SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, 20th Floor
Columbia, SC 29201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
1333 Main Street, Suite 101
Columbia, SC 29201-3201
(Former name, former address and former fiscal year,
if changed since last report)
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 ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
27,859,408 shares of Common Stock, $.0001 par value, as of November 10, 1996.
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995.......................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1996 and 1995........ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995....................... 5
Notes to Condensed Consolidated Financial Statements............ 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................... 11
Signature............................................................ 12
Exhibit Index........................................................ 13
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
<TABLE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $39,045,374 $ 1,235,983
Investments........................................................ 9,081,298 -
Accounts receivable, net........................................... 1,239,446 143,295
Net investment in sales-type leases -- current..................... 1,296,001 297,576
Inventories........................................................ 3,195,645 366,610
Other current assets............................................... 446,430 29,534
----------- -----------
Total current assets....................................... 54,304,194 2,072,998
Net investment in sales-type leases -- non-current................... 1,900,827 860,295
Property and equipment, net.......................................... 4,037,557 1,446,675
Software development costs .......................................... 298,772 203,048
Other assets......................................................... 468,144 8,152
----------- -----------
$61,009,494 $ 4,591,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and capital lease obligations..... $ 96,595 $ 247,419
Accounts payable and accrued expenses.............................. 2,511,149 1,192,862
Current portion of deferred revenue................................ 488,939 1,767,182
----------- -----------
Total current liabilities.................................. 3,096,683 3,207,463
Notes payable and capital lease obligations, less current portion.... 149,425 370,518
Deferred revenue..................................................... 451,422 258,275
Capital stock of subsidiary held by minority investor................ 200,000 137,500
Stockholders' equity:
Preferred stock, common stock and additional paid-in capital ...... 68,758,258 7,221,986
Deferred compensation.............................................. (4,205,813) (3,590,574)
Accumulated deficit................................................ (7,440,481) (3,014,000)
----------- -----------
Total stockholders' equity...................................... 57,111,964 617,412
----------- -----------
$61,009,494 $ 4,591,168
<FN>
=========== ===========
(1) The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
</FN>
</TABLE>
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial set-up, transactions and other....... $ 116,364 $ 7,686 $ 542,656 $ 16,722
Sales and rental............................. 199,321 25,900 2,311,342 511,264
License revenue.............................. - - 1,800,000 -
----------- --------- ----------- ---------
Total revenues............................ 315,685 33,586 4,653,998 527,986
Costs and expenses:
Cost of revenues............................. 212,620 16,500 2,725,427 209,662
Research and development..................... 738,296 29,801 1,735,409 83,737
Selling, general and administrative expenses. 3,451,979 375,713 5,968,165 779,919
----------- --------- ----------- ---------
Total costs and expenses.................. 4,402,895 422,014 10,429,001 1,073,318
----------- --------- ----------- ---------
Operating loss.................................. (4,087,210) (388,428) (5,775,003) (545,332)
Interest income (expense), net.................. 825,493 (15,793) 1,348,522 (52,407)
----------- --------- ----------- ---------
Net loss........................................ $(3,261,717) $(404,221) $(4,426,481) $(597,739)
=========== ========= =========== =========
Net loss per share.............................. $ (0.12) $ ( 0.03) $ (0.19) $ (0.04)
=========== ========= =========== =========
Weighted average shares outstanding............. 27,786,723 15,430,971 22,908,466 14,968,500
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Operating activities
Operating activities
Net loss............................................................. $(4,426,481) $ (597,739)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 442,046 110,866
Amortization of deferred compensation.............................. 761,720 -
Deferred revenue................................................... (1,085,096) 1,513,032
Changes in assets and liabilities:
Accounts receivable............................................. (1,003,082) (158,602)
Net investment in sales-type leases............................. (2,038,956) (504,000)
Inventories..................................................... (2,829,035) (466,025)
Other assets.................................................... (569,927) (35,735)
Accounts payable and accrued expenses........................... 1,264,730 606,486
----------- -----------
Net cash (used in) provided by operating activities.................. (9,484,081) 468,283
Investing activities
Purchases of property and equipment.................................. (2,972,149) (876,555)
Software development costs........................................... (143,316) (172,618)
Purchases of investments, net........................................ (9,081,298) -
Purchase of other assets............................................. (349,618) -
----------- -----------
Net cash used in investing activities................................ (12,546,381) (1,049,173)
Financing activities
Proceeds from notes payable.......................................... 1,450,000 1,019,416
Payments on notes payable and capital leases......................... (1,831,958) (143,299)
Proceeds from IPO, net............................................... 60,091,805 -
Exercise of stock warrants........................................... 45,417 -
Exercise of stock options............................................ 22,090 -
Increase in minority interest........................................ 62,500 75,000
----------- -----------
Net cash provided by financing activities............................ 59,839,854 951,117
----------- -----------
Net increase in cash................................................. 37,809,392 370,227
Cash and cash equivalents at beginning of period..................... 1,235,983 29,985
----------- -----------
Cash and cash equivalents at end of period........................... $39,045,375 $ 400,212
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of Affinity Technology Group, Inc.
