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 June 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.
1333 Main Street, Suite 101
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 254-9006
(Registrant's telephone number, including area code)
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.
27,773,680 shares of Common Stock, $.0001 par value, as of August 14, 1996.
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995.............................................. 3
Condensed Consolidated Statements of Operations for the
six and three months ended June 30, 1996 and 1995.............. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 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 4. Submission of Matters to a Vote of Security Holders... 11
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>
June 30, December 31,
1996 1995
---- ----
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and short term investments ...................... $54,349,165 $ 1,235,983
Accounts receivable, net ............................. 1,090,213 143,295
Net investment in sales-type leases -- current ....... 1,695,564 297,576
Inventories .......................................... 926,098 366,610
Other current assets ................................. 361,923 29,534
----------- -----------
Total current assets ......................... 58,422,963 2,072,998
Net investment in sales-type leases--non-current........ 1,584,248 860,295
Property and equipment, net ............................ 3,225,431 1,446,675
Software development costs ............................. 229,157 203,048
Other assets ........................................... - 8,152
----------- -----------
$63,461,799 $ 4,591,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and
capital lease obligations $ 101,618 $ 247,419
Accounts payable and accrued expenses ................ 1,808,884 1,192,862
Current portion of deferred revenue .................. 1,007,854 1,767,182
----------- -----------
Total current liabilities .................... 2,918,356 3,207,463
Notes payable and capital lease obligations,
less current portion 154,894 370,518
Deferred revenue ....................................... 116,773 258,275
Capital stock of subsidiary held by minority investor... 200,000 137,500
Stockholders' equity:
Preferred stock, common stock and additional
paid-in capital ..................................... 68,746,578 7,221,986
Deferred compensation ................................ (4,496,038) (3,590,574)
Accumulated deficit .................................. (4,178,764) (3,014,000)
----------- -----------
Total stockholders' equity ........................ 60,071,776 617,412
----------- -----------
$63,461,799 $ 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>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Initial set-up, transactions and other....... $ 426,292 $ 9,036 $ 156,264 $ 8,805
Sales and rental............................. 2,112,021 485,364 1,734,653 61,103
License revenue.............................. 1,800,000 - 562,500 -
----------- --------- ---------- ---------
Total revenues............................ 4,338,313 494,400 2,453,417 69,908
Costs and expenses:
Cost of revenues............................. 2,512,807 193,162 1,784,596 55,863
Research and development..................... 997,113 53,936 609,676 28,200
Selling, general and administrative expenses. 2,516,186 404,206 1,513,084 311,388
----------- --------- --------- ---------
Total costs and expenses.................. 6,026,106 651,304 3,907,356 395,451
----------- --------- ---------- ---------
Operating loss................................ (1,687,793) (156,904) (1,453,939) (325,543)
Interest income (expense), net................ 523,029 (36,614) 507,357 (12,500)
----------- --------- ---------- ---------
Net loss...................................... $(1,164,764) $(193,518) $ (946,582) $(338,043)
=========== ========= ========== =========
Net loss per share............................ $ (0.06) $ ( 0.01) $ (0.04) $ (0.02)
=========== ========= ========== =========
Weighted average shares outstanding........... 20,388,105 14,735,678 24,080,893 14,839,117
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
1996 1995
---- ----
<S> <C> <C>
Operating activities
Net loss............................................................. $(1,164,764) $(193,518)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 234,302 57,299
Amortization of deferred compensation.............................. 471,495 -
Deferred revenue................................................... (900,830) 1,136,061
Changes in assets and liabilities:
Accounts receivable............................................. (946,918) (25,021)
Net investment in sales-type leases............................. (2,121,941) (504,000)
Inventories..................................................... (559,488) (108,197)
Other assets.................................................... (324,673) (25,004)
Accounts payable and accrued expenses........................... 616,022 345,564
---------- --------
Net cash (used in) provided by operating activities.................. (4,696,795) 683,184
Investing activities
Purchases of property and equipment.................................. (1,983,431) (446,310)
Software development costs........................................... (55,300) (110,758)
----------- --------
Net cash used in investing activities................................ (2,038,731) (557,068)
Financing activities
Proceeds from notes payable.......................................... 1,450,000 586,369
Payments on notes payable and capital leases......................... (1,811,425) (85,578)
Increase in minority interest........................................ 62,500 75,000
Proceeds from initial public offering, net........................... 60,102,216 -
Exercise of stock warrants........................................... 45,417 -
----------- --------
Net cash provided by financing activities............................ 59,848,708 575,791
----------- --------
Net increase in cash................................................. 53,113,182 701,907
Cash and cash equivalents at beginning of period..................... 1,235,983 29,985
----------- --------
Cash and cash equivalents at end of period........................... $54,349,165 $731,892
=========== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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:
June 30, December 31,
1996 1995
Electronic parts and other components........... $517,803 $182,680
Work in progress................................ 408,295 229,930
-------- --------
926,098 412,610
Inventory valuation reserve..................... - (46,000)
-------- --------
$926,098 $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 the quarter ended June 30, 1996 and
recorded such additional license fee as revenue.
<PAGE>
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 six and three month periods ended June 30, 1996 presented in
accordance with APB 15 as modified by SAB 83 is presented supplementary below:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss per share under APB No. 15 as modified
by SAB 83.................................. $ (0.04) $ (0.01) $ (0.03) $ (0.01)
Shares used in computing net loss per share under
APB No. 15 as modified by SAB 83.......... 32,502,049 29,258,325 34,188,716 29,361,763
</TABLE>
<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 June 30, 1996 of
$4,178,764 with operating losses of $1,164,764 and $946,582 for the six and
three months ended June 30, 1996, respectively.
