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, 1997
[ ] 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, Minneapolis, 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 August 1, 1997, the Corporation
had 4,520,622 shares of its $.01 par value common stock outstanding.
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30,
1997 and December 31, 1996 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 1997 and
June 30, 1996 4
Condensed Consolidated Statements of Income for the
Six Months Ended June 30, 1997 and
June 30, 1996 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1997 and
June 30, 1996 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
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
AS OF:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,964,929 $5,504,161
Marketable securities 171,014 1,131,736
Receivables 487,285 522,007
Other 513,585 341,981
----------- ----------
TOTAL CURRENT ASSETS 9,136,813 7,499,885
----------- ----------
EQUIPMENT
Furniture, fixtures, and equipment 3,934,869 3,074,020
Less accumulated depreciation 1,351,852 944,317
----------- ----------
2,583,017 2,129,703
----------- ----------
MARKETABLE SECURITIES -- 301,530
----------- ----------
$11,719,830 $9,931,118
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,180,923 $1,382,010
Accrued expenses 491,867 358,194
Income taxes payable 34,530 190,230
----------- ----------
TOTAL CURRENT LIABILITIES 2,707,320 1,930,434
----------- ----------
DEFERRED INCOME TAXES 63,000 63,000
----------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common stock 45,207 45,206
Additional paid-in capital 4,720,534 4,719,910
Retained earnings 4,183,769 3,170,441
Unrealized gain on investments -- 2,127
----------- ----------
8,949,510 7,937,684
----------- ----------
$11,719,830 $9,931,118
=========== ==========
</TABLE>
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED:
JUNE 30, JUNE 30,
1997 1996
---------- ----------
Revenue $7,917,723 $4,636,898
Cost of Revenue 5,785,105 3,208,793
---------- ----------
Gross Margin 2,132,618 1,428,105
Sales, Marketing, General And
Administrative Expenses 1,177,036 870,352
---------- ----------
Operating Income 955,582 557,753
Other Income 8,373 34,040
---------- ----------
Income Before Taxes 963,955 591,793
Income Tax Expense 390,000 233,000
---------- ----------
Net Income $ 573,955 $ 358,793
========== ==========
Net Income Per Share $ 0.12 $ 0.08
========== ==========
Weighted Average Shares Outstanding 4,710,594 4,715,004
========== ==========
See notes to condensed consolidated financial statements
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED:
JUNE 30, JUNE 30,
1997 1996
----------- ----------
Revenue $14,407,680 $7,825,059
Cost of Revenue 10,391,394 5,241,014
----------- ----------
Gross Margin 4,016,286 2,584,045
Sales, Marketing, General And
Administrative Expenses 2,330,239 1,598,484
----------- ----------
Operating Income 1,686,047 985,561
Other Income 29,281 65,113
----------- ----------
Income Before Taxes 1,715,328 1,050,674
Income Tax Expense 702,000 408,000
----------- ----------
Net Income $ 1,013,328 $ 642,674
=========== ==========
Net Income Per Share $ 0.22 $ 0.14
=========== ==========
Weighted Average Shares Outstanding 4,710,594 4,669,680
=========== ==========
See notes to condensed consolidated financial statements
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
GAME FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,013,328 $ 642,674
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation 407,535 210,304
Amortization of investment premiums
and discounts 6,139 38,062
Changes in operating assets and liabilities:
Receivables 34,722 (46,713)
Other current assets (171,604) (108,823)
Accounts payable 643,213 516,668
Accrued expenses 133,673 (63,414)
Deferred revenue -- 213,063
----------- -----------
Net cash provided (used) by
operating activities 2,067,006 1,401,821
----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities of marketable securities 1,253,986 1,924,032
Purchases of marketable securities -- (793,507)
Purchases of equipment (860,849) (585,010)
----------- -----------
Net cash provided (used) by investing activities 393,137 545,515
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 625 25,048
Proceeds from exercise of underwriters warrants -- 510,000
----------- -----------
625 535,048
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,460,768 2,482,384
CASH AND CASH EQUIVALENTS
Beginning of period 5,504,161 868,903
----------- -----------
End of period $ 7,964,929 $ 3,351,287
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------- -----------
Cash Paid for Taxes $ 931,700 $ 500,075
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
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, 1997 and December 31, 1996, and the results of operations and
cash flows for the periods ended June 30, 1997 and 1996. The results of
operations and cash flows for the period ended June 30, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31, 1997,
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, 1996.