for the year ended December 31, 1995.
2. Inventories
Inventories consist of the following:
September 30, December 31,
1996 1995
Electronic parts and other components......... $1,809,063 $ 182,680
Work in progress.............................. 742,767 229,930
Finished goods................................ 643,815 -
---------- ---------
3,195,645 412,610
Inventory valuation reserve................... - (46,000)
---------- ---------
$3,195,645 $ 366,610
========== =========
Inventories in the amount of $46,000, for which a reserve was recorded as of
December 31, 1995, were charged against the reserve during the quarter ended
June 30, 1996.
3. License Revenue
Deferred license revenue at December 31, 1995 related to a non-exclusive,
perpetual, royalty-free license, granted to a financial institution, to use one
of the Company's software products, Assets3. At December 31, 1995, the financial
institution had paid the Company $1,237,500 as a license fee for use of an
initial version of Assets3 in the United States, which fee was deferred at
December 31, 1995 pending delivery of the product. The Company delivered the
product to the financial institution in the quarter ended March 31, 1996, and
accordingly recognized the deferred revenue during such quarter. In addition,
such financial institution has exercised its option to purchase for $562,500 a
perpetual, royalty-free license to use Assets3 in North America, which option
became exercisable upon the Company's enhancement of such system. The Company
delivered such enhancement during the quarter ended June 30, 1996 and recorded
such additional license fee as revenue during such quarter.
4. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of the
condensed consolidated statements of operations have been computed based on the
weighted average number of shares of Common Stock outstanding in accordance with
Accounting Principles Board No. 15 ("APB No. 15"). Under this guidance, options,
warrants, convertible preferred stock and other potentially dilutive securities
are considered as outstanding only if their effect is dilutive (i.e. increasing
the net loss per share).
For periods presented prior to the Company's initial public offering on May 1,
1996 and which were presented in the Company's Registration Statement on Form
S-1 filed in connection with the Company's initial public offering of Common
Stock and the Company's Form 10-Q for the quarter ended March 31, 1996, net
income (loss) per share amounts were presented in accordance with APB No. 15 as
modified by Staff Accounting Bulletin No. 83 ("SAB 83") of the Securities and
Exchange Commission. Under SAB 83, all issuances of the Company's Common Stock
options, warrants, convertible preferred stock and other potentially dilutive
securities, at prices below the initial public offering price during the twelve
month period preceding the offering, were included as Common Stock equivalents
as if they had been issued at the Company's inception, regardless of whether the
effect was dilutive or anti-dilutive. SAB 83 applies to all periods presented
prior to the Company's initial public offering. The net loss per share of Common
Stock for the three and nine month periods ended September 30, 1996 and 1995
presented in accordance with APB 15 as modified by SAB 83 is presented
supplementary below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss per share under APB No. 15 as modified
by SAB 83.................................. $(0.09) $(0.01) $(0.13) $(0.02)
Shares used in computing net loss per share under
APB No. 15 as modified by SAB 83.......... 35,482,971 29,953,618 33,258,795 29,491,147
</TABLE>
5. Purchase of Assets
On May 1, 1996, the Company purchased for $450,000 certain furniture, fixtures,
equipment and computer hardware of Association Membership Services, Inc. d/b/a
Electronic Merchant Services ("EMS"), a private company principally engaged in
the business of developing and marketing software designed to process credit
cards and other transactions. On September 26, 1996, the Company purchased
substantially all of the remaining net assets of EMS, consisting primarily of
software and certain intellectual property and contract rights, for a purchase
price to be calculated based on the revenues generated by such assets during the
three year period following the transaction. Under the terms of the agreement
governing such transaction, the Company paid to EMS the sum of $375,000 which
amount is refundable to the Company in certain instances. Due to the current
financial condition of EMS, the Company does not anticipate that EMS will be
able to refund any portion of the $375,000 that subsequently may become payable
by EMS to the Company under the terms of the agreement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company was formed in January 1994 to develop and market technologies that
enable financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention.
