UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
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.)
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
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 [ ]
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $48,717,651 as of March
17, 1997. For purposes of such calculation, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by directors and officers of the Registrant and their immediate
family members have been included because such persons may be deemed to be an
affiliate. This determination is not necessarily conclusive.
There were 28,150,603 shares of Registrant's Common Stock outstanding
as of March 17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's proxy statement with
respect to the 1997 Annual Meeting of Stockholders of the Registrant have
been incorporated by reference herein.
<PAGE>
Item 1 of this Form 10-K entitled "Business" and Item 7 of this Form 10-K
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are inherently uncertain and
actual results could differ materially from those expressed or implied by the
forward-looking statements. These forward-looking statements should be
considered in the context of the business risks set forth below in Item 1 of
this report.
Part I
Item 1 Business
General
Affinity Technology Group, Inc. (the "Company" or "Affinity")
develops and markets electronic commerce technology that enables financial
institutions and other businesses to provide financial services electronically
with reduced or no human intervention. Since its formation in January 1994,
the Company has concentrated its product development efforts primarily
on a "closed loop" electronic commerce system that enables financial
institutions to automate the processing and consummation of consumer loans
and other financial services at the point of sale. This technology is
designed to enable financial institutions to open new distribution channels
for their products and services, thereby increasing their assets and
revenues and broadening customer relationships while reducing their
operating and infrastructure costs.
The Company's current products and services consist of the Affinity
Automated Loan Machine ("ALM" Registered Tradmark) and a call center
decisioning system which provide financial institutions the ability to
originate financial products and services with little or no human intervention.
Integral to the capabilities the Company provides to its customers is access
to its proprietary Decision Support System/Real Time ("Decisys/RT" Service
Mark) (formerly known as the DSS system). To date, the principal financial
product utilized by customers through the Company's systems has been the
ability to originate unsecured consumer loans. The Company's systems also have
the ability to originate loans secured by cash collateral, renew existing
loans, open demand deposit accounts, cross sell other products and services
and make counter offers to applicants who qualify for a larger loan or who are
initially unable to qualify for the type of loan requested. All products
have the ability to be communicated to the applicant in English and Spanish.
Financial product origination capabilities currently under development include
pre-approved personal loans, automobile loans, personal lines of credit,
credit card accounts and first and second mortgage loans through the ALM. The
Company has continued to develop additional financial product origination
capabilities and to improve and enhance the technological capabilities of
the ALM, the call center decisioning system and the Decisys/RT system.
The ALM permits a consumer to apply for and receive a loan without
human intervention in as little as 10 minutes. Similar in appearance to an
automated teller machine ("ATM"), the ALM is a fully automated system that
utilizes the Company's proprietary Decisys/RT technology to process consumer
loans, generate the underlying loan documentation and distribute loan
proceeds. The Company believes its customers can use the ALM as a substitute
for traditional branch-based consumer lending, which involves significant
personnel costs and typically takes substantial time to complete. The
Company further believes the deployment of ALMs in retail centers, the
'
customers to maintain or increase their revenues and assets. At December
31, 1996, there were 164 ALMs deployed or accepted and awaiting
deployment.
The Company's Decisys/RT system automates the processing and
consummation of financial products and services. Based on the Company's
proprietary object-oriented software, Decisys/RT uses a three-tiered
client/server architecture to provide a stable, scalable platform capable
of processing large numbers of transactions in a reliable, efficient and
timely fashion. Decisys/RT can simultaneously interact with consumers
to capture personal information (such as through touch-screen terminals)
and with third parties (such as credit bureaus) that supply additional
information necessary to consummate the transaction efficiently. A central
server located at the Company's Network Operations Center ("NOC")
coordinates the flow and analysis of information and evaluates, based on
each customer's underwriting model, whether and on what terms the transaction
can be consummated.
Substantially all the Company's recurring revenues to date have
been derived from fees charged for the installation and rental of ALMs. To a
lesser extent, the Company's recurring revenues have been
derived from transaction fees that are primarily based on the aggregate
principal amount of loans processed through ALMs. The Company's strategy is
to generate a substantial recurring revenue stream from transaction fees
while recovering its cost of assembling, installing and maintaining ALMs
through revenue generated by ALM set-up, rental and other fees.
The Company does not make or guarantee loans, does not receive
any interest income or other fees directly from borrowers and does not
offer, endorse or guarantee any other products or services offered by its
financial institution customers. Under the terms of the contractual
relationships with its customers, the Company is entitled to payment of
without regard to whether consumer loans made through an ALM are repaid.
Products and Services
The Company has focused its product development efforts on
exploiting its Decisys/RT technology to enhance transaction processing
and delivery systems. The Company believes its Decisys/RT technology will
be particularly attractive to businesses, such as consumer lending
institutions, engaged in transactions that require collecting information
from consumers and third parties, analyzing such information and
providing on-the-spot transaction fulfillment. For such transactions, the
speed and efficiency of Decisys/RT-based systems have the potential to offer
significant advantages when compared to more labor intensive and less
technically advanced processing and delivery systems.
The Affinity ALM
General. The ALM and Decisys/RT (together, the "ALM System")
fully automate the consumer lending process, enabling consumers to apply
for and, if approved, receive a personal loan (including loan documentation
and proceeds) in as little as 10 minutes without involving loan officers,
customer service representatives or other lending personnel. The Company
believes the deployment of ALMs in retail centers, the workplace, leisure
and travel destinations and other non-traditional banking locations will
enable the Company's customers to reduce their costs of processing certain
consumer financial service transactions and maintain or increase their
revenues and assets.
Design and Features. The ALM looks and interacts with consumers
much like an ATM and can be operated as a free standing kiosk or wall unit. The
Company's existing customers have located ALMs in traditional branch
offices, malls, retail stores and other retail environments.
The ALM System contains a magnetic strip card reader used to identify
loan applicants by credit card, charge card, or debit card, a touch-screen
monitor used to elicit information from applications, a magnetic pen and
signature capture unit used to electronically execute loan documents, a
digital camera system used to photograph applicants as they sign loan
documents, video cameras used to take pictures at intervals during all hours
of ALM operations, a laser printer used to print loan documents and checks on
site and a modem connecting the ALM to the Company's NOC. The software
supporting each ALM System is modified by the Company to meet the marketing
and underwriting requirements of each financial institution customer.
The Company's first ALMs, introduced in 1994 and placed into
service in 1995, permitted consumers to apply for and receive unsecured
consumer loans in amounts, and on terms and conditions, specified by the
particular ALM sponsor. The most advanced ALM System currently available
also can be programmed to make counteroffers to applicants who qualify for a
larger loan or who are initially unable to qualify for the type of loan
requested (such as by offering the applicant a reduced principal amount or
a loan at a higher interest rate), communicate in Spanish, originate loans
secured by cash collateral, renew existing loans, open demand deposit
accounts and cross-sell other products and services offered by the
institution during the time the applicant is waiting for a decision on a loan
application. In addition, the Company is developing the ability to originate
certain other financial products including pre-approved personal loans,
automobile loans, personal lines of credit, credit card accounts, and
first and second mortgage loans. The Company also has enhanced Decisys/RT
and the ALM System to support its "Second Look" program, as discussed below.
The Company's developmental activities are subject to the risks inherent in
the development of new products and applications, including the
development of unforeseen design or engineering problems. See "Business Risks
- - Early Stage Products and Services."
Fraud Detection. The ALM System employs a number of methods
intended to detect and prevent fraudulent loan applications, some of which
are standard for all ALMs and some of which are customized to fit each
customer's underwriting model and specifications. Certain information, such
as credit card data, is verified by contacting third-party verification
services. In addition, the Decisys/RT system contains fraud analysis
software that evaluates consumer-supplied data, such as social security
numbers and addresses, against a number of format and consistency tests.
Moreover, additional fraud analysis is performed through the use of on-line
fraud detection service providers. As a further deterrent, each ALM
imprints a digital photograph of the loan applicant on all checks and other
loan documents generated in a transaction. The Company periodically
refines its fraud detection programs to include other forms of data
verification and currently is pursuing certain new processes that aid in the
identification of fraud, including Personal Identification Number ("PIN")
codes used by debit and ATM cards. Although the Company is unaware of any
significant instances of fraud in connection with loans consummated through
the use of ALMs, the rate of fraudulent activity could increase. See
"Business Risks - Risk of Fraud in Consumer Lending."
Second Look Program. The Company is developing its Second Look
program to provide a means through which loan applications that are rejected
by the primary ALM sponsor can be reviewed and funded at the ALM by one or
more secondary lenders during a single application process. The Second
Look program is designed to enable the ALM System to serve two traditionally
distinct consumer finance markets: the "prime" market, consisting of
consumers with more attractive credit profiles who are often served by
banks, and the "sub-prime" market, consisting of consumers with less
attractive credit profiles who are more likely to be served by consumer finance
companies. Under the Second Look program, a consumer applying for a
loan through an ALM would first be considered by the institution that
operates the ALM. If the consumer does not meet the primary institution's
lending requirements, he or she would be considered by one or more
secondary lenders serving the sub-prime market. If the consumer qualifies
for a loan from a secondary lender, the loan could be consummated at the ALM.
In such event, the primary ALM sponsor would receive a fee, the secondary
lender would book the loan and the consumer would obtain the loan from the
secondary lender. The Company believes that the Second Look function can
be performed without adding significant time to the application process.
The Company has entered into agreements with two finance companies
(the "Second Look Lenders") pursuant to which such lenders will participate as
secondary lenders in the Second Look program. In addition, the Company has
enhanced its Decisys/RT system and the ALM to permit the processing of Second
Look loans. However, certain regulatory issues, including in particular
state and federal regulation of consumer finance companies, have prevented
the Company from introducing the Second Look program. The Company and the
Second Look Lenders are attempting to resolve regulatory impediments to the
Second Look program. However, no assurance can be given that the Company
will ever earn significant revenues from its Second Look program. See
"Business Risks - Governmental Regulations."
Revenue Sources. The Company derives both recurring and one-time
revenues from ALMs as described below.
Recurring Revenues:
First Look Transaction Fees. Upon order of the ALM, the Company
enters into an Automated Loan System Agreement (the "ALS
Agreement") with the customer pursuant to which the customer is
granted a non-exclusive license to use certain software
supporting the ALM System. Under the terms of the standard ALS
Agreement, the customer agrees to pay a transaction fee equal to
a percentage of the aggregate principal amount of all loans
funded by the customer through its ALMs. The amount of such
transaction fees will depend on a variety of factors, including
the type of loan and the number of ALMs operated by the particular
customer.
Second Look Transaction Fees. Under the Second Look program, if
such program is successfully implemented, the Company would earn
recurring transaction fees for loans processed. Pursuant to the
Company's agreements with the Second Look Lenders, the
Company would receive a transaction fee equal to a percentage
of the aggregate principal amount of all loans funded through the
Second Look program. Under such agreements, transaction fees
generated by Second Look loans generally would be higher than
transaction fees generated by loans made by the primary ALM
sponsors. The implementation of the Second Look program is
subject to successful resolution of certain regulatory issues,
as discussed above. See "-Products and Services - The Affinity
ALM - Second Look Program."
One-Time Revenues:
Set-Up Fees. The Company's ALS Agreement also provides for the
payment of set-up fees that are generally determined based on the
number of ALMs operated by the customer. Generally, such fees are
paid by customers when the ALM is ordered. Set-up fees are
initially recorded as deferred revenue. Upon installation of an
ALM, the Company generally recognizes as revenue a portion of the
set-up fee in an amount approximately equal to the cost of
set-up and installation of such ALM, with the remainder recorded as
deferred revenue and amortized ratably over the term of the ALS
Agreement. Certain of the Company's ALS Agreements provide that
the customer may apply a portion of the initial set-up fee to
future transaction and other fees. The Company capitalizes the
unearned portion of such set-up fee as deferred revenue, which is
amortized ratably as revenue over the term of the related agreement.
Rental Fees. The Company enters into a lease agreement with
its customer under which the customer agrees to pay a monthly
rental fee for the hardware components of the ALM. The amount
of the rental fee typically is based on the number of ALMs
operated by the customer, and the rental term generally is 48
months. The Company recognizes revenue associated with ALM leases
pursuant to Statement of Financial Accounting Standards No. 13
("SFAS 13"), "Accounting for Leases." Under SFAS 13, the
Company's ALMs are either sales-type or operating leases. If the
ALMs meet the criteria for sales-type leases under SFAS 13, the
present value of the future minimum lease payments is recognized
as sales revenue in the period in which the sale occurs. Rental
revenue associated with operating leases is recognized as rental
revenue over the term of the ALM lease.