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 offers its cash access services
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 number of locations at which the Company
operated at the indicated dates:
<TABLE>
<CAPTION>
NUMBER OF LOCATIONS AT:
SERVICES PROVIDED 12/31/94 12/31/95 12/31/96 6/31/97
<S> <C> <C> <C> <C>
Credit card only 5 19 48 51
Credit card and check cashing 5 9 15 14
Credit card and ATM -- -- 4 5
Credit card, check cashing and ATM -- -- 6 10
Check Cashing Only -- -- -- 1
ATM only -- -- 3 2
-- -- -- -
Total 10 28 76 83
== === == ==
Number of states 6 14 19 20
</TABLE>
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's GameCash solution enables casinos to offer their patrons
comprehensive cash access services including credit card cash advances, POS
Debit, 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 83 locations at June 30, 1997, compared to compared to 76 and 28 at
the end of 1996 and 1995, respectively.
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 service agreements, payroll for employees staffing 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 also increase with increases in
revenue. However, 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 contracts may decrease due to higher commission rates payable by the
Company to casino operators. The Company is seeking to expand into the
traditional gaming markets of Nevada and Atlantic City. While larger casinos in
these markets generate higher volumes of cash access revenue, margins for cash
access services are dramatically 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 and systems. The Company's sales staff currently consists of 5
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 technology for cash access services.
REVENUE
Revenue for the quarter ended June 30, 1997 was $7,918,000, a 71% increase over
$4,637,000 for the same period in 1996. Revenue for the six months ended June
30, 1997 was $14,408,000, an 84% increase over $7,825,000 for the same period
last year.
COST OF REVENUE
Cost of revenue for the quarter ended June 30, 1997 was $5,785,000, compared
with $3,209,000 for the same period last year. For the six months ended June 30,
1997, cost of revenue was $10,391,000 compared with $5,241,000 for the same
period last year. The increase in the number of transactions and 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 27% for the quarter ended June 30, 1997 compared
with 31% for the same period last year. For the six months ended June 30, 1997,
gross margin was 28% compared with 33% for the same period last year. The
reduction in gross margin as a percentage of revenue was due primarily to higher
casino commission rates payable to casino operators under certain new or renewed
contracts and increases in fees paid to the credit card companies for processing
credit card transactions.
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. The Company is continuing its
efforts to improve operating efficiencies and improve the cost effectiveness of
its equipment.
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
SALES, MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales, marketing, general and administrative expenses for the quarter ended June
30, 1997 were $1,177,000, or 15% of revenue, compared with $870,000 or 19% of
revenue, for the same period last year. For the six months ended June 30, 1997,
sales, marketing and general and administrative expenses were $2,330,000 or 16%
of revenue compared with $1,598,000 or 20% of revenue. 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 cost control measures.
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, 1997, net income increased 60% to $574,000 or 12
cents per share compared with $359,000, or 8 cents per share for the same period
last year. For the six months ended June 30, 1997, net income increased 58% to
$1,013,000 or 22 cents per share compared with $643,000 or 14 cents per share.
All earnings per share amounts have been adjusted to reflect the 5-for-4 stock
splits paid in September 1995 and June 1996.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's primary capital requirements have been to provide working capital
for operating new and existing locations and fund purchases of equipment for use
at new casino locations. At June 30, 1997, the Company had $9,137,000 in current
assets compared with $7,500,000 at December 31, 1996. Cash, cash equivalents and
marketable securities totaled $8,136,000 at June 30, 1997 compared with
$6,937,000 at December 31, 1996. The Company's business requires it to maintain
cash inventories for check cashing and ATM services. Cash inventory requirements
increase as the Company increases the number of locations at which it provides
its GameCash services. During the quarter the Company obtained a $5,000,000 line
of credit which should be sufficient to address the cash requirements of
continued growth for the next 12 to 24 months.
