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 September 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.)
13705 First Avenue North, Plymouth, MN 55441
(Address of principal executive offices)
(612) 476-8500
(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 November 1, 1996 the Corporation had
4,505,309 shares of its $.01 par value common stock outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Number
------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30,
1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the
Three Months Ended September 30, 1996 and
September 30, 1995 4
Condensed Consolidated Statements of Income for the
Nine Months Ended September 30, 1996 and
September 30, 1995 5
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1996 and
September 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 - 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Exhibit 11 - Computation of Earnings Per Share 13
Exhibit 27 - Financial Data Schedule 14
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
AS OF:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $4,483,097 $ 868,903
Marketable securities 1,968,699 3,795,164
Receivables 332,201 209,482
Deferred taxes 52,000 63,000
Other 204,741 76,283
---------- ----------
TOTAL CURRENT ASSETS 7,040,738 5,012,832
---------- ----------
EQUIPMENT
Furniture, fixtures, and equipment 2,656,147 1,492,028
Less accumulated depreciation 783,102 438,949
---------- ----------
1,873,045 1,053,079
---------- ----------
MARKETABLE SECURITIES 200,263 565,487
---------- ----------
$9,114,046 $6,631,398
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,182,133 $ 425,460
Payable to customers 18,788 19,662
Accrued expenses 331,904 239,181
Deferred revenue 47,719 91,225
---------- ----------
TOTAL CURRENT LIABILITIES 1,580,544 775,528
---------- ----------
DEFERRED INCOME TAXES 31,000 49,400
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common stock 45,053 34,781
Additional paid-in capital 4,719,352 4,192,796
Retained earnings 2,738,097 1,576,662
Unrealized gain on investments -- 2,231
---------- ----------
7,502,502 5,806,470
---------- ----------
$9,114,046 $6,631,398
========== ==========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED:
SEPTEMBER 30, SEPTEMBER 30,
1996 % 1995 %
--------------------- --------------------
<S> <C> <C> <C> <C>
Revenue $ 5,448,310 100% $ 2,610,874 100%
Cost of Revenue 3,594,484 66% 1,487,423 57%
------------ -----------
Gross Margin 1,853,826 34% 1,123,451 43%
Sales, Marketing, General And
Administrative Expenses 1,021,737 19% 559,629 21%
------------ -----------
Operating Income 832,089 15% 563,822 22%
Other Income 32,657 1% 45,064 2%
------------ -----------
Income Before Taxes 864,746 16% 608,886 23%
Income Tax Expense 345,999 6% 237,915 9%
------------ -----------
Net Income $ 518,747 10% $ 370,971 14%
============ ===========
Net Income Per Share $ 0.11 $ 0.08
============ ===========
Weighted Average Shares Outstanding 4,710,006 4,609,985
============ ===========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE NINE MONTHS ENDED:
SEPTEMBER 30, SEPTEMBER 30,
1996 % 1995 %
--------------------- --------------------
<S> <C> <C> <C> <C>
Revenue $ 13,273,370 100% $ 6,432,221 100%
Cost of Revenue 8,835,485 67% 3,760,169 58%
------------ -----------
Gross Margin 4,437,885 33% 2,672,052 42%
Sales, Marketing, General And
Administrative Expenses 2,620,221 20% 1,439,330 22%
------------ -----------
Operating Income 1,817,664 14% 1,232,722 19%
Other Income 97,771 1% 130,982 2%
------------ -----------
Income Before Taxes 1,915,435 14% 1,363,704 21%
Income Tax Expense 754,000 6% 516,763 8%
------------ -----------
Net Income $ 1,161,435 9% $ 846,941 13%
============ ===========
Net Income Per Share $ 0.25 $ 0.19
============ ===========
Weighted Average Shares Outstanding 4,683,122 4,482,205
============ ===========
</TABLE>
<TABLE>
<CAPTION>
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED:
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,161,435 $ 846,941
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 344,153 176,284
Amortization of investment premiums
and discounts 51,133 86,583
Deferred income taxes (6,000)
Changes in operating assets and liabilities:
Receivables (122,719) 52,625
Other current assets (128,458) (55,066)
Accounts payable 756,673 73,350
Payable to customers (874) (23,411)
Accrued expenses 92,723 (170,538)
Deferred revenue (43,506) (165,336)
----------- -----------
Net cash provided by
operating activities 2,104,560 821,432
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities of marketable securities 2,930,432 --
Purchases of marketable securities (793,507) (54,485)
Purchases of equipment (1,164,119) (566,657)
----------- -----------
Net cash provided (used) by investing activities 972,806 (621,142)
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 26,828 14,596
Proceeds from exercise of underwriter warrants 510,000 --
----------- -----------
Net cash provided by financing activities 536,828 14,596
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,614,194 214,886
CASH AND CASH EQUIVALENTS
Beginning of period 868,903 896,243
----------- -----------
End of period $ 4,483,097 $ 1,111,129
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------- -----------
Cash Paid for Taxes $ 728,879 $ 350,425
----------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
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 September 30, 1996 and December 31, 1995, and the results of operations
for the three months and nine months ended September 30, 1996 and 1995. The
results of operations for the three months and nine months ended September 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 6 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
Locations Opened 12 1 13
Locations Discontinued - - -
---------------------------------------------
September 30, 1996 17 48 19 67
=============================================
Contracted Locations Opening after September 30, 1996 3 0 3
====================================
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW:
The Company's GameCash solution enables casinos to offer their patrons
comprehensive cash access services including credit card cash advances, check
cashing and ATMs. Revenue which is derived from fees charged for cash access
services, has increased significantly as a result of an increase in the number
of locations at which the Company provides cash access services, the
establishment of operations at larger casinos and an increase in the volume of
transactions at existing locations. The Company provided GameCash cash access
services at 67 locations at September 30, 1996, compared to six, 10 and 28
locations at the end of 1993, 1994 and 1995, respectively. At September 30,
1996, the Company had agreements in place with three additional locations at
which operations are expected to commence by December 31, 1996. In April 1996,
the company also began providing cash access services through ATMs and at
September 30, 1996 operated ATMs at six locations. Fees from ATM services have
not accounted for a significant portion of revenue to date, but are expected to
be a growing source of revenue in future periods.