The Company recently entered into agreements with certain hardware
vendors under which such vendors will market and sell kiosks that will utilize
the Company's Decisys/RT system in a manner comparable to the ALM. As a
result of such agreements, the Company expects that it may restructure its
pricing policies such that there will be no advantage to customers as a result
of whether they acquire kiosks manufactured by third party vendors or by
the Company.
Assembly and Deployment. The Company currently is able to design,
assemble and install an ALM System for a new customer in 60 to 90 days from the
time an order is accepted. The Company generally is able to assemble and
install additional ALMs for a customer's existing ALM System in approximately
30 days.
After an initial order is received, the Company consults with the
customer to prepare any necessary specialized software applications and loan
documentation and to design the exterior appearance of the ALM and the computer
screens. The Company works closely with its customers to develop the
program design and consumer interface and assists its customers in complying
with regulatory requirements by providing, among other things, forms
prepared by a third-party provider of standardized documents for financial
services. The Company, through its demographic and underwriting consulting
staff, periodically consults with its customers regarding ALM performance.
The Company subcontracts with unaffiliated third parties to
construct the ALM enclosure, assemble the ALM components and provide periodic
maintenance for ALMs placed in service. Otherwise, all aspects of assembly
and installation, including purchasing of components, ALM final testing
and transportation, currently are performed by employees of the Company.
Once the systems have been designed and assembled, the Company tests the
operational readiness of each ALM. During this stage, customers are required
to come to the Company's offices to review the appearance of the ALM and to run
test loans in order to check adherence to the customer's underwriting model.
Prior to installation, each customer must certify in writing that its ALM
System meets its lending standards.
The Company has established relationships with vendors of the
hardware components of the ALM System. The Company purchases ALM components as
needed to meet firm and expected orders and does not maintain significant
inventory. The signature capture unit used in the current ALM design is
available through one vendor only, and the loss of such vendor could
temporarily interrupt the Company's assembly of ALMs. The Company believes
that all other ALM components are available from a wide variety of sources.
The Company generally is not obligated to retrofit ALMs in service
with new hardware, software or other product enhancements. However, the
Company believes that it is often advantageous to do so in order to reduce
costs associated with maintaining multiple production versions in service.
Accordingly, the Company's ALM agreements require ALM customers who do
not desire to accept operational upgrades to ALMs in service to pay a special
maintenance fee. Due to cost savings often associated with upgrades and the
Company's goal of expanding consumer acceptance and usage of ALMs, the Company
historically has upgraded ALMs in service. The net costs of such upgrades have
not been significant to date and are not expected to be material in the future.
With respect to product enhancements allowing ALMs to offer new products,
the Company may charge additional fees to incorporate such products into ALMs in
service.
Call Center Decisioning System
General. In June 1996, the Company completed development of its
call center decisioning system (formerly known as "Assets3"), which uses the
Decisys/RT system to allow banks and other financial institutions to (i)
integrate multiple computer systems which store consumer and other
information, (ii) standardize and streamline lending and other retail banking
practices and (iii) increase marketing effectiveness of customer service
representatives, tellers and other branch personnel by providing them with
(a) point of sale access to pertinent consumer data and (b) the ability to
consummate financial transactions such as loans by querying deposit and loan
databases, verifying third-party credit information, scoring an application
and generating loan documents.
The Company believes that, to date, institutions with multiple retail
banking technology platforms have typically relied on either customized
solutions, which can be expensive to develop and maintain, or replacement
programs involving the system-wide acquisition of new technology platforms,
which often requires writing off significant investments in existing
technology platforms. The Company's call center decisioning system is
intended to be a flexible, lower cost alternative that would integrate many
of the most common retail banking technology platforms at the "front end,"
permitting banks to gain the cost advantages associated with a common
technology platform without writing off existing equipment or incurring new
platform investments.
Joint Venture Arrangement with Union Planters. In connection with the
Company's development of its call center decisioning system, the Company
entered into a joint venture arrangement with Union Planters Corporation, a bank
holding company headquartered in Memphis, Tennessee ("Union Planters"),
relating to the development of such system. Pursuant to such arrangement,
Affinity Processing Corporation, a majority-owned subsidiary of the Company
("APC"), has granted to Union Planters a non-exclusive, perpetual, royalty-free
sublicense to use the call center decisioning system software in North America
for an aggregate nonrefundable license fee of $1.8 million.
The arrangement also allows Union Planters to purchase, for its own use,
products and services offered by APC to third parties at a fee equal to APC's
actual cost of producing such products or providing such services plus 10% of
such cost, provided that the only items chargeable to Union Planters in
connection with the use of the call center decisioning system will be the actual
transaction processing costs and actual costs of installing the call center
decisioning system on additional or alternative computer systems that Union
Planters may specify from time to time. In no event may such fee exceed the fee
at which such products and services are offered by APC to third parties.
Pursuant to the arrangement, APC has engaged the Company to assume full
operational control of all aspects of the management and administration of APC.
Union Planters currently owns 24.9% of the outstanding stock of APC, on
a fully diluted basis. The Company and Union Planters may not transfer shares
of APC stock without first offering to sell such shares first to APC and, to the
extent not acquired by APC, then to the other party upon the same terms and
conditions of any proposed transfer. Each of the Company and Union Planters
also is required to sell its share of APC stock first to APC and, to the extent
not acquired by APC, then to the other party at the appraised fair market value
of such shares in certain events, including any party's bankruptcy or insolvency
and the material breach by any party of the terms of the underlying agreement,
if such breach is not cured with 30 days after written notice thereof.
Sales and Marketing.
The Company has concentrated its sales and marketing resources on
participation in well-recognized and widely attended industry trade shows,
direct mailing of literature, videos and other materials and regional
presentations at which selected financial institutions are offered the
opportunity to view a demonstration of an ALM and meet with members of
Affinity's management team. The Company has an internal marketing group that
coordinates the marketing of the Company and its products nationwide through
customer meetings and trade shows and the use of public relations firms and
advertising agencies. Additionally, this group has designed marketing support
materials for use by Affinity's customers to assist them in educating consumers
and creating product awareness.
The Company has established an in-house demographic and underwriting
consulting staff to consult with existing and prospective customers to identify
suitable locations for ALMs and refine underwriting models to achieve desired
rates of return and risk tolerance. The Company also provides after-sale
support to its customers with respect to improving the performance of ALM
operations.
To leverage the Company's direct marketing group and sales force, the
Company has entered into strategic alliances with certain vendors that
presently service the technology needs of financial institutions and other
potential customers of the Company. Such vendors sell products or services
that are complementary to the ALM and/or the Decisys/RT system and have
established sales organizations which have formed existing relationships with
potential customers of the Company. The Company also has recently entered
into agreements with certain hardware vendors, under which such vendors
will market and sell kiosks that contain and access the software applications
developed by the Company in a manner comparable to the Company's ALM. Under
such agreements, the vendors will receive a commission for their sales efforts
resulting in ALM sales by the Company, and will be able to manufacture and sell
their own kiosks, directly interact with customers with respect to ALM
design, certification and implementation and receive a portion of the
transaction fees generated by ALM usage.
In addition to the Company's strategic alliance program, the Company
intends to enter into nonexclusive distribution agreements with companies
that do not qualify as strategic partners but that have existing relationships
with potential customers and an established sales organization. Under
the arrangement with distributors as currently proposed, the Company intends
to be directly involved in ALM design, certification and implementation.
Compensation of distributors will be negotiated on a case-by-case basis.
The Company believes that adding strategic partners and distributors is a
vital component in its strategy to penetrate target markets and to deploy ALMs.
However, no assurances can be given that any strategic partner or distributor
will be able to market successfully any ALMs or kiosks that employ the Company's
software. See "Business Risks - Undeveloped Distribution Channels."
Competition
The market for products and services that enable electronic commerce is
highly competitive and is subject to rapid innovation and technological change,
shifting consumer preferences, frequent new product introductions and
competition from traditional products and services having all or some of the
same features as products and services enabling electronic commerce.
Competitors in this market have frequently taken different strategic approaches
and have launched substantially different products or services in order to
exploit the same perceived market opportunity. Until the market actually
validates a strategy through widespread acceptance of a product or service, it
is difficult to identify all current or potential market participants or
gauge their relative competitive position. There can be no assurance that
the ALM or Decisys/RT will be competitive technologically or otherwise,
or that any other products and services developed by the Company will be
competitive technologically or otherwise. The ability of the Company to
compete in the market will depend upon, among other things, broad acceptance
of the Company's products and services and on the Company's ability
continually to improve and expand the ALM and Decisys/RT and other products
and services the Company may develop to meet changing customer requirements.
Electronic commerce technologies in general, including the ALM,
compete with traditional consumer lending methods, including in-person loan
applications at branch offices of financial institutions and cash advances on
credit cards, home equity lines of credit and other revolving credit facilities,
some or all of which are employed by the Company's existing and potential
customers. The ability of the ALM and Decisys/RT and of any other electronic
commerce products and services the Company may develop to compete with
traditional lending methods will be dependent in part on consumer acceptance of
electronic commerce in general and industry acceptance of the Company's
products and services in particular.
The Company also faces competition from companies engaged in the
business of producing automated lending systems and other alternatives to
conventional consumer lending, including software and data processing companies
and technology and service companies. In particular, the Company is aware of
several companies, including Dyad Corporation ("Dyad"), that have developed
video and other kiosk technology for the delivery of financial services.
In addition, the Company is aware of certain companies that have designed and
are marketing software that enables loan applications to be taken over the
telephone. The Company also is aware that many banks have begun using on-line
services, such as America-On-Line, Inc. ("America-On-Line"), CompuServe, Inc.
("CompuServe") and Prodigy Services Co. ("Prodigy"), to provide certain
financial services electronically, and is aware of several companies that
have already made substantial investments in software products that enable
various other home banking services, including International Business
Machines Corporation ("IBM"), Microsoft Corp. ("Microsoft"), Intuit Inc.
("Intuit"), Meca Software, Inc. ("Meca") and U.S. Order, Inc. ("U.S.
Order"). Moreover, IBM and The Chase Manhattan Bank have announced a system
for processing automobile loans over the Internet. Further, the Company
understands that ULTRADATA Corporation ("ULTRADATA") has developed certain
on-line processing systems for the credit union market that may be in direct
competition with Affinity's proposed call center decisioning system (see
"Business Risks - Competition, Future Price Erosion").
The Company expects competition to increase in the future from
existing and new competitors that produce automated loan systems and other
alternatives to traditional consumer lending methods. Such competitors may
include actual or potential customers of the Company that may develop
competitive technology internally. Most of the Company's current and potential
competitors in the market for its products have substantially greater
financial, marketing and technical resources than the Company. Accordingly, the
Company may not be able to compete successfully against new or existing
competitors. Furthermore, competition may reduce the prices the Company is
able to charge for its products and services, thereby potentially lowering
revenues and margins, which would have a material adverse effect on the
Company's business, operating results and financial condition. See "Business
Risks - Rapid Technological Changes" and " - Competition; Future Price Erosion."
Technology
The Decisys/RT system employs a three-tiered client/server architecture
that integrates the consumer interface, application analysis function and
multiple data sources together in a seamless operating environment. The
Decisys/RT architecture enables true multi-tasking, which permits an expedient
loan decision. The Decisys/RT uses standard C++ code and object-oriented
programming which permits the decoupling of functional development from system
deployment, greatly reducing the time and cost of maintenance. The Company has
ensured easy platform portability by using standards as the TCP/IP
communications protocol and C++ programming language, while maintaining
compatibility with widely accepted third-party database programs and operating
systems.
The Company"s NOC, located in Columbia, South Carolina connects to the
various ALMs in service through a private network. The NOC is connected to the
network via dedicated 56.6 Kbps line (ungradable to T-1) while the ALMs use
dial-up connections. The Company also maintains leased line connections
to TRW Inc., Trans Union Corporation, Equifax Inc. and other providers of
information for validation of a consumer's identity and loan underwriting.
The combination of data-encryption techniques and the closed loop nature of
the system provide for a secure environment.
The Company's operations are dependent on its ability to protect its
central computer system against damage from fire, earthquake, power loss,
telecommunications failure or similar events. All of the Company's computer
equipment constituting its central computer system, including its processing
operations, is located at the Company's NOC in Columbia, South Carolina. The
Company has adopted a formal disaster recovery plan and has contracted with a
major disaster recovery company for back-up, off-site processing systems capable
of supporting its Decisys/RT operations in the event of system and other
failure.
Intellectual Property
The Company has applied with the United States Patent and Trademark
Office ("PTO") for patents to protect the closed loop lending system utilized
by, and the other essential features of, the ALM System. Such applications
and all amendments thereto to date have been rejected by the PTO based on prior
art. The Company nevertheless intends to continue vigorous prosecution of its
applications and, if necessary, appeal the PTO's rejection of such patent
applications. "Affinity" and "More Assets, Less Infrastructure" are
registered service marks and "Assets3" and "ALM" are registered trademarks of
the Company.
