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, 1997 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, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(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.
28,384,993 shares of Common Stock, $.0001 par value, as of November 1, 1997.
<PAGE>
Item 1. Financial Statements
<TABLE>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,208,142 $ 31,563,950
Investments 22,451,669 10,583,997
Accounts receivable, less allowance for doubtful accounts of $361,468 and
$198,987 at September 30, 1997 and December 31, 1996, respectively
1,222,629 812,443
Net investment in sales-type leases - current 1,094,110 865,380
Inventories 2,626,573 2,804,978
Other current assets 1,043,011 336,439
------------------- -------------------
Total current assets 33,646,134 46,967,187
Net investment in sales-type leases - non-current 2,276,082 2,386,010
Property and equipment, net 6,420,457 6,073,303
Software development costs, less accumulated amortization of $90,800
and $67,686 at September 30, 1997 and December 31, 1996, respectively 785,355 363,721
Other assets 1,723,956 308,636
=================== ===================
Total assets $ 44,851,984 $ 56,098,857
=================== ===================
Liabilities and stockholders' equity Current liabilities:
Current portion of capital lease obligations to related party $ 61,872 $ 69,987
Accounts payable 242,834 1,442,662
Accrued expenses 987,317 1,257,939
Deferred revenue - current 275,428 523,920
------------------- -------------------
Total current liabilities 1,567,451 3,294,508
Capital lease obligations to related party, less current portion 16,964 66,245
Deferred revenue - non current 541,709 403,465
Capital stock of subsidiary held by minority investor - 200,000
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, outstanding
28,379,693 shares at September 30,1997 and 27,879,680
shares at December 31, 1996 2,914 2,788
Additional paid-in capital 68,815,336 68,777,090
Treasury stock, at cost (758,207 shares at September 30, 1997) 322,930 -
Deferred compensation (2,042,260) (3,939,044)
Accumulated deficit (23,727,200) (12,706,195)
------------------- -------------------
Total stockholders' equity 42,725,860 52,134,639
=================== ===================
Total liabilities and stockholders' equity $ 44,851,984 $ 56,098,857
=================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Initial set-up, transactions and other $ 1,488,825 $ 542,656 $ 762,718 $ 116,364
Sales and rental 1,306,748 2,311,342 954,701 199,321
License revenue - 1,800,000 - -
------------------- ------------------ ------------------ ------------------
Total revenue 2,795,573 4,653,998 1,717,419 315,685
Costs and expenses:
Cost of revenues 1,339,502 2,725,427 798,546 212,620
Research and development 2,583,334 1,735,409 896,460 738,296
Selling, general and administrative expenses 11,462,475 5,968,165 3,755,032 3,451,979
------------------- ------------------ ------------------ ------------------
Total costs and expenses 15,385,311 10,429,001 5,450,038 4,402,895
------------------- ------------------ ------------------ ------------------
Operating loss (12,589,738) (5,775,003) (3,732,619) (4,087,210)
Interest income, net 1,568,733 1,348,522 472,803 825,493
------------------- ------------------ ------------------ ------------------
Net loss $ (11,021,005) $ (4,426,481) $ (3,259,816) $ (3,261,717)
=================== ================== ================== ==================
Net loss per share $ (0.39) $ (0.19) $ (0.11) $ (0.12)
=================== ================== ================== ==================
Shares used in computing net loss per share 28,506,406 22,908,466 28,837,376 27,786,723
=================== ================== ================== ==================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30,
1997 1996
<S> <C> <C>
Operating activities
Net loss $ (11,021,005) $ (4,426,481)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,478,627 442,046
Amortization of deferred compensation 368,128 761,720
Deferred revenue (110,248) (1,085,096)
Other 67,605
Changes in current assets and liabilities:
Accounts receivable (894,734) (1,003,082)
Net investment in sales-type leases (118,802) (2,038,956)
Inventories 669,280 (2,829,035)
Other current assets (248,772) (569,927)
Accounts payable and accrued expenses (1,535,546) 1,264,730
------------------- ------------------
Net cash used in operating activities (11,345,467) (9,484,081)
Investing activities
Purchases of property and equipment (2,184,620) (2,972,149)
Software development costs (444,748) (143,316)
Purchase of short term investments (11,867,672) (9,081,298)
Other (300,000) (349,618)
------------------- ------------------
Net cash used in investing activities (14,797,040) (12,546,381)
Financing activities
Proceeds from notes payable - 1,450,000
Payments on notes payable and capital leases (57,396) (1,831,958)
Proceeds from sale of capital stock of subsidiary to
minority interest - 62,500
Proceeds from issuance of common stock - 60,091,805
Exercise of options 35,443 22,090
Exercise of warrants 37,490 45,417
Treasury stock purchased (228,838) -
------------------- ------------------
Net cash (used in) provided by financing activities (213,301) 59,839,854
------------------- ------------------
Net increase (decrease) in cash (26,355,808) 37,809,392
Cash and cash equivalents at beginning of period 31,563,950 1,235,983
=================== ==================
Cash and cash equivalents at end of period $ 5,208,142 $ 39,045,375
=================== ==================
</TABLE>
See accompanying notes.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Affinity Technology
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The balance sheet at
December 31, 1996 has been derived from the audited consolidated 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.
