the six months ended
was $7,825,000, a 105% increase over $3,821,000 for the same period in 1995. The
Company operated in 54 locations at June 30, 1996, compared with 23 locations at
June 30, 1995. The difference of 31 locations is comprised of five locations
that opened between April 1, 1995 and December 31, 1995, 10 that opened during
the quarter ended March 31, 1996 and 17 that opened during the quarter ended
June 30, 1996. The most notable of the 17 locations that opened during the
second quarter of 1996 were Stratosphere, which opened in late April and Grand
Casino Tunica, which opened in late June.
As of August 1, 1996, the Company is operating in 57 locations and has
agreements in place with eight additional locations which will be operational
during the third quarter of 1996.
COST OF REVENUE
The cost of revenue is primarily comprised of credit card cash advance
processing fees paid to the credit card company, casino commissions, as defined
in the financial services agreements, payroll for employees staffing the service
desks at check cashing locations, bad check expense, depreciation related to the
equipment at the locations and operating supplies of the locations.
Cost of revenue for the quarter ended June 30, 1996 was $3,209,000, a 146%
increase over $1,305,000 for the first quarter of 1995. Cost of revenue for the
six months ended June 30, 1996 was 5,241,000, a 131% increase over $2,273,000
for the same period last year. The variable nature of the majority of the direct
expenses is the primary cause of the increase in cost of revenue.
The gross margin percentage was 31% for the quarter ended June 30, 1996
compared to 38% for the same period last year. For the six months ended June 30,
1996, the gross margin percentage was 33% compared to 41% for the same period
last year. The reduction is due to a combination of factors including start-up
expenses, primarily payroll and supplies, related to opening check cashing
locations during the quarter, increases in casino commissions.
Management continues to believe that as the Company enters into more
established markets with larger properties, primarily Las Vegas and Atlantic
City, there will be increased pressure on gross margins. However, with the
Company's continuing efforts to improve operating efficiencies and improve the
cost effectiveness, margins should remain in their present range.
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, marketing, general and administrative expenses for the quarter ended
June 30, 1996 were $870,000, 19% of gross revenue compared to $443,000, 21% of
gross revenue for the same period last year. For the six months ended June 30,
1996, sales, marketing and administration expenses were $1,598,000, 20% of gross
revenue compared to $880,000, 23% of gross revenue for the same period last
year. The reduction in these expenses as a percentage of sales is due to the
fixed nature of many of the items, the rapid growth in revenue and of
management's effort to control expenses.
The Company will continue to prudently invest in the development of new and
improved applications of technology for the financial services segment of the
gaming industry. In addition, through ongoing contact with current customers,
the Company is continually upgrading and implementing system enhancements.
NET INCOME:
For the quarter ended June 30, 1996, net income increased 39% to $359,000
or 8 cents per share compared with net income of $258,000 or 6 cents per share
in the second quarter of 1995. For the six months ended June 30, 1996, net
income increased 35% to $643,000 or 14 cents per share compared with net income
of $476,000 or 11 cents per share for the same period last year. All earnings
per share amounts have been restated to reflect the 5-for-4 stock splits in
September 1995 and June 1996.
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1996, the Company had $6,790,000 in current assets compared
with $5,013,000 at December 31, 1996. Cash, cash equivalents and marketable
securities totaled $6,540,000 at June 30, 1996 compared with $5,230,000 at
December 31, 1995. The improvement in liquidity is a direct result of the
Company's profitable operations and positive cash flow in the six months ended
June 30, 1996.
Operating activities during the six months ended June 30, 1996 generated
$1,402,000 of net cash compared with $96,000 for the same period last year.
Though net income was only $167,000 different between the periods, changes in
operating assets and liabilities, primarily other current assets, accounts
payable and deferred revenue created the significant difference between the
periods. The Company's investment in property and equipment of $585,000 during
the six months ended June 30, 1996 was $81,000 above the investment in equipment
during the same period last year. Investments in property are primarily related
to equipment used in casino locations.
During the second quarter, the underwriters exercised all outstanding
warrants related to the initial public offering in April 1994. The exercise of
the warrants was responsible for $510,000 of the increase in cash and cash
equivalents through June 30, 1996.
The Company believes its liquidity and capital resources together with cash
generated from operations will be sufficient to finance its planned expansion.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant legal proceedings
ITEM 2. CHANGES IN SECURITIES
The Company declared a 5-for-4 stock split which was distributed on
June 21, 1996. All data in the accompanying financial statement has
been restated to give effect to the stock split.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held on May 9, 1996. The following
matters were submitted to a vote for the shareholders at the Annual
Meeting:
Election of Directors - The following persons were elected to serve as
directors for a term of one year:
Gary A. Dachis
Thomas J. Brosig
Paul H. Ravich
Stephen P. Weisbrod
Amend the Game Financial Stock Option and Incentive Plan to increase
the number of shares reserved for issuance by 250,000.
Ratification of Appointment for Lurie, Besikof, Lapidus & Co. LLP as
independent auditors.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(11) Statement re: computation of earnings per share
(27) Financial Data Schedule
Reports on Form 8-K:
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GAME FINANCIAL CORPORATION
(Registrant)
Dated: August 8, 1996 By: /s/ Gary A. Dachis
------------------
Gary A. Dachis, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Gary A. Dachis President, Chief Executive Officer, 8/8/96
Gary A. Dachis Secretary, Treasurer and Director
/s/ Stephen P. Weisbrod Vice President Information Systems 8/8/96
Stephen P. Weisbrod and Director
/s/ Jeffrey Ringer Vice President Finance and Chief 8/8/96
Jeffrey Ringer Financial Officer
Exhibit 11 - Computation of Earnings Per Share
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30,
Primary: 1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,501,408 4,339,844 4,426,840 4,339,844
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 213,596 101,469 242,840 78,466
---------- ---------- ---------- ----------
Totals 4,715,004 4,441,313 4,669,680 4,418,309
Net Income $ 358,793 $ 258,245 $ 642,674 $ 475,970
---------- ---------- ---------- ----------
Net Income Per Share $ .08 $ 0.06 $ 0.14 $ 0.11
========== ========== ========== ==========
Fully Diluted:
Weighted average shares outstanding 4,501,408 4,339,844 4,426,840 4,339,844
Net effect of dilutive stock
options - based on the
treasury stock method using
the higher of the average
or the closing price 229,693 149,564 255,202 109,095
---------- ---------- ---------- ----------
Totals 4,731,101 4,489,408 4,682,042 4,448,939
Net Income $ 358,793 $ 258,245 $ 642,674 $ 475,970
---------- ---------- ---------- ----------
Net Income Per Share $ .08 $ 0.06 $ 0.14 $ 0.11
---------- ---------- ---------- ----------
</TABLE>
All shares outstanding have been restated to give effect to the 5-for-4 stock
splits declared during September 1995 and June 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,351,287
<SECURITIES> 2,934,568
<RECEIVABLES> 256,195
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,790,156
<PP&E> 2,077,038
<DEPRECIATION> 649,253
<TOTAL-ASSETS> 8,471,806
<CURRENT-LIABILITIES> 1,441,845
<BONDS> 0
0
0
<COMMON> 45,045
<OTHER-SE> 6,936,916
<TOTAL-LIABILITY-AND-EQUITY> 8,471,806
<SALES> 4,636,898
<TOTAL-REVENUES> 4,636,898
<CGS> 3,208,793
<TOTAL-COSTS> 3,208,793
<OTHER-EXPENSES> 870,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 591,793
<INCOME-TAX> 233,000
<INCOME-CONTINUING> 358,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358,793
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