The Company's success and ability to compete is heavily dependent upon
its proprietary technology. The Company also relies on trade secret and
copyright law and employee, customer and business partner confidentiality
agreements to protect its technology. However, the Company believes that
factors such as technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining
a state-of-the-art technological system. There can be no assurance that the
Company will be able to protect its technology from disclosure or that
others will not develop technologies that are similar or superior to the
Company's technology. See "Business Risks - Limited Protection of Technology."
Research and Development
The Company's software development activities currently include, among
other things, (i) developing new consumer finance applications for the ALM,
such as mortgage loans, and (ii) adapting the Company's Decisys/RT technology
for use in the consumer insurance industry. The Company's research and
development activities include the enhancements of existing products and the
development of new products using existing software applications.
The Company's ability to attract and retain highly skilled
research and development personnel is important to the Company's success.
During 1996, the Company spent approximately $2,905,232 on research and
development activities, or approximately 57.2% of 1996 revenues. The Company
anticipates that it will continue to commit substantial resources to research
and development activities for the future.
Government Regulation
The market currently targeted by the Company, the financial services
industry, is subject to extensive and complex federal and state regulation.
The Company's current and prospective customers, which consist of state and
federally chartered banks, savings and loans, credit unions, consumer finance
companies and other consumer lenders, as well as customers in the insurance
industry that the Company may target in the future, operate in markets that
are subject to extensive and complex federal and state banking and insurance
regulation. Because the Company does not make or guarantee loans, does not
receive any interest income or other fees directly from consumers and does not
offer, endorse or guarantee any produce or service offered by its financial
institution customers, it is not required to be licensed by the Office of the
Comptroller of the Currency, the Federal Reserve Board of other federal or
state agencies that regulate financial institutions. Nevertheless, the
Company's products and services must be designed to work within the regulatory
environment in which its customers operate.
Federal and state laws and regulations also regulate the lending
practices of financial institutions. These laws include federal and state
truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, which prohibits discrimination in lending practices,
the Electronic Funds Transfer Act, which regulates electronic funds
transfers, the Fair Credit Reports Act, which regulates access to and use of
credit records maintained by credit bureaus, and the Community Reinvestment Act,
which requires financial institutions to serve the credit needs of the entire
community in which they operate, including low and middle income
neighborhoods. While these regulations must be taken into account in the design
of the Company's products and services, the Company itself is not directly
subject to these regulations and the Company's standard ALS Agreement
with its customers provides that the customer will be responsible for compliance
with these laws.
Some consumer groups have expressed concern regarding the privacy and
security of ALMs and whether electronic lending is a desirable technological
development in light of the current level of consumer debt. While the Company
believes these concerns are unfounded, it is possible that consumer groups or
others could take actions to cause one or more states eventually to promulgate
specific regulations applicable to the deployment and operation of ALMs. The
Company cannot predict, however, when such regulations might be implemented,
if ever, or the effects of any such regulation on the Company's business,
operating results or financial condition. See "Business Risks - Government
Regulation and Uncertainties of Future Regulation."
Employees
At December 31, 1996 the Company employed approximately 133
full-time employees and 2 part-time employees. The Company has no collective
bargaining agreements and believes its relationship with its employees is good.
Backlog
At March 31, 1997, the Company had contracts for 35 ALMs and a for the
development of a call center decisioning system that will result in revenues of
approximately $1.3 million. At April 3, 1996, the Company had contracts for
58 ALMs that resulted in revenues of approximately $2.1 million.
Business Risks
In addition to the other information in this report, readers should
carefully consider the following important factors, among others, that in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of
operations to differ materially from those expressed in any forward looking
statements made by, or on behalf of, the Company.
Limited Operating History; Significant Losses; Accumulated Deficit;
Future Losses
The Company was incorporated in January of 1994 and placed its
first product, the ALM, in service in January 1995. Accordingly,
the Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. 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 December 31, 1996 of $12,706,195, with operating losses of
$705,971 for the period from inception (January 12, 1994) through December 31,
1994, and $2,308,029 and $9,692,195 for the years ended December 31, 1995 and
1996, respectively. The Company expects to incur substantial additional costs
to complete its products and services in development, to enhance and market the
ALM and Decisys/RT and to complete any new products and services that may be
developed by the Company. There can be no assurance that the Company will ever
achieve profitability or, if achieved, sustain such profitability.
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. To address these risks, the
Company must, among other things, respond to competitive developments,
attract and motivate qualified personnel, establish effective distribution
channels, effectively manage any growth that may occur and continue to upgrade
its technologies and successfully commercialize products and services
incorporating such technologies.
Potential for Fluctuation in Quarterly Results
Because the Company has a limited operating history, management has
very little data upon which to base estimated operating revenues and expenses.
In addition, while there can be no assurance that the Company will achieve, or
will achieve in a timely fashion its revenue objectives, the Company has
rapidly expanded its technology, installation, sales and marketing and other
resources in order to support its growth objectives. The levels of these
expenditures, which are to a large extent fixed, are based in part on the
Company's goals as to its future revenues. The Company's revenues will be
affected by many factors, including demand for the Company's technology and
demand for any additional products or services developed by the Company,
introduction and enhancement of products by the Company and its competitors,
market acceptance of such technology in existence or developed in the future,
mix of distribution channels through which products are sold and general
economic conditions (particularly those conditions affecting financial
services supply and demand). Further, the Company's current customer base is
highly concentrated and such concentration may have a significant effect on
revenues due to the uncertainty of new and additional sales of the Company's
technology. See "- Lack of Product Diversification; Dependence on Consumer
Retail Lending Industry; Cyclical Nature of Consumer Lending." Any significant
shortfall in demand for the Company's technology in relation to the Company's
expectations, or the occurrence of any other factor which causes revenues to
fall short of the Company's expectations, would have an immediate material
adverse effect on the Companys business, operating results and financial
condition.
The uncertainty regarding the extent and timing of any revenue growth
coupled with the Company's substantial operating expenses (many of which the
Company is unable to adjust in a timely manner) means that the Company will
likely experience substantial quarterly fluctuations in its operating results.
In addition, the Company will continue to commit significant resources to
further fund research and development and increase its sales and marketing
operations, develop new distribution channels and broaden its customer support
capabilities. To the extent these expenses are not preceded or followed by
substantially increased revenues, the Company's business, operating results and
financial condition will be materially adversely affected.
In accordance with Statement of Financial Accounting Standards No.
13 "Accounting for Leases," the Company treats certain of its
leases for which the present value of future minimum lease payments exceeds 90%
of the cost of the related ALM as sales-type leases and all other leases are
treated as operating leases. For sales-type leases, the Company recognizes
as revenue, generally upon ALM installation, the present value of the aggregate
future minimum lease payments to be received during the term of the related
rental agreement using the Company's incremental borrowing rate for
lease-secured transactions as the discount rate. For operating leases,
the Company recognizes lease payments as revenue ratably over the term of the
applicable agreement. A default by any significant customer of its obligation
to make lease payments or a termination of an ALM agreement could have an
adverse effect on the Company's quarterly revenues and operating results,
particularly with regard to ALMs that are leased under agreements treated as
sales-type leases.
As a result of all the foregoing factors and other factors discussed
under "Business Risks," the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance. Moreover, it is likely
that in some future quarter the Company's operating results will be below the
expectation of public market analysts and investors. In such event, the price
of the Company's Common Stock could be materially adversely affected.
Unproven Market, Unproven Acceptance of the Company's Products and Services
The market for products and services that enable electronic commerce
is new, developing and uncertain. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty.
The Company's future growth and financial performance will depend upon
consumer acceptance of electronic commerce as an attractive means of
conducting certain consumer financial transactions and also upon institutional
acceptance of the Company's products as a preferred means for serving
consumers. Such institutional acceptance will in part depend on continued
and growing use of relatively new quantitative credit scoring methodologies
that are amenable to automation. If the electronic commerce market fails to
grow or grows more slowly than anticipated, or if lenders reduce their use of
quantitative credit scoring tools, the Company's business, operating
results and financial condition would be materially adversely affected.
Furthermore, even if this market does experience substantial growth, there can
be no assurance that the Company's products and services will be commercially
successful or benefit from such growth. Failure of either the providers of
consumer financial services or the consumers of such services to quickly
accept electronic commerce distribution channels in general, and the
Company's electronic commerce enabling technologies in particular, or the
inability of the Company's products and services to satisfy its customers' or
consumers' expectations, would have a materially adverse effect on the
Company's business, operating results and financial condition.
Because the market for the Company's products and services is new,
evolving and uncertain, it is difficult to determine the size and predict
the future growth rate, if any, of this market. The market for the Company's
primary product, the ALM, and its planned products and services may never be
developed, or may develop at a slower pace than expected, or such products and
services may not be adopted by participants in this market or may be adopted
by only a limited number of participants. If the market fails to develop of
develops more slowly than expected, or if the Company's products and services
do not achieve significant market acceptance, the Company's business, operating
results and financial condition would be materially adversely affected.
While additional ALM orders have been received from certain existing
customers, none of the Company's ALM customers has, to the Company's knowledge,
made any determination with respect to making ALMs a component of its long-term
retail delivery strategy. Accordingly, there can be no assurance when or if
any additional orders will be forthcoming. Further, even if the Company does
succeed in generating substantial additional orders from existing customers,
uncertainty as to the timing and implementation of any such orders
adds to the unpredictability if the Company's quarterly operating results.
As of March 31, 1997, there were 164 ALMs deployed or accepted and
awaiting deployment. Agreements with one customer covering 50 ALMs provide that
if, after two years in service, an ALM covered by such agreement does not meet
certain financial performance criteria, the customer may terminate the agreement
with respect to such ALM subject to payment of a fee based on the number of
months remaining under the contract. Further, agreements with one customer
covering eight ALMs in service provide that if such ALMs do not achieve loan
volumes averaging one loan per day over a one month period in the second
quarter of 1997, the customer may terminate the agreement with respect to such
ALMs. Such performance criteria are substantially greater than average
performance results of ALMs currently deployed by such customer. Further,
agreements with one customer covering 30 ALMs deployed or awaiting deployment
provide for the waiver of the monthly rental fee for any month during which
such ALMs do not process a certain volume of loans, which volume of loans is
substantially greater than the volume of loans processed by ALMs currently
deployed by such customer.
Lengthy Sales Cycle
The Company has to date experienced a lengthy sales cycle for the ALM.
In most cases, the time between initial customer order contact and the execution
of a final contract has exceeded six months. While the Company believes that
the length of the sales cycle will compress over time if the ALM gains
acceptance in the marketplace, there can be no assurance such compression will
take place in the future.
Early Stage Products and Services
The ALM and the Company's planned products and services are in the
early stages of development and are subject to the risks inherent in the
development and marketing of new products including the development of
unforeseen design or engineering problems with the Company's products
and applications. There can be no assurance that these or other risks
associated with new product development will not occur. The occurrence of
one or more of these risks could have a material adverse effect on the Company's
business, operating results and financial condition.
Rapid Technological Changes
The market for products and services that enable electronic commerce is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences, frequent new product introductions and
competition from traditional products and services having all or some of the
same features as products and services enabling electronic commerce. Competitors
in this market have frequently taken different strategic approaches and have
launched substantially different products or services in order to exploit the
same perceived market opportunity. Until the market validates a strategy through
widespread acceptance of a product or service, it is difficult to identify all
current or potential market participants or gauge their relative competitive
position. There can be no assurance that the ALM or the Decisys/RT system will
be competitive technologically or otherwise or that any other products and
services developed by the Company will be competitive technologically or
otherwise. The ability of the Company to compete in this market will depend
upon, among other things broad acceptance of the Company's products and services
and on the Company's ability continually to improve the ALM and the Decisys/RT
system and other products and services the Company may develop to meet changing
customer requirements. There can be no assurance that the Company will
successfully identify new product and service opportunities and develop and
bring to the market new and enhanced ervices and products in a timely manner;
that such products, services and technologies will be commercially successful;
that the Company will benefit from such development; or that products, services
and technologies developed by others will not render the Company's products,
services and technologies noncompetitive or obsolete. If the Company is unable
to penetrate new markets in a timely manner in response to changing market
conditions or customer requirements or if new or enhanced products do not
achieve a significant degree of market acceptance, the Company's business,
operating results and financial condition would be materially and adversely
affected.