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 year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 1996.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the
disclosure of financial and descriptive information pertaining to an
enterprise's reportable operating segments. The Company does not expect the
adoption of SFAS 131 to have a material impact on the Company's financial
results or financial position.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------- -------------------------
<S> <C> <C>
Electronic parts and other components $ 694,293 $ 1,166,277
Work in process 526,293 213,646
Finished goods 1,535,061 1,445,055
------------------------- -------------------------
2,755,647 2,824,978
Reserve for obsolescence (129,074) (20,000)
========================= =========================
$ 2,626,573 $ 2,804,978
========================= =========================
</TABLE>
3. Stockholders' Equity
On May 7, 1997 the Company acquired the assets of Buy American, Inc.
and Project Freedom, Inc. for aggregate consideration initially consisting of
$300,000 in cash and the issuance of 259,460 shares of restricted common stock.
In addition, on May 21, 1997 the Company issued 666,667 shares of common stock
to an unrelated third party in exchange for all shares of capital stock of
Affinity Processing Corporation ("APC"), a subsidiary of the Company, held by
such unrelated third party. The unrelated third party acquired the APC capital
stock for aggregate consideration of $200,000.
In July 1997, the Company adopted a share repurchase plan under which
the Company would be authorized to use up to $2 million of general corporate
funds to acquire from time to time in the open market shares of the outstanding
common stock of the Company. As of September 30, 1997, the Company had
repurchased a total of 77,000 shares at an average price of $2.92 per share for
an aggregate cost of $224,500 under the share repurchase plan. In addition,
during 1997 the Company has repurchased an aggregate of 643,066 shares of
its common stock from former employees of the Company at an aggregate cost of
$484 pursuant to stock purchase agreements with such former employees.
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 Opinion No. 15 ("APB 15"). Under this guidance,
options, warrants, convertible preferred stock and other potentially dilutive
securities are considered as outstanding only if their effect is dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is required to be adopted for years ending after December 15, 1997.
Under SFAS 128 the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods where applicable.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options and warrants are to be excluded. SFAS No. 128
is not expected to impact the calculation of primary and fully diluted earnings
per share for the third quarter ended September 30, 1997 and 1996, since stock
options and warrants are excluded from the computation for each of these
quarters in accordance with APB 15.
5. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. Certain claims have also been filed
by plaintiffs who claim certain rights, damages or interests incidental to the
Company's formation and development. The Company intends to vigorously contest
all such actions and, in the opinion of management, the Company has meritorious
defenses and the resolution of such actions will not materially affect the
financial position of the Company.
<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. The Company's current delivery channels consist of the Affinity
Automated Loan Machine ("ALM(R)") and a call center decisioning system which
accesses the Company's proprietary Decision Support System/Real Time
("Decisys/RTSM") technology. In addition, the Company has developed the
e-xpertLenderSM platform, that permits a financial institution to input consumer
applicant information similar to information captured by the ALM, and use of
Decisys/RT to process all of the financial services available through an ALM.
Decisys/RTSM technology is a real-time, closed loop decision support system
designed to automate the processing and closing of credit, deposit, insurance,
mortgage and other financial transactions.
To date, the Company has generated minimal operating revenues, has
incurred significant losses and has experienced substantial negative cash flow
from operations. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly technology-based companies operating in
unproven markets with unproven products. The Company had an accumulated deficit
as of September 30, 1997 of $23,727,200, with operating losses of $3,259,816 and
$11,021,005 for the three and nine months ended September 30, 1997,
respectively. The Company expects to incur substantial additional costs to
develop its financial product origination capabilities, to enhance and market
the ALM and Decisys/RT and to complete any new products and services that may be
developed by the Company. Accordingly, there can be no assurance that the
Company will be able to achieve profitability or, if achieved, sustain such
profitability.
Results of Operations
Revenues
The Company's revenues for the three and nine months ended September
30, 1997 were $1,717,419 and $2,795,573, respectively, compared to $315,685 and
$4,653,998 for the corresponding periods of 1996.