To date, the Company has generated minimal operating revenues, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company had an accumulated deficit as of September 30, 1996 of
$7,440,481 with operating losses of $3,261,717 and $4,426,481 for the three and
nine months ended September 30, 1996, respectively.
Results of Operations
Revenues
The Company's revenues for the three and nine months ended September 30, 1996
were $315,685 and $4,653,998, respectively, compared to $33,586 and $527,986,
respectively, for the corresponding periods of 1995. To date, the Company's
revenues have been tied primarily to the installation of ALMs under new
contracts. Revenues for the three month period ended September 30, 1996
decreased significantly as compared to the first two quarters of 1996 due to
the lower number of ALM installations during such quarter.
Initial Set-up, Transactions, and Other. Revenues from initial set-up,
transactions and other amounted to $116,364 and $542,656 for the three and nine
months ended September 30, 1996 , respectively, compared to $7,686 and $16,722
for the corresponding periods in 1995. The increases during 1996 reflect volume
increases as significantly more ALMs were installed during the first nine months
of 1996 compared to the corresponding period in 1995.
Sales and Rental. Sales and rental revenues were $199,321 and $2,311,342 for the
three and nine months ended September 30, 1996, respectively, compared to
$25,900 and $511,264 for the corresponding periods in 1995. The increases are
due to an increase in the number of ALMs installed during 1996 as compared to
1995.
License Revenue. License revenue amounted to $1,800,000 during the nine months
ended September 30, 1996. This item related to a non-exclusive, perpetual,
royalty-free license granted to a financial institution to use Assets3. The
financial institution paid the Company $1,237,500 in 1995 as a license fee for
use of an initial version of Assets3 in the United States, which fee was
deferred at December 31, 1995 and recognized as revenue in the quarter ended
March 31, 1996 upon delivery of the product. In addition, such financial
institution has exercised its option to purchase for $562,500 a perpetual,
royalty-free license to use Assets3 in North America upon the Company's
enhancement of such system. The Company delivered such enhancement during the
quarter ended June 30, 1996 and recorded such additional license fee as revenue
during such quarter.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended September
30, 1996 totaled $212,620 and $2,725,427, respectively, compared to $16,500 and
$209,662 for the corresponding periods in 1995. The increase is primarily due to
an increase in the number of ALMs installed during 1996 and costs associated
with system enhancements provided to existing customers.
Research and Development. Research and development costs totaled $738,296 and
$1,735,409 for the three and nine months ended September 30, 1996, respectively,
compared to $29,801 and $83,737 for the corresponding periods in 1995. Cost
increases in this area are primarily attributable to increased staffing deployed
in the development of new products. The Company's major research and development
activities during the three and nine month periods ended September 30, 1996 are
related to the development of the Company's "Second Look" program, auto loan and
mortgage loan products and credit card and deposit account services. The Company
anticipates that it will continue to commit substantial resources to research
and development activities for the foreseeable future.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses totaled $3,451,979 and $5,968,165 for the three and nine
months ended September 30, 1996, respectively, compared to $375,713 and $779,919
for the corresponding periods in 1995. These increases are primarily due to
additional salaries and wages expense resulting from increased levels of
staffing to prepare for volume increases as well as the amortization of deferred
compensation expense resulting from stock options granted in 1995 and 1996.