Competition, Future Price Erosion
Electronic commerce technologies in general, including the ALM,
compete with traditional consumer lending methods, including in-person loan
applications at branch offices of financial institutions and cash advances on
credit cards and other revolving credit facilities, some or all of which are
employed by the Company's existing and potential customers. The ability of the
ALM and of any other electronic commerce products and services the Company may
develop to compete with traditional lending methods will be dependent in part on
consumer acceptance of electronic commerce in general and industry acceptance
of the Company's products and services in particular.
The Company also faces competition from companies engaged in the
business of producing automated lending systems and other alternatives to
conventional consumer lending, including software and data processing companies
and technology and service companies. In particular, the Company is aware of
several companies, including Dyad, that have developed video and other kiosk
technology for the delivery of financial services. In addition, the Company
is aware of certain companies that have designed and are marketing
software that enables loan applications to be taken over the telephone. The
Company also is aware that many banks have begun using on-line services, such
as America-On-Line, CompuServe and Prodigy to provide certain financial services
electronically, and is aware of several companies that have already made
substantial investments in software products that enable various other home
banking services, including IBM, Microsoft, Intuit, Meca and U.S. Order.
Moreover, IBM and The Chase Manhattan Bank have announced a system for
processing automobile loans over the Internet. Further, the Company
understands that ULTRADATA has developed certain on-line processing systems
for the credit union market that may be in direct competition with Affinity's
proposed call center decisioning system product. See "Business - Products and
Services."
The Company expects competition to increase in the future from existing
and new competitors that produce automated loan systems and other alternatives
to traditional consumer lending methods. Such competitors may include
actual or potential customers of the Company that may develop competitive
technology internally. Most of the Company's current and potential competitors
in the market for its products and services have substantially greater
financial, marketing and technical resources than the Company. Accordingly,
the Company may not be able to compete successfully against new or existing
competitors. Furthermore, competition may reduce the prices that Company is
able to charge for its products and services thereby potentially lowering
revenues and margins, which would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business - Competition."
Lack of Product Diversification; Dependence on Consumer Retail Lending
Industry; Cyclical Nature of Consumer Lending
For the year ended December 31, 1996 the Company derived substantially
all of its recurring revenues from its ALM operations, excluding certain
revenues that were recognized in 1996 from the licensing of its call center
decisioning system software. Further a substantial portion of the Company's
revenues in the future are expected to be derived from fees associated with the
ALM. Accordingly, the Company will be heavily dependent on market acceptance
of the ALM and, in particular, its acceptance as a vehicle for executing
transactions historically executed through traditional distribution channels.
The failure of the Company to generate demand for the ALM or the occurrence of
any significant technological problems with the ALM would have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's business is currently concentrated on the consumer
lending industry and is expected to be so concentrated for the foreseeable
future, thereby making the Company susceptible to a downturn in that industry.
For example, a decrease in consumer lending could result in smaller overall
market for the Company's products and services. Furthermore, U.S. banks are
continuing to consolidate, decreasing the overall potential number of buyers
for the Company's products and services. Moreover, two customers accounted
for approximately 58% of the Company's revenue in 1996. The Company expects
that its operating revenues will continue to be attributable to a relatively
small number of customers. See "--Unproven Market, Unproven Acceptance of
the Company's Products and Services." These factors as well as others
affecting the consumer lending industry could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company's business currently depends upon the volume of
consumer loans made through ALMs. Historically, demand for consumer loans
has been cyclical, in large part based on general economic conditions and cycles
in overall consumer indebtedness levels. Changes in general economic
conditions that adversely affect the demand for consumer loans or the
willingness of financial institutions to provide funds for such loans,
such as changes in interest rates and the overall consumer indebtedness level,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Limited Protection of Technology
The Company is heavily dependent upon its technology, but holds
no patents with respect to such technology. The Company has applied with
the PTO for patents to protect the closed loop lending system utilized by, and
the other essential features of, the ALM System. Such applications and all
amendments thereto to date have been rejected by the PTO based on prior art.
The Company nevertheless intends to continue vigorous prosecution of its
applications and, if necessary, appeal the PTO's rejection of such patent
applications.
The Company regards certain of its technology as critical to its
business and attempts to protect such technology under copyright and trade
secret laws and through the use of employee, customer and business partner
confidentiality agreements. Such measures, however, afford only limited
protection, and the Company may not be able to maintain the confidentiality of
its technology.
As result of the foregoing factors, existing and potential competitors
may be able to develop products and services that are competitive with or
superior to the Company's products and services, and such competition could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business- Intellectual Property."
New Management; Management of Growth
The Company's rapid growth has placed and may continue to place, a
significant strain on the Company's managerial, operational and financial
resources. As of December 31, 1996, the Company had grown to 135 employees
from 55 employees at December 31, 1995 and six employees at December 31, 1994.
The inability of management and recently hired employees of the Company to
adjust quickly to, and perform as expected in, their respective roles
within the Company could have a material adverse effect on the Company's
business, operating results and financial condition.
To manage growth, the Company must continue to implement and
improve its operational and financial systems and to expand, train and
manage its employee base. The Company also will be required to manage multiple
relationships with various customers, business partners and other third
parties. Moreover, the Company has incurred significant expenses associated
with its rapid growth and may incur additional unexpected costs relating to its
anticipated expansion. The Company's systems, procedures or controls may not
be adequate to support the Company's operations and Company management may not
be able to achieve the rapid expansion necessary to exploit potential market
opportunities for the Company's products and services. The Company's future
operating results may also depend on its ability to expand its sales and
marketing and research and development organizations, implement and manage
new distribution channels to penetrate markets and expand its support
organization. If the Company is unable to manage growth effectively, the
Company's business, operating results and financial condition will be materially
adversely affected.
Risk of Fraud in Consumer Lending
Consumer credit transactions, such as those processed by the ALM,
involve the risk of consumer fraud. The customer operating the ALM is
responsible for the selection and use of the loan origination and underwriting
parameters incorporated in the software supporting the ALM. In addition,
pursuant to the Company's standard ALS agreement, the Company disclaims
(i) the responsibility for the collection of any payments due from loan
applicants and (ii) liability or responsibility to customers or others
with respect to liability caused or alleged to be caused directly or indirectly
by an ALM. The Company is unaware of any significant instances of fraud in
connection with the funding of loans through the use of its ALM. However,
the rate of fraudulent activity could increase, especially if the number of
transactions processed by ALMs increase. Moreover, in light of the limited
operating experience of the Company, there can be no assurance that the
Company's experience with respect to fraud to date is indicative of future
performance for the ALM or any other product or service that the Company may
develop. While the Company shifts the risk of collection in any given
transaction to its customers under the terms of the ALS agreement, the Company
may nevertheless be held responsible for losses associated with fraudulent
transactions if such transactions are attributable to the Company's
malfeasance. The Company has not attempted to procure insurance to cover
losses it may incur in connection with such fraud and does not know whether
such insurance is available. Furthermore, even if the Company is not directly
liable or contractually liable for fraudulent transactions processed by its
ALMs, an increase in fraud to levels greater than those experienced in
traditional and other emerging consumer credit processing systems would likely
have a material and adverse impact on the ability of the Company to attract and
retain financial institution customers and thus on the Company's business,
operating results and financial condition. In addition, the Company may not
be able to control adequately the occurrence of fraud in the future or may
only be able to do so at considerable cost, either of which would materially
and adversely affect the Company's business, operating results and financial
condition.
Risk of Third-Party Network Failure
The ALM relies on third parties for certain fraud detection systems
and for obtaining credit information about loan applicants. Additionally, the
Company uses an Affinity-dedicated private data network provided by a third
party to gain access to the networks maintained by such third parties.
Prolonged or repeated failure of (i) a network that provides access to
information necessary to complete a loan transaction through the Company's
ALMs or (ii) the Company's network access provider to provide access to such
networks or to ALMs in service would materially and adversely affect the
Company's business, operating results and financial condition.
Dependence on Third Parties
The expected rapid growth of the market for products that enable
electronic commerce, together with the number and resources of competitors
seeking to serve that market and the limited resources of the Company, make
the success of the Company and its business dependent on, among other things,
its ability to identify and reach agreements and work successfully with third
parties. In particular, the Company expects to rely on third parties in
connection with its customer relationships, the "Second Look" program,
strategic alliance arrangements (see "- Undeveloped Distribution Channels"),
assembly of products and other areas. There can be no assurance that the Company
will be successful in identifying such third parties, that it will be able to
reach suitable agreements with such third parties or that it will be able to
successfully implement any such agreements that are or have been reached.
Failure by the Company to accomplish any of the above could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's success will depend particularly on the ability of
customers and third parties to market successfully the Company's products and
services. For example, the ability of the Company to realize recurring revenues
from transactions will be dependent on the success of its customers in
generating consumer demand for transactions using the Company's products
and services. Failure of ALM customers to generate and sustain consumer
demand for the ALM and other products and services that may be developed by
the Company would have a material adverse effect on the Company's business,
operating results and financial condition. Although the Company views its
proposed strategic and other alliances with third parties as an important
factor in the development and commercialization of its products and services,
there can be no assurance that such third parties will view their alliances
with the Company as significant for their own businesses or that they will not
reassess their commitment to the Company at a time in the future. Currently,
the Company's agreements with ALM customers do not require them to meet
minimum performance requirements. Instead, the Company relies on the
voluntary efforts of such customers to promote consumer acceptance and use
of ALMs. The Company's ability to maintain relationships with its customers
and third parties will depend, in part, on its ability to successfully enhance
products and services and develop new products and services. The Company's
inability to meet such requirements could result in its customers and third
parties seeking alternative providers of the Company's products and
services, which would have a material adverse effect on the Company's business,
operating results and financial condition.
Undeveloped Distribution Channels
The Company currently sells its products and services directly
through its own sales force, marketing agreements with strategic partners and
distribution agreements with other entities. For the Company to emerge from
its initial stages of development and achieve broad distribution of the
ALM or any other products or services it may develop, it must implement
effective marketing and distribution arrangements with third parties. The
inability of the Company to enter into favorable arrangements with strategic
partners and other entities could have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore,
the Company will incur significant costs and expend substantial time to train
and educate strategic partners about the Company's products and services. If
the Company is unable to successfully and efficiently train and educate
strategic partners or other third parties, the Company may not achieve, or
achieve in a timely fashion, broad distribution of its products and services.
To the extent broad distribution of the Company's products and services is
not achieved, there would be a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Key Employees
The Company is highly dependent on certain key executive officers
and technical employees. Given the Company's early stage of development,
the Company is also dependent on its ability to recruit, retain and motivate
high quality personnel. Competition for such personnel is intense, and the
inability to attract and retain qualified employees or the loss
of current key employees could materially and adversely affect the Company's
business, operating results and financial condition. Additionally, the
Company does not maintain "key man" insurance policies on any of its employees
other than Jeff A. Norris, its President and Chief Executive Officer (which
policy provides coverage of only $1.5 million), nor does the Company
intend to secure such insurance. The loss of the services of any of the
Company's executive officers could have a material adverse effect upon the
Company's business, operating results and financial condition.
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price
Sales of substantial amounts of Common Stock in the public market
or the prospect of such sales could adversely affect the market price for the
Company's Common Stock and the ability of the Company to raise equity capital
in the future. As of March 17, 1997, the Company had outstanding an
aggregate of 28,150,603 shares of Common Stock. Of such shares, an aggregate of
approximately 5,636,092 shares of Common Stock represent shares sold by
the Company in its initial public offering, shares issued by the Company
under stock option plans that have been registered under the Securities Act of
1933, as amended (the "Securities Act"), and shares that have been sold in the
public market by holders of "restricted securities," as that term is defined by
Rule 144 under the Securities Act, and are freely tradeble without
restriction or further registration under the Securities Act (except for any of
such shares held by "affiliates," as that term is defined in Rule 144 under the
Securities Act ("Affiliates")). Of the remaining shares of Common Stock,
the Company believes that 19,436,104 shares (the "Affiliate Shares") are
held by Affiliates and 3,078,407 shares (the "Nonaffiliate Shares) are held by
nonaffiliates of the Company. All of such shares of Common Stock are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). The Company believes that 17,569,020
Affiliate Shares and 466,179 Nonaffiliate Shares are currently eligible for
sale under Rule 144, and that an additional 1,867,084 Affiliate Shares and
2,589.526 Nonaffiliate Shares will become eligible for sale under Rule 144 on
April 29, 1997 when the recent amendments to Rule 144 (which, among other
things, reduce the holding period for restricted securities) become effective.
Certain stockholders of the Company have the right to cause the Company to
register their Restricted Shares under the Securities Act. In addition, as of
December 31, 1996, the Company had outstanding options granted under stock
option plans exercisable into an aggregate of 446,000 shares of Common Stock
with a weighted average exercise price of approximately $0.58 per share and
there were warrants exercisable into an aggregate of 5,902,560 shares of
Common Stock at a weighted average exercise price of approximately $0.006
per share. The issuance of shares of capital stock to address liquidity
needs of the Company or for other business purposes could also adversely affect
the market price of the Company's Common Stock.