Initial Set-up, Transactions and Other. Revenues from initial set-up,
transactions and other fees were $762,718 and $1,488,825 for the three and nine
months ended September 30, 1997, respectively, compared to $116,364 and $542,656
for the corresponding periods in 1996. The increase for the three and nine
months ended September 30, 1997 as compared to the same periods in 1996 is
primarily attributable to increases in initial set-up fees, transactional
revenue earned from financial service applications processed using Decisys/RT
and product and channel license fees. In addition during 1997 the Company earned
additional revenues from professional services and consulting and processing
credit card and other electronic payment transactions.
Sales and Rental. Sales and rental fees were $954,701 and $1,306,748
for the three and nine months ended September 30, 1997, respectively, compared
to $199,321 and $2,311,342 for the corresponding periods in 1996. The increase
during the three months ended September 30, 1997 as compared to the same period
in 1996 is attributable to an increase in the number of ALMs deployed during the
third quarter of 1997 under sales-type lease agreements. The decrease during the
nine months ended September 30, 1997 as compared to the same period in 1996 is
primarily attributable to a net decrease in the number of ALMs deployed during
1997 under sales-type lease agreements.
License Revenue. Non-recurring license fees of $1,800,000 during 1996
reflect one-time license fees paid by Union Planters Corporation ("Union
Planters") to Affinity Processing Corporation ("APC"), a subsidiary of the
Company, for a perpetual, royalty-free license to use the Company's call center
decisioning system (formerly known as "Assets(3)") in North America. Pursuant to
a joint venture arrangement formerly in effect among the Company, APC and Union
Planters, all amounts paid by Union Planters to APC as license fees were paid by
APC to the Company as license and management fees.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended
September 30, 1997 was $798,546 and $1,339,502, respectively, compared to
$212,620 and $2,725,427 for the corresponding periods in 1996. The increase
during the three months ended September 30, 1997 as compared to the same period
in 1996 is primarily attributable to an increase in ALMs deployed under
sales-type lease agreements during the third quarter of 1997 compared to the
same period in 1996. The decrease during the nine months ended September 30,
1997 as compared to the same period in 1996 is attributable to a decrease in
ALMs deployed under sales-type lease agreements in 1997, offset by an increase
in depreciation expense in 1997 associated with an increase in ALMs in service
under operating lease agreements in 1997.
Research and Development. Costs incurred for research and development
for the three and nine months ended September 30, 1997 totaled $896,460 and
$2,583,334, respectively, as compared to $738,296 and $1,735,409 for the
corresponding periods in 1996. The increase in research and development costs is
attributable to increased staffing and continued technological development
associated with the enhancement of the Company's Decisys/RT technology and its
financial product origination capabilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $3,755,032 and $11,462,475 for the three and
nine months ended September 30, 1997, respectively, as compared to $3,451,979
and $5,968,165 for the corresponding periods in 1996. The increase is primarily
attributable to the increase in the number of employees during the three and
nine months ended September 30, 1997 compared to the corresponding periods in
1996 associated with the Company's product and channel development, expanded
marketing, sales initiatives and operating activities.
Interest Income/Expense. Interest income for the three and nine months
ended September 30, 1997 totaled $479,326 and $1,598,104, respectively, as
compared to $836,413 and $1,404,991 for the corresponding periods in 1996. The
decrease in interest income for the three months ended September 30,1997 is due
to a decrease in cash and cash equivalents and investments balances as compared
to the same period of 1996 coupled with a decrease in the amount of amortization
of deferred interest income associated with ALMs under sales-type lease
agreements. The increase in interest income for the nine months ended September
30, 1997 as compared to the same period in 1996 is due to interest earned on the
investment of proceeds from the Company's initial public offering in May 1996
and the amortization of deferred interest income relating to ALMs under
sales-type lease agreements. Interest expense for the three and nine months
ended September 30, 1997 was $6,523 and $29,371, respectively, compared to
$10,920 and $56,469 for the corresponding periods in 1996.
Liquidity and Capital Resources
The Company has generated operating losses of $23,727,200 since its
inception and has financed its operations primarily through net proceeds from
its initial public offering in May 1996 and, prior to such offering, through the
private sale of debt and equity securities, capital lease obligations, bank
financing, factoring of ALM rental contracts, and loans from affiliates. Net
cash and investments used during the nine months ended September 30, 1997 to
fund operations was $11,345,467. Proceeds from the offering and other sources of
cash were used to fund current period operations, including research and
development of $2,583,334 and marketing activities of $952,071, capital
expenditures of $2,184,620 and software development efforts of $444,748. At
September 30, 1997, cash and liquid investments were $27,659,811 and working
capital was $32,078,683.