Results of Operations
Revenues
The Company's revenues for the six and three months ended June 30, 1996 were
$4,338,313 and $2,453,417, respectively, compared to $494,400 and $69,908,
respectively, for the corresponding periods of 1995.
Initial Set-up,Transactions, and Other. Revenues from initial set-up,
transactions and other amounted to $426,292 and $156,264 for the six and three
months ended June 30, 1996 , respectively, compared to $9,036 and $8,805 for the
corresponding periods in 1995. The increases resulted from an increased level of
volume as significantly more ALMs were installed during the first two quarters
of 1996 compared to the corresponding periods in 1995.
Sales and Rental. Sales and rental revenues were $2,112,021 and $1,734,653 for
the six and three months ended June 30, 1996, respectively, compared to $485,364
and $61,103 for the corresponding periods in 1995. These increases are due to an
increase in the number of ALMs installed during 1996 as compared to 1995.
License Revenue. License revenue amounted to $562,500 during the three months
ended June 30, 1996. This item related to a non-exclusive, perpetual,
royalty-free license granted to a financial institution to use Assets3. The
financial institution had 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. The revenue was recognized 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.
<PAGE>
Costs and Expenses
Cost of Revenues. Cost of revenues for the six and three months ended June 30,
1996 totaled $2,512,807 and $1,784,596, respectively, compared to $193,162 and
$55,863 for the corresponding periods in 1995. The increase is primarily due to
an increase in the number of ALMs installed during 1996, increased costs
associated with system enhancements provided to existing customers and increases
in staffing and other spending increases necessary to prepare for increased
levels of output.
Research and Development. Research and development costs totaled $997,113 and
$609,676 for the six and three months ended June 30, 1996, respectively,
compared to $53,936 and $28,200 for the corresponding periods in 1995. Cost
increases in this area are primarily attributable to increased staffing in the
Company's technical areas. 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 $2,516,186 and $1,513,084 for the six and three
months ended June 30, 1996, respectively, compared to $404,206 and $311,388 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 $569,115 and $531,941 for the six
and three months ended June 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. The Company expects interest income relating to ALMs
under capital lease to increase in future periods as more ALMs are placed into
service.
Interest expense for the six and three months ended June 30, 1996 was $46,086
and $24,584, respectively.
Liquidity and Capital Resources
The Company has generated operating losses of $4,178,764 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.
Cash used in investing activities of approximately $2,039,000 during the six
months ended June 30, 1996 related primarily to capital expenditures. Cash flows
from financing activities of approximately $59,849,000 were primarily due to
proceeds received from the Company's initial public offering.
<PAGE>
The Company believes that the proceeds from the sale of the Common Stock,
internally generated funds 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. These and other factors may cause actual results to differ
materially from those anticipated.
<PAGE>
Part II. Other Information
Item 1, 2, 3 and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The stockholders of the Company adopted certain resolutions by written
consent effective April 22, 1996 (the "Written Consent") in lieu of the 1996
Annual Meeting of Stockholders of the Company.
(b) Pursuant to the Written Consent, the stockholders of the Company unanimously
elected the following individuals to serve on the Board of Directors of the
Company:
Alan H. Fishman
Steven J. Gilbert
Paul A. Jones, Jr.
Jeff A. Norris
Robert M. Price
Edward J. Sebastian
Peter R. Wilson
(c) Pursuant to the Written Consent, the stockholders of the Company also
unanimously (i) adopted certain amendments to the Company's Certificate of
Incorporation pursuant to which, among other things, (a) the Company was
authorized to issue 60,000,000 shares of Common Stock, par value $.0001 per
share, and (b) each share of Common Stock of the Company outstanding immediately
prior to the time of such amendment was reconstituted as and converted into 106
shares of Common Stock; (ii) approved Amended and Restated By-Laws of the
Company; and (iii) approved the 1996 Stock Option Plan of Affinity Technology
Group, Inc. and the Non-Employee Directors' Stock Option Plan. Such actions were
taken in connection with the Company's initial public offering, which was
consummated on May 1, 1996.
(d) 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 June 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/ Carl M. Donnelly
Carl M. Donnelly
Executive Vice President, Chief Financial Officer and Treasurer
Date: August 14, 1996
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 54,349,165 54,349,165
<SECURITIES> 0 0
<RECEIVABLES> 4,370,025 4,370,025
<ALLOWANCES> 0 0
<INVENTORY> 926,098 926,098
<CURRENT-ASSETS> 58,422,963 58,422,963
<PP&E> 3,225,431 3,225,431
<DEPRECIATION> 317,202 317,202
<TOTAL-ASSETS> 63,461,799 63,461,799
<CURRENT-LIABILITIES> 2,918,356 2,918,356
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 60,071,776 60,071,776
<TOTAL-LIABILITY-AND-EQUITY> 63,461,799 63,461,799
<SALES> 0 0
<TOTAL-REVENUES> 4,338,313 2,453,417
<CGS> 0 0
<TOTAL-COSTS> 6,026,106 3,907,356
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (523,029) (507,357)
<INCOME-PRETAX> (1,164,764) (946,582)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,164,764) (946,582)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,164,764) (946,582)
<EPS-PRIMARY> (0.06) (0.04)
<EPS-DILUTED> (0.06) (0.04)
</TABLE>