Volatility of Stock Price and Risk of Litigation
The Company's Common Stock price has been extremely volatile and has
experienced substantial and sudden fluctuation, particularly as a result of
announcements by the Company and its competitors, changes in financial
estimates by securities analysts and announcements with respect to the
industry generally. In addition, the stock market has experienced significant
price and volume fluctuations that have especially affected the market
prices of equity securities of many high technology companies, and that often
have been unrelated to the operating performance of such companies. These
broad market fluctuations have adversely affected and may continue to
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, which would have a material adverse
effect on the Company's business, operating results and financial condition.
Control by Principal Stockholders
The directors and executive officers of the Company
collectively beneficially own approximately 55.2% of the Common Stock and Jeff
A. Norris, the Company's President and Chief Executive Officer,
individually beneficially owns 37.7% of the Common Stock of the Company. As a
result, these persons will be able to exercise control over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company and could have an adverse effect on the market price of the Common
Stock.
Government Regulation and Uncertainties of Future Regulation
The market currently targeted by the Company, the financial services
industry, is subject to extensive and complex federal and state regulation.
The Company's current and prospective customers, which consist of state and
federally chartered banks, savings and loans, credit unions, consumer
finance companies and other consumer lenders, as well as customers in the
insurance industry that the Company may target in the future, operate in
markets that are subject to extensive and complex federal and state banking
and insurance regulation. Because the Company does not make or guarantee loans,
does not receive any interest income or other fees directly from consumers and
does not offer, endorse or guarantee any product or service offered by
its financial institution customers, it is not required to be licensed by the
Office of the Comptroller of the Currency, the Federal Reserve Board of other
federal or state agencies that regulate financial institutions. Nevertheless,
the Company's products and services must be designed to work within the
regulatory environmental in which its customers operates.
While the Company is not itself directly subject to this regulation,
the Company's products and services must be designed to work within the
extensive and evolving regulatory constraints in which its customers operate.
These constraints include federal and state truth-in-lending disclosure
rules, state usury laws, the Equal Credit Opportunity Act, the Electronic
Funds Transfer Act, the Fair Credit Reporting Act, the Community Reinvestment
Act, and restrictions on the establishment, number and location of branch
offices and remote electronic banking facilities such as automated teller
machines. Because many of these regulations were promulgated before the
development of products that enable electronic commerce (such as the ALM), the
application of such regulations to any products and services developed by the
Company must be determined on a case-by-case basis. Affinity has not attempted
to review the laws of each state that might be applicable to the deployment of
ALMs. It is possible that other states may have or will in the future adopt
specific regulations applicable to the deployment and operation of ALMs.
Furthermore, some consumer groups have expressed concern regarding the
privacy and security of ALMs, the use of automated credit scoring tools in
underwriting and whether electronic lending is a desirable technological
development in light of the current level of consumer debt. It is possible that
consumer groups or others could take actions to cause one or more states
eventually to promulgate specific regulations applicable to the deployment
and operation of ALMS. Regulations currently existing or promulgated in the
future that significantly restrict the ability of a financial institution
to install ALMs at multiple locations outside branch offices or otherwise
adversely affect the use of ALMs or any other products or services the Company
may develop could have a material adverse effect on the Company's business,
operating results and financial condition.
Anti-Takeover Provisions
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and by-laws could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. These provisions of Delaware law and
the Company's Certificate of Incorporation and by-laws may also have the
effect of discouraging or preventing certain types of transactions involving
an actual or threatened change of control of the Company (including
unsolicited takeover attempts), even though such a transaction may offer
the Company's stockholders the opportunity to sell their stock at a price
above the prevailing market price. Certain of these provisions allow the
Company to issue Preferred Stock with rights senior to those of the Common
Stock and other rights that could adversely affect the interest of holders of
Common Stock without any further vote or action by the stockholders. The
issuance of Preferred Stock, for example, could decrease the amount of
earnings or assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights,
of the holders of the Common Stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock, as
well as having the anti-takeover effects discussed above.
Item 2. Properties
The Company's principal executive offices are located at 1201 Main
Street in Columbia, South Carolina. Such office space encompasses
approximately 33,000 square feet and is currently under lease which expires
in the year 2001. The Company's primary assembly and quality assurance
facilities are located at 2500 Leaphart Road in West Columbia, South
Carolina, which encompasses approximately 19,000 square feet and is currently
under lease which expires in the year 2001. The Company also sub-leases
approximately 1,000 square feet of sales office space in New York, New York
from Columbia Financial Partners, L.P., an affiliate of Alan H. Fishman, who
is Chairman of the Board and a director of the Company.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Executive Officers of the Registrant
Name Age Position with the Company
Jeff A. Norris 36 President and Chief Executive Officer
and Director
Joseph A. Boyle 43 Senior Vice President and Chief
Financial Officer
John D. Rogers 53 Senior Vice President - Operations
Terrance J. Sabol, Sr. 51 Senior Vice President - Technology
Jeff A. Norris, founder of the Company, has served as the Company's Chief
Executive Officer and as a director since March 1994 and served as Chairman
of the Board from March 1994 to April 1996 and as Treasurer from March 1994 to
February 1996. Mr. Norris held the position of President from March 1994 to
May 1994 and reassumed that position in October 1995. Prior to founding the
Company, Mr. Norris was employed as a salesman by Digital Equipment Corporation
for nine years.
Joseph A. Boyle became Senior Vice President and Chief Financial Officer of
the Company in September 1996. Mr. Boyle is a Certified Public Accountant.
Prior to joining the Company, Mr. Boyle served as Price Waterhouse
LLP engagement partner for all of its Kansas City, Missouri financial services
clients and as a member of the firm's Mortgage Banking Group. Mr. Boyle was
employed by Price Waterhouse LLP from September 1982 to August 1996.
John D. Rogers became Senior Vice President of Sales of Affinity in January
1997. Mr. Rogers has served as President of Affinity Processing Corporation, a
majority owned subsidiary of the Company, since May 1996. Prior to joining the
Company, Mr. Rogers served as Executive Vice President of the Information
Services Group of BISYS Group, Inc., from 1989-1996.
Terrance J. Sabol, Sr., Senior Vice President of Technology, joined Affinity
in October 1995. From July 1990 to October 1995, he served as
Products Manager for Policy Management Systems Corporation, a Columbia, South
Carolina company that provides and supports computer systems for insurance
companies.
Part II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
The Company's common stock is traded on The Nasdaq National
Market under the symbol "AFFI." The following table presents the high and
low sales prices of the Company's common stock for the periods indicated
during 1996, as reported by the Nasdaq National Market. The Company completed
its initial public offering in the second quarter of 1996 at a price of $13.00
per share. As of February 28, 1997, there were 158 stockholders of record
of the common stock.
Sales Price Per Share
High Low
April 25, 1996 to June 30, 1996 $24.25 $7.63
Third Quarter 14.25 6.00
Fourth Quarter 10.75 6.25
The Company has never paid dividends on its capital stock. The Company
intends to retain earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
<PAGE>
Item 6. Selected Financial Data
The following table presents summary financial data for the periods
indicated. The following financial data should be read in conjunction with
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and Notes thereto and other information included elsewhere
in this report.
Period from
inception
Year ended (January 12, 1994)
December 31, to
1996 1995 December 31, 1994
Statements of Operations Data:
Revenues $ 5,081,818 $ 1,524,911 $ -
Costs and expenses:
Cost of revenues 3,088,321 1,101,330 -
Research and development 2,905,232 368,452 264,600
Selling, general and
administrative expenses 10,819,381 2,305,653 428,896
----------------------------------------------------
Total costs and expenses 16,812,934 3,775,435 693,496
-----------------------------------------------------
Operating loss (11,731,116) (2,250,524) (693,496)
Interest income 2,099,004 48,476 -
Interest expense (60,083) (105,981) (12,475)
-----------------------------------------------------
Net loss $(9,692,195) $(2,308,029) $ (705,971)
=====================================================
Net loss per share $ (0.40) $ (0.15) $ (0.08)
=====================================================
Shares used in computing
net loss per share 24,136,480 15,044,286 9,185,078
=====================================================
December 31,
-----------------------------------------------------
1996 1995 1994
Balance Sheet Data
Cash and cash equivalent $31,563,950 $ 1,235,983 $ 29,985
Working capital (deficit) 43,672,679 (1,134,465) (431,547)
Net investment in sales-type leases,
less current portion 2,386,010 860,295 -
Total assets 56,098,857 4,591,168 338,172
Notes payable,
less current portion - 222,399 200,000
Capital lease obligations to related party,
less current portion 66,245 148,119 199,508
Capital stock of subsidiary held by
minority investor 200,000 137,500 -
Stockholders' equity (deficit) 52,134,639 617,412 (679,463)
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company was formed to develop and market technologies that enable
financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. For the period
from inception (January 12, 1994) through December 31, 1994, the Company was a
development stage company, and its activities principally related to developing
its Decisys/RTSM technology (formerly known as the "DSS System") and the
Affinity Automated Loan Machine ("ALM"), raising capital and recruiting
personnel. The Company did not earn any revenues during this period, and the
Company does not believe that its operating results during this period can be
used to provide meaningful comparisons with its results of operations in
subsequent periods.
The Company's current products and services consist of the
ALM and a call center decisioning system which
provide financial institutions the ability to originate financial products
and services with little or no human intervention. Integral to the
capabilities the Company provides to its customers is access to its
proprietary Decisys/RT. To date, the principal financial product utilized by
customers through the Company's systems has been the ability to originate
unsecured consumer loans. The Company's systems also have the ability to
originate loans secured by cash collateral, renew existing loans, open demand
deposit accounts, cross sell other products and services and make counter
offers to applicants who qualify for a larger loan or who are initially
unable to qualify for the type of loan requested. All products have the
ability to be communicated to the applicant in English and Spanish.
Financial product origination capabilities currently under development include
pre-approved personal loans, automobile loans, personal lines of credit,
credit card accounts and first and second mortgage loans through the ALM. The
Company has continued to develop additional financial product origination
capabilities and to improve and enhance the technological capabilities of
the ALM, the call center decisioning system and the Decisys/RT system.
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 December 31, 1996 of $12,706,195, with operating
losses of $9,692,195, $2,308,029 and $705,971 for the years ended December
31, 1996 and 1995 and for the period from inception (January 12, 1994) to
December 31, 1994, 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 ever be able to achieve profitability or,
if achieved, sustain such profitability.
The market for the Company's products and services is new, evolving
and uncertain and it is difficult to determine the size and predict the future
growth rate, if any, of this market. In addition, the market for products
and services that enable electronic commerce is highly competitive and is
subject to rapid innovation and competition from traditional products and
services having all or some of the same features as products and services
enabling electronic commerce. Competitors in this market have frequently
taken different strategic approaches and have launched substantially
different products or services in order to exploit the same perceived market
opportunity. Until the market has validated a strategy through widespread
acceptance of a product or service, it is difficult to identify all
current or potential market participants or gauge their relative competitive
position.
Revenue and Expense Recognition
To date, the Company has derived substantially all of its recurring
revenues from ALM lease, set-up and transaction processing fees. The Company's
ALM pricing structure is designed to recapture a portion of the Company's costs
through set-up and lease fees and to generate over the long term a
greater portion of revenues through recurring transaction fees. The
Company's ALM lease pricing generally is tiered based on the number of ALMs
ordered and operated by each customer. However, the terms of each contract
reflect negotiations between the Company and the customer. Depending on
whether certain criteria are met, ALM leases may be reported as sales-type
leases or operating leases.
Pursuant to the Company's standard ALM Automated Loan System
Agreement (the "ALS Agreement"), (i) the Company (a) grants to the customer a
non-exclusive right to use the software supporting the ALM and (b) agrees to
provide technical assistance to the customer during the term of such
agreement and (ii) the customer agrees to pay an initial set-up fee as well
as fees for each loan transaction consummated based on a percentage of the
principal amount of the loan. At the time an order is placed by a customer,
the Company typically collects a non-refundable set-up fee, which is
initially recorded as deferred revenue. Generally, upon installation of an
ALM, the Company recognizes as revenue a portion of the set-up fee in an amount
approximately equal to the cost of set-up and installation of such ALM, with
the remainder of such set-up fee amortized ratably over the term of the ALS
Agreement. Additionally, under the ALS Agreement, the Company collects other
miscellaneous processing fees that are designed to help the Company recapture
a portion of its processing costs. The Company recognizes transaction fees
as revenue when earned under the terms of the ALS Agreement.