In July 1997, the Company adopted a share repurchase plan under which
the Company would be authorized to use up to $2 million of general corporate
funds to acquire from time to time in the open market shares of the outstanding
common stock of the Company. As of September 30, 1997, the Company had
repurchased a total of 77,000 shares at an average price of $2.92 per share for
an aggregate cost of $224,500 under the share repurchase plan. In addition,
during 1997 the Company has repurchased an aggregate of 643,066 shares of
its common stock from former employees of the Company at an aggregate cost of
$484 pursuant to stock purchase agreements with such former employees.
The Company believes existing cash, cash equivalents, internally
generated funds and available borrowings will be sufficient to meet the
Company's currently anticipated operating expenditure requirements during the
remainder of 1997. During the remainder of 1997 and in 1998, the Company expects
to continue to use a significant amount of existing cash, cash equivalents and
internally generated funds to fund research and development, marketing efforts
designed to promote consumer awareness and use of its products and services and
capital expenditures. In order to fund more rapid expansion, to develop new or
enhanced products or to address liquidity needs caused by shortfalls in
revenues, the Company may need to raise additional capital in the future. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to Common Stock. There can be no
assurance that additional financing will be available when needed on terms
favorable to the Company or at all. If adequate funds are not available or not
available on acceptable terms, the Company may be unable to develop, enhance and
market products, retain qualified personnel, take advantage of future
opportunities, or respond to competitive pressures, any of which could have
material adverse effect on the Company's business, operating results and
financial condition.
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 information set forth under the caption "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No. 333-1170)
and under the caption "Business Risks" in Item 1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. These and other factors may
cause actual results to differ materially from those anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
Part II. Other Information
Items 1, 3, 4 and 5 are not applicable.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company's registration statement on Form S-1 (File No.
333-1170) with regard to an initial public offering of 5,060,000
shares of common stock, par value $.0001 per share, of the Company
was declared effective by the Securities and Exchange Commission
on April 24, 1996. As set forth in the Company's Form SR, Report
of Sales of Securities and Use of Proceeds Therefrom, Montgomery
Securities and Donaldson, Lufkin & Jenrette Securities Corporation
acted as the managing underwriters for the offering, which
commenced April 25, 1996. As of September 30, 1997, the Company
has used net proceeds of $60,078,000 from the offering as follows:
<TABLE>
<CAPTION>
Direct or indirect
payments to directors,
officers, general
partners of the issuer
or their associates; to
persons owning ten
percent or more of any
class of equity
securities
of the issuer; and to Direct or indirect
affiliates of the issuer. payments to others
-------------------------------- ------------------------
<S> <C> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 4,442,000
Purchase of real estate
Acquisition of other business(es) 300,000
Repayment of indebtness $ 771,000 1 1,000,000
Working capital 16,113,000
Temporary investments:
US Treasury obligations 25,866,000
Commercial paper 1,502,000
Money market / cash 292,000
Other purposes
Marketing 3,087,000
Research & development 4,962,000
Purchase of software 1,743,000
<FN>
1 Reflects the repayment of debt owned to Carolina First Corporation, as
described under the caption "Use of Proceeds" in the Company's Prospectus, dated
April 25, 1996.
</FN>
</TABLE>
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, 1997.
<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, Chief Financial Officer, Secretary and Treasurer
Date: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 5,208,142 5,208,142
<SECURITIES> 22,451,669 22,451,669
<RECEIVABLES> 1,222,629 1,222,629
<ALLOWANCES> 0 0
<INVENTORY> 2,626,573 2,626,573
<CURRENT-ASSETS> 33,646,134 33,646,134
<PP&E> 8,743,571 8,743,571
<DEPRECIATION> 2,323,114 2,323,114
<TOTAL-ASSETS> 44,851,984 44,851,984
<CURRENT-LIABILITIES> 1,567,451 1,567,451
<BONDS> 0 0
0 0
0 0
<COMMON> 2,914 2,914
<OTHER-SE> 42,722,946 42,722,946
<TOTAL-LIABILITY-AND-EQUITY> 44,851,984 44,851,984
<SALES> 0 0
<TOTAL-REVENUES> 1,717,419 2,795,573
<CGS> 0 0
<TOTAL-COSTS> 5,450,038 15,385,311
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (472,803) (1,568,733)
<INCOME-PRETAX> (3,259,816) (11,021,005)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,259,816) (11,021,005)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,259,816) (11,021,005)
<EPS-PRIMARY> (0.11) (0.39)
<EPS-DILUTED> (0.11) (0.39)
</TABLE>