Operating activities during the six months ended June 30, 1997 generated
$2,067,000 of net cash compared with $1,402,000 of cash for the same period last
year. The Company's investment in property and equipment of $861,000 during the
six months ended June 30, 1997 was significantly above the $585,000 investment
in equipment during the same period last year. Investments in property are
primarily related to equipment used in casino locations.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This document contains forward-looking statements
relating to such matters as plans for future expansion, business prospects,
anticipated financial performance and similar matters. These 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, those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
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
The Company's Annual Meeting was held on May 8, 1997. The following
matters were submitted to a vote by the shareholders at the Annual
Meeting. All matters were approved.
Election of Directors - The following persons were elected to serve as
directors for a term of one year:
Gary A. Dachis
Thomas Grossman
Paul H. Ravich
Stephen P. Weisbrod
Amend the Game Financial Stock Option and Incentive Plan to increase
the number of shares reserved for issuance and to provide automatic
grants of stock options to non-employee directors.
To ratify the appointment of Ernst & Young, 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
<PAGE>
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
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 11,1997 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, 8/11/97
- --------------------------- Secretary, Treasurer and Director
Gary A. Dachis
/s/ Stephen P. Weisbrod Vice President Information Systems 8/11/97
- --------------------------- and Director
Stephen P. Weisbrod
/s/ Jeffrey Ringer Vice President Finance and Chief 8/11/97
- --------------------------- Financial Officer
Jeffrey L. Ringer
/s/ Thomas Grossman Director 8/11/97
- ---------------------------
Thomas Grossman
/s/ Paul H. Ravich Director 8/11/97
- ---------------------------
Paul H. Ravich
Exhibit 11 - Computation of Earnings Per Share
GAME FINANCIAL CORPORATION
FORM 10-QSB
JUNE 30, 1997
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30,
Primary: 1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,520,655 4,501,408 4,520,639 4,426,840
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 189,939 213,596 169,905 242,840
------------------------ ------------------------
Totals 4,710,594 4,715,004 4,690,544 4,669,680
Net Income $ 573,955 $ 358,793 $1,013,328 $ 642,674
------------------------ ------------------------
Net Income Per Share $ 0.12 $ 0.08 $ 0.22 $ 0.14
======================== ========================
Fully Diluted:
Weighted average shares outstanding 4,520,655 4,501,408 4,520,639 4,426,840
Net effect of dilutive stock
options - based on the
treasury stock method using
the higher of the average
or the closing price 207,177 229,693 176,758 255,202
------------------------ ------------------------
Totals 4,727,832 4,731,101 4,697,397 4,682,042
Net Income $ 573,955 $ 358,793 $1,013,328 $ 642,674
------------------------ ------------------------
Net Income Per Share $ 0.12 $ 0.08 $ 0.22 $ 0.14
======================== ========================
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,964,929
<SECURITIES> 171,014
<RECEIVABLES> 487,285
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,136,813
<PP&E> 3,934,869
<DEPRECIATION> 1,351,852
<TOTAL-ASSETS> 11,719,830
<CURRENT-LIABILITIES> 2,707,320
<BONDS> 0
0
0
<COMMON> 45,207
<OTHER-SE> 8,904,303
<TOTAL-LIABILITY-AND-EQUITY> 11,719,830
<SALES> 14,407,680
<TOTAL-REVENUES> 14,407,680
<CGS> 10,391,394
<TOTAL-COSTS> 10,391,394
<OTHER-EXPENSES> 2,359,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,715,328
<INCOME-TAX> 702,000
<INCOME-CONTINUING> 1,013,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,013,328
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