The Company generally leases the ALM hardware to its customers under
a standard rental agreement that typically is non-cancelable and has a term
of 48 months, although certain of the Company's current agreements allow
customers to terminate such agreements prior to the end of their term in
certain circumstances. In accordance with Statement of Financial Accounting
Standards No. 13 ("SFAS 13"), "Accounting for Leases," the Company treats
certain leases as sales-type leases, and other leases are treated as
operating leases. For its sales-type leases, under SFAS 13, the Company
recognizes as revenue, generally upon ALM installation, the present value of
the aggregate future minimum lease payments to be received during the
term of the related rental agreement using the Company's estimated incremental
borrowing rate for lease-secured transactions as the discount rate. The
difference between the aggregate future minimum lease payments and the
present value of such lease payments is capitalized as unearned interest
income and amortized into revenue over the term of the rental
agreement. For operating leases, the Company recognizes lease payments as
revenue ratably over the term of the applicable agreement. Significant
fluctuations in quarterly revenue and operating results may result depending
on whether leases consummated during a period are sales-type or operating
leases.
Prior to May 31, 1995, the Company generally used an agreement
that provided for (i) an initial fee, substantially all of which is credited
against future licensing fees at a predetermined rate over the term of the
agreement, and (ii) monthly or quarterly licensing fees equal to the
greater of a minimum amount and a fee calculated based upon the principal
amount of loans funded. Such agreements have terms of 12, 24 or 48 months.
The Company has recorded the prepaid portion of the initial fee as deferred
revenue, which is amortized over the term of the particular agreement. The
Company treats such agreements as operating leases. Accordingly, monthly and
quarterly fees under such agreements are recognized as revenue over the term
of the applicable agreements. The Company depreciates the cost of ALMs
leased under such agreements over five years using the straight-line
method. At December 31, 1996, there were 59 ALMs in service under such
agreements. The Company believes that revenues attributable to ALMs leased
under such agreements in 1996 are substantially less than revenues
attributable to ALMs leased under agreements that are treated as sales-type
leases primarily due to the fact that agreements in use prior to May 31, 1995
provide that set-up fees will be applied to future ALM fees and do not
provide for separate periodic rental payments. The Company does not plan
to use this form of agreement in the future.
The Company accounts for research and development costs as operating
costs and expenses such costs in the time period incurred. In accordance
with Statement of Financial Accounting Standards No. 86 ("SFAS 86"),
"Computer Software to be Sold, Leased or Otherwise Marketed," the Company
capitalizes software costs incurred in the development of a software
application after the technological feasibility of the application has been
established. Technological feasibility is established when an application
design and a working model of the application have been completed and the
completeness of the working model and its consistency with the
application design have been confirmed by testing. From the time technological
feasibility is established until the time the relevant application is available
for general release to customers, software development costs incurred are
capitalized at the lower of cost or net realizable value. Thereafter,
costs related to the application are again expensed as incurred.
Capitalized software development costs are amortized using the greater of
the revenue curve or straight-line method over the estimated economic
life of the application. Software costs capitalized include direct labor,
other costs directly associated with the development of the related
application and an allocation of indirect costs, primarily facility costs and
other costs associated with the Company's software development staff. The
Company bases such allocation on the percentage of the Company's total labor
costs represented by the software development staff labor costs.
Results of Operations
Revenues
The Company's revenues were $5,081,818 and $1,524,911 for the
years ended December 31, 1996 and 1995, respectively. The Company did not earn
any revenues from operations during the period from inception (January 12,
1994) through December 31, 1994.
Sales and rental fees of $2,552,158, non-recurring license revenue
of $1,800,000 and set-up and transaction fees of $729,660 accounted for
approximately 50.2%, 35.4% and 14.4%, respectively, of the Company's revenues
for 1996, whereas sales and rental fees of $1,275,101 and set-up and
transaction fees of $198,607 accounted for approximately 83.6% and 13.0%,
respectively, of the Company's revenues for 1995. During 1996, the Company
consummated sales-type leases for 74 ALMs compared to 30 ALM sales-type leases
in 1995. At December 31, 1996 and 1995 there were a total of 164 and 51 ALMs,
respectively, under both sales-type and operating leases.
The Company has experienced disappointing revenue growth, and
continues to experience an extremely lengthy sales cycle for the ALM. Average
consumer use of ALMs in service and average approval rates for loan
applications have been lower than customers' expectations, although
certain customers have deployed their ALMs in a manner that has resulted
in acceptable loan approval rates. The Company believes the
lower-than-expected loan approval rates are primarily attributable to ALM
locations and the use by many of its customers of overly conservative loan
scoring models. Further, the Company has experienced delays in the
development of certain financial product origination capabilities,
and the Company believes that many of its current and potential customers
have been reluctant to deploy ALMs that do not offer a broad range of
financial product origination capabilities. The Company believes that its
future financial performance will depend on, among other factors, a significant
improvement in consumer acceptance and use of the ALM, a significant
improvement in loan approval rates and timely development and introduction
of additional financial product origination capabilities.
Total ALM sales for 1996 were to 11 customers of which 7 customers
represented new relationships. During 1996, Union Planters Corporation
("Union Planters") and Banc One Corporation accounted for 37% and 21%,
respectively, of total revenue. The Company does not believe the loss of any
one of these customers would have a material adverse effect on the Company's
financial condition or results of operations due to the developing
nature of the Company's customer base and revenue streams. However, the
Company expects that a substantial portion of the Company's operating
revenues in the future may continue to be attributable to relatively few
customers. Such customer concentration may cause significant fluctuations in
the Company's quarterly and annual revenues due to the uncertainty of the timing
of new and additional orders for ALMs.
Non-recurring license fees of $1.8 million during 1996 reflect
one-time license fees paid by Union Planters to Affinity Processing Corporation
("APC"), a majority owned subsidiary of the Company, for a perpetual, royalty-
free license to use the Company's call center decisioning system (formerly
known as "Assets3") in North America. Pursuant to a joint venture arrangement
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.
The Company recently has entered into agreements with certain hardware
vendors under which the vendors will market and sell kiosks that will utilize
the Company's Decisys/RT technology in a manner comparable to the Company's
ALMs. As a result of the agreements, the Company contemplates
that it may restructure its pricing policies such that there will be no
material benefit or detriment to customers with respect to whether such
customers acquire the Company's ALM or vendors' kiosks. Additionally, it is
the Company's intent to utilize pricing policies with respect to software
licenses and other services provided by the Company and utilized by the vendors'
customers to produce profit margins for products leased or sold through such
vendors comparable to the profit margins realized
through the sale or rental of the Company's ALM.
Costs and Expenses
Cost of Revenues. Cost of revenues for the years ended December 31,
1996 and 1995 were $3,088,321 and $1,101,330, respectively. Cost of revenues
primarily reflects (i) set-up costs including the cost of preparing ALMs for
installation, (ii) the cost of ALM components and (iii) salaries and
overhead allocated to cost of revenues. Approximately $1,353,334 or 43.8% of
the Company's cost of revenues for 1996 was attributable to the cost of
materials used in the assembly of ALMs, compared to $698,604 or 63.4% during
1995. The cost of ALM hardware sold under capital leases, depreciation expense
for hardware leased to customers under operating leases and other direct and
indirect costs associated with sales and rental revenues totaled $2,426,476
and $891,040 for the years ended December 31, 1996 and 1995, respectively.
Labor and other direct and indirect costs associated with initial set-up,
transactions and other revenue totaled $517,911 and $210,290 for the years
ended December 31, 1996 and 1995, respectively. Direct and indirect costs
associated with license revenue consisted primarily of allocated salaries and
overhead and totaled $143,934 in 1996.
The cost of designing, assembling and installing individual ALMs
fluctuated significantly during 1995. Prior to September 1995, the Company
incurred significant costs in customizing ALM designs for customers. Since
that time, the Company has standardized the base operating system and redesigned
the cabinet structure, graphics and component installation to reduce the
cost, assembly time and ALM size. Further, during 1996 the Company
outsourced certain aspects of ALM cabinet construction, hardware assembly and
delivery to reduce costs.
Research and Development.
Research and development expenses for the year ended December 31,
1996 were $2,905,232, compared to $368,452 and $264,600 for the year ended
December 31, 1995 and the period ended December 31, 1994, respectively. The
increase in research and development expenses is primarily attributable to
the Company's enhancement of its Decisys/RT technology and its financial
product origination capabilities. During 1996, the Company capitalized
$214,820 of software development costs related primarily to the development of
certain loan applications. During 1995, the Company capitalized $216,587 of
software development costs related to the ALM. The Company did not capitalize
any software development costs during 1994. Capitalized software
development costs are being amortized over 48 months. 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 ("SG&A") expenses for the year
ended December 31, 1996 were $10,819,381, compared to $2,305,653 and
$428,896 for the year ended December 31, 1995 and the period ended December
31, 1994, respectively. SG&A expenses during 1996 consisted primarily of
personnel costs of $5,375,856 not included in cost of sales; professional
fees of $2,290,017 consisting primarily of legal, accounting, recruiting
and relocation fees; advertising and marketing costs of $1,661,508; deferred
compensation expense amortization of $1,028,489; and travel costs of $791,693.
SG&A expenses during 1995 consisted primarily of personnel costs of $585,421
not included in cost of sales; professional fees of $372,076 consisting
principally of legal fees associated with capital financings, the Company's
patent applications and general corporate matters; deferred compensation
expense amortization of $524,248; and travel costs of $114,823. SG&A expenses
during 1994 consisted primarily of personnel costs of $179,242, professional
fees of $59,357 and travel costs of $23,653.
Interest Income
Interest income of $2,099,004 during 1996 primarily reflects interest
income attributable to the short term investment of the proceeds from the
Company's initial public offering in May 1996. Interest income also reflects
the amortization of deferred interest income attributable to ALM sales-type
leases. Interest income of $48,476 for the year ended December 31, 1995
reflects the amortization of deferred interest income attributable to ALM sales-
type leases. The Company recognized no interest income during the period ended
December 31, 1994.
Interest Expense
Interest expense for the year ended December 31, 1996 was $60,081,
compared to $105,981 and $12,475 for the year ended December 31, 1995 and the
period ended December 31, 1994, respectively. The decrease of $45,900 in 1996
is due primarily to the re-payment of outstanding debt with the use of
proceeds from the Company's initial public offering.
Income Taxes
The Company has recorded a valuation allowance for the full amount of
its deferred income tax assets as of December 31, 1996 and 1995, based on
management's evaluation of the recognition criteria as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
Liquidity and Capital Resources
The Company has generated operating losses of $12,706,195 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 proceeds from the Company's initial public
offering were $60,091,805. Net cash used in 1996 to fund operations was
$12,726,521. During 1996, net proceeds from the offering and other sources
of cash were used to fund current year operations, to repay $1,775,416 in
notes payable and to fund capital expenditures of $5,558,806. At December
31, 1996, cash and cash equivalents were $42,147,947 and working capital was
$43,672,679.
The Company has entered into a revolving line of credit with a lender
providing for a maximum borrowing amount of up to $2,000,000 (the "Line of
Credit") which expires in May 1997. The Company had no outstanding
borrowings under the Line of Credit as of December 31, 1996.
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 1997. During 1997, 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.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements are
set forth below:
Report of Independent Auditors
Board of Directors and Stockholders
Affinity Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of Affinity
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995 and for the period
from inception (January 12, 1994) to December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Affinity
Technology Group, Inc. and subsidiaries at December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows
for the years ended December 31, 1996 and 1995 and for the period from
inception (January 12, 1994) to December 31, 1994 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Greenville, South Carolina
February 12, 1997
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1996 1995
--------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 31,563,950 $ 1,235,983
Investments 10,583,997 -
Accounts receivable, less
allowance for doubtful accounts of
$198,987 and $3,667 at December 31,
1996 and 1995, respectively 812,443 143,295
Net investment in sales-type
leases - current:
Third parties 620,270 182,284
Related party 245,110 115,292
Inventories 2,804,978 366,610
Other current assets 336,439 29,534
--------------------------------------------------
Total current assets 46,967,187 2,072,998
Net investment in sales-
type leases - non-current:
Third parties 2,159,832 525,227
Related party 226,178 335,068
Property and equipment, net 6,073,303 1,446,675
Software development costs,
less accumulated amortization of
$67,686 and $13,539 at December
31, 1996 and 1995, respectively 363,721 203,048
Other assets 308,636 8,152
--------------------------------------------------
Total assets $ 56,098,857 $ 4,591,168
==================================================
See accompanying notes.