Interest Income/Expense. Interest income was $836,413 and $1,404,991 for the
three and nine months ended September 30, 1996, respectively. No interest income
was reported in the corresponding period in 1995. In 1996, the majority of
interest income was attributable to interest earned from the investment of the
proceeds of the Company's initial public offering as well as interest income
relating to ALMs under capital leases.
Interest expense for the three and nine months ended September 30, 1996 was
$10,920 and $56,469, respectively.
Liquidity and Capital Resources
The Company has generated operating losses of $7,440,781 since its inception and
has financed its operations primarily through the sale of debt and equity
securities, capital lease obligations, bank financing and loans from affiliates.
The Company has on two occasions financed, and may from time to time in the
future finance, its operations through the sale of ALM rental contracts to a
commercial factor.
On May 1, 1996, the Company successfully completed its initial public offering
of 5,060,000 shares of its Common Stock. The offering yielded net proceeds to
the Company of approximately $60.1 million. The Company used a portion of the
proceeds of this offering to repay outstanding bank debt, and expects to use the
remaining balance to implement an extensive marketing plan, to fund research and
development and capital expenditures and for general corporate purposes, which
may include the acquisition of services, products, technologies or companies
that complement or otherwise enhance the Company's existing business.
On May 1, 1996, the Company purchased for $450,000 certain furniture, fixtures,
equipment and computer hardware of EMS, a private company principally engaged in
the business of developing and marketing software designed to process credit
cards and other transactions. On September 26, 1996, the Company purchased
substantially all of the remaining net assets of EMS, consisting primarily of
software and certain intellectual property and contract rights, for a purchase
price to be calculated based on the revenues generated by such assets during the
three year period following the transaction. Under the terms of the agreement
governing such transaction, the Company paid to EMS the sum of $375,000 which
amount is refundable to the Company in certain instances. Due to the current
financial condition of EMS, the Company does not anticipate that EMS will be
able to refund any portion of the $375,000 that subsequently may become payable
by EMS to the Company under the terms of the agreement.
Cash used in investing activities of approximately $12,546,000 during the nine
months ended September 30, 1996 related primarily to capital expenditures and
the purchase of high grade investment securities. Cash flows from financing
activities of approximately $59,840,000 were primarily attributable to proceeds
received from the Company's initial public offering.
The Company believes that the proceeds from the sale of the Common Stock and
available borrowings will be sufficient to meet the Company's anticipated
operating and capital expenditure requirements for the foreseeable future,
including planned expenditures for the enhancement of the Affinity ALM, the
development of Assets3 and general research and development.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed in the Company's filings with the Securities and
Exchange Commission, including the factors set forth under the caption "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No.
333-1170). These and other factors may cause actual results to differ materially
from those anticipated.
<PAGE>
Part II. Other Information
Item 1, 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1996.
<PAGE>
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.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
Joseph A. Boyle
Senior Vice President and Chief Financial Officer
Date: November 14, 1996
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 39,045,374 39,045,374
<SECURITIES> 9,081,298 9,081,298
<RECEIVABLES> 4,436,274 4,436,274
<ALLOWANCES> 0 0
<INVENTORY> 3,195,645 3,195,645
<CURRENT-ASSETS> 54,304,194 54,304,194
<PP&E> 4,544,537 4,544,537
<DEPRECIATION> 506,980 506,980
<TOTAL-ASSETS> 61,009,494 61,009,494
<CURRENT-LIABILITIES> 3,096,683 3,096,683
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 57,111,964 57,111,964
<TOTAL-LIABILITY-AND-EQUITY> 61,009,494 61,009,494
<SALES> 0 0
<TOTAL-REVENUES> 315,685 4,653,998
<CGS> 0 0
<TOTAL-COSTS> 4,402,895 10,429,001
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (825,493) (1,348,522)
<INCOME-PRETAX> (3,261,717) (4,426,481)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,261,717) (4,426,481)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,261,717) (4,426,481)
<EPS-PRIMARY> (0.12) (0.19)
<EPS-DILUTED> (0.12) (0.19)
</TABLE>