Cost of revenue consists principally of credit card cash advance processing
fees paid to credit card companies, commissions paid to casino operators
pursuant to cash access services agreements, payroll for employees staffing the
GameCash service desks at check cashing locations, depreciation related to the
equipment at the locations, bad check expense and operating supplies of the
locations. Fees paid to credit card companies for processing cash advances are
based on a percentage of the dollar volume of transactions processed. While the
applicable rates payable by the Company decrease slightly at specified aggregate
dollar volumes of transactions processed, processing fees generally increase in
proportion to increases in revenue. Casino commissions are typically based on a
percentage of fee revenue generated at each property. As a result, as
transactions volumes and revenue grows, so will casino commissions. As existing
casinos in emerging markets mature and as competition for contracts with casinos
in both the traditional and emerging markets intensifies, the Company's margins
on new contracts or renewals of existing contacts may decrease due to higher
commission rates payable by the Company to casino operators. In addition, the
Company is seeking to expand into the traditional gaming markets of Las Vegas
and Atlantic City. While larger casinos in these markets generate higher volumes
of cash access revenue, margins for cash access services are lower due to the
higher commissions generally paid to casino operators.
Sales, marketing, general and administrative expenses have increased as a result
of the expansion of the Company's sales staff and increased marketing efforts
designed to promote the recognition of Game Financial Corporation and its
GameCash services. In December 1995, the Company added a Vice President of
National Sales and three sales representatives. The Company's sales staff
currently consists of six full-time employees, all of whom have experience in
the gaming industry. In addition, Gary A. Dachis, President and Chief Executive
Officer of the Company, continues to spend a significant amount of time with
current and potential customers. Sales, marketing, general and administrative
expenses also reflect the Company's continuing investment in the development of
new and the enhancement of existing system and services.
REVENUE:
Revenue for the quarter ended September 30, 1996 was $5,448,000, a 109%
increase over $2,611,000 for the same period in 1995. Revenue for the nine
months ended was $13,273,000, a 106% increase over $6,432,000 for the same
period in 1995. The Company operated in 67 locations at September 30, 1996,
compared with 28 locations at December 31, 1995. During the quarter ended
September 30, 1996, the Company opened 12 credit card locations and one check
cashing location.
As of November 4, 1996, the Company is operating in 70 locations and has
agreements in place with five additional locations which will be operational
during the fourth quarter of 1996.
As of November 4, 1996, the Company is operating in 70 locations and
has agreements in place with five additional locations which will be operational
during the fourth quarter of 1996. In October 1996, the Company was notified by
the Coushatta Indian Tribe of Louisiana that the Tribe does not intend to renew
its contract with the Company when it expires in January 1997. The casino, which
is owned by the Coushatta Tribe and managed by Grand Casino, Inc., generated
approximately 11% of the Company's revenue for the nine months ended September
30, 1996.
COST OF REVENUE:
Cost of revenue for the quarter ended September 30, 1996 was $3,594,000, a
142% increase over $1,487,000 for the same period in 1995. Cost of revenue for
the nine months ended September 30, 1996 was 8,835,000, a 135% increase over
$3,760,000 for the same period in 1995. The variable nature of the majority of
the direct expenses is the primary cause of the increase in cost of revenue.
GROSS MARGIN:
The gross margin percentage was 34% for the quarter ended September 30,
1996 compared to 43% for the same period in 1995. The reduction is due to
increased casino commissions paid to some larger locations opened during 1996.
On a quarter to quarter basis, there was a 10% improvement in gross margin from
31% for the quarter ended June 30, 1996. This is primarily due to lower payroll
costs during the quarter ended September 30, 1996 as the initial startup and
training phase had been completed at many of the locations opened between March
1996 and June 1996.
For the nine months ended September 30, 1996, the gross margin percentage
was 33% compared to 42% for the same period in 1995. The reduction is due to a
combination of factors including start-up expenses, primarily payroll and
supplies, related to opening check cashing locations and higher casino
commissions paid on certain contracts signed in 1996.