<PAGE>
December 31,
1996 1995
--------------------------------------------------
Liabilities and
stockholders' equity
Current liabilities:
Current portion of notes
payable to related parties $ - $ 103,017
Current portion of capital
lease obligations to related
party 69,987 144,402
Accounts payable 1,442,662 686,656
Accrued expenses 802,534 284,132
Accrued compensation and
related benefits 455,405 222,074
Deferred license revenue - 1,237,500
Current portion of deferred
revenue - related party 81,259 -
Current portion of deferred
revenue - third parties 442,661 529,682
--------------------------------------------------
Total current liabilities 3,294,508 3,207,463
Notes payable to related
parties, less current portion - 222,399
Capital lease obligations to
related party, less current portion 66,245 148,119
Deferred revenue - related party 39,805 -
Deferred revenue - third parties 363,660 258,275
Capital stock of subsidiary held
by minority investor 200,000 137,500
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock - Series A,
no par value; authorized none in
1996 and 23,810 shares in 1995;
issued and outstanding none in 1996
and 23,810 shares in 1995 - 250,000
Preferred stock - Series B, no
par value; authorized none in
1996 and 42,000 shares in 1995;
issued and outstanding none
in 1996 and 29,265 shares in 1995 - 2,732,356
Common stock, par value $0.0001;
authorized 60,000,000 shares,
issued and outstanding 27,879,680
shares in 1996 and
16,695,318 shares in 1995 2,788 1,670
Additional paid-in capital 68,777,090 4,237,960
Deferred compensation (3,939,044) (3,590,574)
Accumulated deficit (12,706,195) (3,014,000)
--------------------------------------------------
Total stockholders' equity 52,134,639 617,412
--------------------------------------------------
Total liabilities and stockholders'
equity $ 56,098,857 $ 4,591,168
=================================================
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
<TABLE>
Consolidated Statements of Operations
<CAPTION>
Period from
inception
(January 12,
Year ended 1994) to
December 31, December 31
1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Initial set-up, transactions and other $ 729,660 $ 249,810 $ -
Sales and rental (including $286,413 and $400,591 from related
party for 1996 and 1995, respectively) 2,552,158 1,275,101 -
License revenue 1,800,000 - -
--------------------------------------------------------
5,081,818 1,524,911 -
Costs and expenses:
Cost of revenues 3,088,321 1,101,330 -
Research and development 2,905,232 368,452 264,600
Selling, general and administrative expenses 10,819,381 2,305,653 428,896
--------------------------------------------------------
Total costs and expenses 16,812,934 3,775,435 693,496
--------------------------------------------------------
Operating loss (11,731,116) (2,250,524) (693,496)
Interest income 2,099,004 48,476 -
Interest expense - third parties - (23,325) (2,810)
Interest expense - related parties (60,083) (82,656) (9,665)
--------------------------------------------------------
Net loss (9,692,195) (2,308,029) (705,971)
========================================================
Net loss per share $(0.40) $(0.15) $(0.08)
========================================================
Shares used in computing net loss per share 24,136,480 15,044,286 9,185,078
========================================================
</TABLE>
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
<TABLE>
Consolidated Statements of Stockholders' Equity
<CAPTION>
Preferred Preferred Additional Total
Stock, Stock, Common Paid-in Deferred Accumulated Stockholders'
Series A Series B Stock Capital Compensation Deficit Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception (January
12, 1994) $ - $ - $ - $ - $ - $ - $ -
Issuance of common stock - - 1,508 - - - 1,508
Issuance of warrants - - - 25,000 - - 25,000
Net loss - - - - - (705,971) (705,971)
---------------------------------------------------------------------------------------------
Balance at December 31, 1994 - - 1,508 25,000 - (705,971) (679,463)
Issuance of preferred stock, 250,000 - - - - - 250,000
Series A
Issuance of preferred stock, - 2,732,356 - - - - 2,732,356
Series B
Issuance of common stock - - 162 98,138 - - 98,300
Deferred compensation related
to grant of stock options - - - 4,114,822 (4,114,822) - -
Amortization of deferred - - - - 524,248 - 524,248
compensation
Net loss - - - - - (2,308,029) (2,308,029)
---------------------------------------------------------------------------------------------
Balance at December 31, 1995 250,000 2,732,356 1,670 4,237,960 (3,590,574) (3,014,000) 617,412
Exercise of warrants - 45,417 - - - - 45,417
Conversion of preferred stock (250,000) (2,777,773) 602 3,027,171 -
Initial public offering 506 60,088,010 - - 60,088,516
proceeds
Exercise of stock options - - 10 46,990 - - 47,000
Deferred compensation related
to grant of stock options - - - 1,376,959 (1,376,959) - -
Amortization of deferred - - - - 1,028,489 - 1,028,489
compensation
Net loss - - - - - (9,692,195) (9,692,195)
---------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - $ - $ 2,788 $68,777,090 $(3,939,044) $(12,706,195)$52,134,639
=============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Period from
Years ended inception
(January 12, 1994) to
December 31, December 31, December 31, 1994
1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (9,692,195) $ (2,308,029) $ (705,971)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 902,846 145,248 2,609
Amortization of deferred compensation 1,028,489 524,248 -
Provision for doubtful accounts 170,000 3,667 -
Write-off of patent acquisition costs - 22,931 -
Inventory valuation allowance 20,000 46,000 -
Deferred revenue (1,098,072) 754,227 33,730
Deferred license revenue - 1,237,500 -
Other 59,243 - 25,000
Changes in current assets and liabilities:
Accounts receivable (746,079) (146,962) -
Net investment in sales-type leases (2,093,519) (1,157,871) -
Inventories (2,420,946) (257,317) -
Other current assets (300,428) (28,232) (1,302)
Accounts payable 702,449 486,309 200,347
Accrued expenses 508,361 281,313 12,475
Accrued compensation and related benefits 233,331 187,478 34,596
-----------------------------------------------------------------
Net cash used in operating activities (12,726,520) (209,490) (398,516)
Investing activities
Purchases of property and equipment (5,558,806) (1,350,702) (26,092)
Software development costs (214,820) (216,587) -
Purchases of short-term investments (10,583,997) - -
Other (349,618) (5,954) (25,690)
-----------------------------------------------------------------
Net cash used in investing activities (16,707,241) (1,573,243) (51,782)
Financing activities
Proceeds from notes payable to related parties 450,000 769,269 441,574
Proceeds from notes payable to third parties 1,000,000 250,000 50,536
Principal payments on capital leases (156,289) (53,075) (13,335)
Payments on notes payable to related parties (775,416) (170,427) -
Payments on notes payable to third parties (1,000,000) (300,536) -
Proceeds from sale of capital stock of subsidiary to
minority interest 62,500 137,500 -
Exercise of warrants 45,417 - -
Exercise of options 47,000 - -
Proceeds from issuance of common stock 60,088,516 1,000 1,508
Proceeds from issuance of preferred stock - 2,355,000 -
-----------------------------------------------------------------
Net cash provided by financing activities 59,761,728 2,988,731 480,283
-----------------------------------------------------------------
Net increase in cash 30,327,967 1,205,998 29,985
Cash and cash equivalents at beginning of period 1,235,983 29,985 -
-----------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,563,950 $ 1,235,983 $ 29,985
=================================================================
</TABLE>
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. The Company
Affinity Technology Group, Inc. (the "Company") was incorporated on January 12,
1994. On May 1, 1996, the Company completed a public offering of 4,400,000
shares of $0.0001 par value Common Stock (the "Initial Public Offering"). The
Initial Public Offering price was $13 per Common Share resulting in gross
offering proceeds of $57,200,000. Proceeds to the Company, net of underwriters'
discount and total offering expenses were $52,109,116.
The following transactions occurred simultaneously with the offering:
The underwriters exercised their over-allotment option to purchase an
additional 660,000 shares of Common Stock at $13 per share, resulting in
additional net proceeds to the Company of $7,979,400.
The preferred stock of the Company, consisting of 23,810 shares of
Series A Preferred Stock and 32,967 shares Series B Preferred Stock
(including 3,702 shares of Series B Preferred Stock issued upon the
exercise of outstanding warrants) was automatically converted into an
aggregate of 6,018,362 shares of Common Stock.
The Company and its subsidiaries develop and market an electronic commerce
technology that enables consumers to conveniently access financial services
through a variety of platforms. Since its formation in January 1994, the
Company has concentrated its product development efforts primarily on a
"closed loop" electronic commerce system that enables financial institutions
to automate the processing and consummation of consumer loans at the point of
sale. This technology is designed to enable financial institutions to open
new distribution channels for their products and services, thereby increasing
assets and revenues and broadening customer relationships, while reducing
operating and infrastructure costs.
The primary platform currently offered by the Company is the ALM, which
permits a consumer to apply for and, if determined to be a suitable credit risk,
receive a loan without human intervention in as little as 10 minutes. Similar
in appearance to an automated teller machine, the ALM is a fully automated
system that utilizes the Company's proprietary Decisys/RT (formerly the
Decision Support System) technology to process consumer loans, generate the
underlying loan documentation and distribute loan proceeds. In addition, the
ALM can be programmed to process other financial transactions. In January
1995, the Company exited the development stage with the delivery of its
first operational ALMs to paying customers. The Company's customers consist
primarily of regional and super-regional financial institutions.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Affinity
Technology Group, Inc. and its subsidiaries, Affinity Bank Technology
Corporation, Affinity Clearinghouse Corporation, Affinity Credit
Corporation, Affinity Processing Corporation ("APC"), Affinity Consulting
Services, Inc. and Affinity Mortgage Technology, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority Investor
An unrelated third party holds 131,510 shares of APC common stock, which was
acquired for aggregate consideration of $125,000, and 90,988 shares of APC
convertible preferred stock, which was acquired for aggregate consideration
of $75,000 ("capital stock of subsidiary held by minority investor" as
captioned in the Company's financial statements). These holdings represent
a 24.9% minority interest in APC. The preferred stock is convertible on a
one-for-one basis into shares of APC common stock.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company markets its ALM product to financial institutions throughout the
United States. The Company performs ongoing credit evaluations of customers and
retains a security interest in leased equipment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Investments
The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, the Company classifies its investments
as held to maturity and such investments are reported at amortized cost at
December 31, 1996, which approximates fair value. These investments consist
of corporate bonds and certificates of deposit with maturities of one year
or less.
Inventories
Inventories at December 31, 1996 and 1995 are stated at the lower of cost or
market. Cost is determined using the first-in, first-out ("FIFO") cost flow
assumption.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of
the assets. Estimated useful lives range from five to ten years for office
furniture and fixtures and three to five years for all other depreciable
assets. Depreciation expense (including amortization of equipment leased
under capital leases) amounted to $848,699, $109,918 and $2,609 during 1996
and 1995 and during the period from inception (January 12, 1994) to December 31,
1994, respectively.
Software Development Costs
Costs incurred in the development of software, which is incorporated as part
of the Company's products or sold separately, are capitalized after a product's
technological feasibility has been established. Capitalization of such costs
is discontinued when a product is available for general release to customers.
Software development costs are capitalized at the lower of cost or net
realizable value and amortized using the greater of the revenue curve method or
the straight-line method over the estimated economic life of the related
product. Amortization begins when a product is ready for general release to
customers.
Amortization of capitalized software development costs began in 1995 and
totaled $54,147 and $13,539 during 1996 and 1995, respectively.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Initial set-up and transaction fees - The Company leases ALMs to customers
utilizing both sales-type and operating lease arrangements and
concurrently enters into a service and processing agreement (the "ALS
Agreement") with the customer. Pursuant to the ALS Agreement, the customer
pays an initial set-up fee which is initially recognized as deferred revenue.
Generally upon installation of an ALM, the Company recognizes as revenue
the portion of the initial set-up fee attributable to the related costs of
set-up and installation. The remainder of the initial fee is deferred and
amortized ratably over the term of the ALS Agreement. Additionally, the
Company earns transaction fees. Transaction fee revenue is recognized as
the related transactions are processed. Transaction processing fees and
other revenues represented approximately 4% of total revenue during 1996 and
1995.
Sales and rental - Revenue and costs related to leases of ALM equipment
are recognized in accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" (see Note 3). Revenue from sales-type
leases is generally recognized when the equipment is installed and accepted
by the customer. Operating lease revenue is recognized ratably over the lease
term.
Software licensing - The Company recognizes revenue from sales of software
licenses upon delivery of the software product to a customer, unless the
Company has significant related obligations remaining, such as installation
services. When significant obligations remain after the software product
has been delivered, revenue is not recognized until such obligations have
been completed or are no longer significant. The costs of any remaining
insignificant obligations are accrued when the related revenue is recognized.
Deferred revenues - Deferred revenue relates to unearned revenue on ALM
leases. Deferred license revenue at December 31, 1995 related to a non-
exclusive, perpetual, royalty-free license, to be granted to a financial
institution, to use one of the Company's software products, Assets3.