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, marketing, general and administrative expenses for the quarter ended
September 30, 1996 were $1,022,000, 19% of gross revenue compared with $560,000,
21% of gross revenue for the same period in 1995. For the nine months ended
September 30, 1996, sales, marketing, general and administrative expenses were
$2,620,000, 20% of gross revenue compared with $1,439,000, 22% of gross revenue
for the same period in 1995. The reduction in these expenses as a percentage of
revenue was due to the fixed nature of many of the items, the rapid growth in
revenue and the Company's costs control measures. The Company is planning
continued investment in personnel and equipment to facilitate anticipated future
growth.
NET INCOME:
For the quarter ended September 30, 1996, net income increased 40% to
$519,000 or $0.11 per share compared with net income of $371,000 or $.08 per
share for the same period last year. For the nine months ended September 30,
1996, net income increased 37% to $1,161,000 or $0.25 per share compared with
net income of $847,000 or $0.19 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:
The Company's primary capital requirements have been to fund purchases of
equipment for use at new casino locations and provide working capital for the
opening and operation of new locations. The primary sources of funds for capital
expenditures and working capital have been net proceeds from the Company's
initial public offering in April 1994 and net cash provided by operating
activities. The Company had no debt at September 30, 1996 or December 31, 1995.
At September 30, 1996, the Company had $7,041,000 in current assets
compared with $5,013,000 at December 31, 1996. Cash, cash equivalents and
marketable securities totaled $6,652,000 at September 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 nine months
ended September 30, 1996.
Operating activities during the nine months ended September 30, 1996
generated $2,105,000 of net cash compared with $821,000 for the same period in
1995. Though net income was only $314,000 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 $1,014,000 during
the nine months ended September 30, 1996 was $597,000 above the investment in
equipment during the same period in 1995 primarily due to the number of new
locations opened during 1996.
During April 1996, 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 September 30, 1996.
FORWARD LOOKING STATEMENTS:
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. This Form 10-QSB and other materials filed or to
be filed by the Company with the Securities and Exchange Commission, as well as
other written materials or oral statements that the Company may make or publish
from time to time, contain forward-looking statements relating to plans for
future expansion, business prospects, anticipated financial performance and
similar matters. Theses statements by their nature involve substantial risks
and uncertainties, and actual results may differ materially from the
anticipated results or other expectations expressed in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
impact of increasing competition for contracts to provide cash access services
in gaming establishments, lower margins on new or renewed contracts due to such
competition and to the Company's expansion into traditional gaming markets, the
risk that existing contracts will not be renewed upon completion of their terms,
and the risks and uncertainties described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-QSB.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant legal proceedings
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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: November 7, 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, 11/07/96
Gary A. Dachis Secretary, Treasurer and Director
/s/ Stephen P. Weisbrod Vice President Information Systems 11/07/96
Stephen P. Weisbrod and Director
/s/ Jeffrey Ringer Vice President Finance and Chief 11/07/96
Jeffrey Ringer Financial Officer
<TABLE>
<CAPTION>
Exhibit 11 - Computation of Earnings Per Share
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Primary: 1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,505,309 4,344,250 4,452,991 4,341,299
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 204,697 265,735 230,131 140,906
--------------------------- ---------------------------
Totals 4,710,006 4,609,985 4,683,122 4,482,205
Net Income $ 518,747 $ 370,971 $ 1,161,435 $ 846,941
--------------------------- ---------------------------
Earnings Per Share $ 0.11 $ 0.08 $ 0.25 $ 0.19
=========================== ===========================
Fully Diluted:
Weighted average shares outstanding 4,505,309 4,344,250 4,452,991 4,341,299
Net effect of dilutive stock
options - based on the
treasury stock method using
the higher of the average
or the closing price 204,697 305,090 230,131 174,426
--------------------------- ---------------------------
Totals 4,710,006 4,649,340 4,683,122 4,515,725
Net Income $ 518,747 $ 370,971 $ 1,161,435 $ 846,941
--------------------------- ---------------------------
Earnings Per Share $ 0.11 $ 0.08 $ 0.25 $ 0.19
=========================== ===========================
All shares outstanding have been restated to give effect to the 5-for-4 stock
splits declared during September 1995 and June 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,483,097
<SECURITIES> 1,968,699
<RECEIVABLES> 332,201
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,040,738
<PP&E> 2,656,147
<DEPRECIATION> 783,102
<TOTAL-ASSETS> 9,114,046
<CURRENT-LIABILITIES> 1,580,544
<BONDS> 0
0
0
<COMMON> 45,053
<OTHER-SE> 7,457,449
<TOTAL-LIABILITY-AND-EQUITY> 9,114,046
<SALES> 13,273,370
<TOTAL-REVENUES> 13,273,370
<CGS> 8,835,485
<TOTAL-COSTS> 8,835,485
<OTHER-EXPENSES> 2,620,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,915,435
<INCOME-TAX> 754,000
<INCOME-CONTINUING> 1,161,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,161,435
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