(The financial institution is the unaffiliated third party who holds the
minority interest in Affinity Processing Corporation - see "Minority
Investor" above.) 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 was deferred at December 31, 1995
pending delivery of the product. The Company delivered the product to the
financial institution in 1996, and accordingly recognized the deferred
revenue in income. 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 June 1996 and recorded the additional license fee as
revenue upon delivery and acceptance by the financial institution.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Cost of Revenues
Cost of revenues is comprised of costs associated with initial set-up and
transaction fees and sales and rental revenues. Costs associated with initial
set-up fees include labor, other direct costs and an allocation of related
indirect costs. Labor and other direct costs associated with initial set-up
fees totaled $426,848 and $122,404 for the years ended December 31, 1996 and
1995, respectively. Costs associated with sales and rental revenues include
the cost of the leased ALM hardware, other direct costs and an allocation of
related indirect costs. Costs of ALM hardware sold under sales-type leases,
depreciation expense for hardware leased to customers under operating leases
and other direct costs associated with sales and rental revenues totaled
$2,426,476 and $746,820 for the years ended December 31, 1996 and 1995,
respectively.
Income Taxes
Deferred income taxes are calculated using the liability method prescribed by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
Stock Based Compensation
The Company accounts for stock options in accordance with APB Opinion No.25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the Company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the Company
records compensation expense related to these options over the performance
period.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
provides an alternative to APB 25 in accounting for stock based compensation
issued to employees. SFAS 123 provides for a fair value based method of
accounting for employee stock options and similar equity instruments. However,
for companies that continue to account for stock based compensation
arrangements under APB 25, SFAS 123 requires disclosure of the pro forma
effect on net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied. The disclosure requirements are
effective for fiscal years beginning after December 31, 1995, or upon
initial adoption of the statement, if earlier. The Company plans to continue
to account for stock based compensation arrangements under APB No. 25 and
has adopted the pro forma disclosure requirements of SFAS 123.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Advertising Expense
The cost of advertising is expensed as incurred. Advertising and marketing
expense was approximately $1,662,000, $154,000 and $35,000 during 1996 and
1995 and the period from inception (January 12, 1994) to December 31, 1994,
respectively.
3. Sales-Type and Operating Leases
The following lists the components of the net investment in sales-type leases at
December 31:
1996 1995
Total minimum lease payments
receivable $ 3,271,650 $ 1,432,130
Residual values 360,000 -
3,631,650 1,432,130
Less unearned interest income (380,260) (274,259)
Net investment in sales-type leases 3,251,390 1,157,871
Net investment is classified as:
Current 865,380 297,576
Non-current 2,386,010 860,295
$ 3,251,390 $1,157,871
Future minimum lease payments to be received on sales-type and operating
leases at December 31, 1996 are as follows:
Sales Type Operating
1997 $ 1,258,800 $ 358,800
1998 1,376,653 358,800
1999 505,765 285,000
2000 130,432 32,000
$ 3,271,650 $ 1,034,600
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Inventories
Inventories consist of the following:
December 31
1996 1995
---------------- -----------------
Electronic parts and other components $1,166,277 $182,680
Work in process 213,646 229,930
Finished goods 1,445,055 -
---------------- -----------------
2,824,978 412,610
Reserve for obsolescence (20,000) (46,000)
---------------- -----------------
$2,804,978 $366,610
================ =================
5. Property and Equipment
Property and equipment consists of the following:
December 31
1996 1995
---------------- -----------------
ALM equipment leased to
others under operating leases $ 1,473,569 $ 604,704
Data processing equipment 2,219,525 395,638
Demonstration equipment 433,727 136,535
Office furniture and fixtures 1,347,182 358,040
Automobiles 72,003 41,670
Purchased software 1,469,605 22,615
---------------- -----------------
7,015,611 1,559,202
Less accumulated
depreciation and amortization (942,308) (112,527)
---------------- -----------------
$ 6,073,303 $ 1,446,675
================ =================
Accumulated depreciation of ALM equipment leased to others was $328,433
and $48,216 at December 31, 1996 and 1995, respectively.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Notes Payable to Related Parties
Notes payable to related parties consist of the following:
December 31
1996 1995
---------------- -----------------
Note payable to bank (a stockholder),
due December 2, 1999, interest at prime
plus 2% annually, interest payable
monthly April 1996 through December 1996,
principal plus interest payable thereafter $ - $ 289,269
Note payable to bank (a stockholder), due
March 7, 1997, interest at 11%, payable in
monthly installments of $1,864 commencing
in February 1996 - 26,147
Notes payable to stockholders, interest
at 2% annually, payable on demand - 10,000
---------------- -----------------
- 325,416
Less current maturities - (103,017)
---------------- -----------------
$ - $ 222,399
================ =================
Upon completion of the Initial Public Offering in May, 1996, the Company paid
off all of its outstanding notes payable.
The Company paid interest totaling $85,287 and $67,377 during 1996 and 1995,
respectively. The Company paid no interest during the period from inception
(January 12, 1994) to December 31, 1994.
7. Revolving Line of Credit
In February 1996, the Company entered into an agreement with a lender for
a revolving line of credit with a maximum borrowing amount of up to $2,000,000
(the "Line of Credit"). The Line of Credit originally bore interest at a 90-
day LIBOR rate plus 250 basis points and was secured by a first priority
security interest on the Company's tangible and intangible personal
property. The Line of Credit was also initially unconditionally guaranteed
by the principal stockholder of the Company (the "Guarantor"). Upon
completion of the Company's Initial Public Offering in May 1996, the interest
rate was reduced to a 90-day LIBOR rate plus 200 basis points, the Guarantor
was released from the personal guaranty and the lender released its lien
on the Company's property. The Line of Credit requires, among other things,
that the Company maintain certain amounts of net worth which increase over
the term of the Line of Credit and certain ratios with regard to total
indebtedness to tangible net worth. The Line of Credit expires in May 1997.
There were no outstanding borrowings under the Line of Credit at December 31,
1996.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity
Convertible Preferred Stock
The preferred stock of the Company, consisting of 23,810 shares of Series A
Preferred Stock and 32,967 shares of Series B Preferred Stock (including
3,702 shares of Series B Preferred Stock issued upon the exercise of
outstanding warrants) automatically were converted into an aggregate of
6,018,362 shares of common stock on May 1, 1996. Upon conversion, all accrued
and unpaid dividends were forfeited.
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
has the authority, without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversions rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be
greater than the rights of the Common Stock. At December 31, 1996 there are no
shares of Preferred Stock issued or outstanding.
Stock Split
During April 1996, the Company's Board of Directors approved a 106-for-1
common stock split and an increase in the common stock par value to $.0001
effective immediately upon completion of the Initial Public Offering. All
common share, option and warrant data have been restated to reflect the split.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Stock Option Plans
During 1995, the Company adopted the 1995 Option Plan under which incentive
stock options and nonqualified stock options may be granted to employees,
directors, consultants or independent contractors. This plan closed during
April 1996.
In April 1996, the Company adopted the 1996 Stock Option and Incentive
Plan. Under the terms of both plans, incentive options may be issued at an
exercise price not less than the estimated fair market value on the date of
grant. Generally, options granted vest ratably over a 60 month term. However,
options granted in 1995 to certain officers vest over a shorter period. At
December 31, 1996, approximately 5,000 and 441,000 options are
exercisable under the 1996 and 1995 Option Plans, respectively.
A summary of activity under the 1996 and 1995 Option Plans is as follows:
Shares Options Outstanding
----------------------------------
Available Number Price
for Grant of Shares Per Share
----------------- ---------------- -----------------
----------------- ---------------- -----------------
1995 Stock Option Plan
Shares reserved 2,173,000 - -
Options granted (1,645,120) 1,645,120 $.44
Options canceled/forfeited 5,300 (5,300) -
----------------- ---------------- -----------------
Balance at December 31, 1995 533,180 1,639,820 $.44
Options granted (178,080) 178,080 $.44
Options canceled/forfeited 78,758 (78,758) $.44
Options exercised - (106,000) $.44
Plan closed (433,858) - -
================= ================ =================
Balance at December 31, 1996 - 1,633,142 $.44
================= ================ =================
1996 Stock Option Plan
Shares reserved 1,900,000 - -
Options granted (97,500) 97,500 $11.88
================= ================ =================
Balance at December 31, 1996 1,802,500 97,500 $11.88
================= ================ =================
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholder's Equity (continued)
The Company has recorded in 1996 and 1995 deferred compensation expense
totaling $5,491,781 for the difference between the grant price and the deemed
fair value of certain of the Company's common stock options granted under
the 1995 Plan. The amount is being amortized over the vesting period of the
individual options. The vesting periods for options granted to one of the
Company's officers are: (a) 90 days from hire date for a portion of the options
and (b) a 48 month period following such 90 day period for the remainder of
the options. The vesting period for other options is generally 60 months.
Amortization of deferred compensation in 1996 and 1995 totaled $1,028,489 and
$524,248, respectively.
During 1994 and June, 1995, in connection with the execution of employment
agreements with two executive officers and a consulting agreement with one of
the Company's directors, the Company sold 4,155,200 shares of restricted
common stock to the officers and directors for nominal consideration. Under
the terms of the agreements, up to 764,048 of the shares are subject to
repurchase by the Company based on cost at a sliding scale over a 60 month
term (resulting in a reduced number of shares subject to repurchase) if
the related employment arrangements terminate. Subsequent to December 31,
1996 one of the executive officers terminated his employment and the
Company intends to repurchase approximately 200,000 shares in 1997 pursuant
to the provisions of the employment agreement.
In September, 1996, 40,000 performance based stock options were awarded
in connection with an employment agreement of a key employee. Under the
terms of this agreement, these options may lapse if the Company does not
meet certain 1997 operating results. If 1997 operating results are met,
these options vest over a 60 month period.
The pro forma disclosures as required by SFAS 123 regarding net loss and
loss per share are to be stated as if the Company has accounted for its stock
options granted subsequent to December 31, 1994 using the fair value method.
Using the Black-Scholes option pricing model the fair value at the date of
grant for these options was estimated using the following assumptions, risk-
free interest rates ranging from 5.8% to 6.8% for 1996 and 5.3% to 6.8% for
1995, volatility factor of the expected market price of the Company's common
stock of 0.69, and an expected option life ranging from 1 to 5 years.
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions. The Company's employee stock options
have characteristics significantly different than those of traded options,
and changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may
not necessarily provide a reliable single measure of the fair value of employee
stock options.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholder's Equity (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the expected life of the options. The Company's
pro forma information follows:
1996 1995
------------------------ -----------------------
Pro forma net loss $(10,662,080) $(2,279,981)
Pro forma net loss per share (0.44) (0.15)
Stock Warrants
In 1995, the Company formalized an agreement with a related party, resulting
from certain financing arrangements preceding the Initial Public Offering,
for the issuance of a stock warrant under which the party may purchase up to an
aggregate of 6,666,340 shares of Common Stock at a purchase price of
approximately $.0001 per share. The party may exercise the warrant in whole
or in part at any given time prior to December 31, 2015 only if, after giving
effect to such exercise, it beneficially owns less than five percent of the
outstanding shares of the Company's Common Stock. The warrant is not
transferable without regulatory approval. On December 28, 1995, the party
exercised a portion of the warrant and acquired 795,000 shares of Common Stock.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Stockholders' Equity (continued)
Pursuant to an agreement reached in July 1994, the Company issued warrants to
purchase certain equity securities as might be determined by a subsequent
financing for an aggregate purchase price of $7,500. Pursuant to the terms of
the agreements, and in conjunction with the Company's issuance of Series B
Preferred Stock in October 1995, the holders of these warrants became entitled
to purchase an aggregate of 79 shares of Series B Preferred Stock at the price
of $93.366 per share. These warrants were exercised concurrently with the
completion of the Initial Public Offering and were automatically converted
into 8,374 shares of Common Stock. The warrants had negligible value at the
time of issuance.
In September 1995, the Company issued warrants to purchase shares of Common
Stock for an aggregate purchase price of $37,500. Pursuant to the terms of the
agreements, and in conjunction with the Company's issuance of Series B
Preferred Stock in October 1995, the per share exercise price was
established at approximately $.88, and accordingly, the warrants represent
rights to purchase 42,571 shares of Common Stock. The warrants for 31,220
shares may be exercised, in whole or in part on or before April 27, 1997. The
remaining warrant for 11,351 shares of Common Stock expires on October 20,2000.
As of December 31, 1996, none of these warrants has been exercised.
The warrants had negligible value at the time of issuance.
The Company agreed, in connection with the issuance of a convertible note in
March 1995, to issue a warrant to a director of the Company. In October 1995,
the Company issued the warrant to the director for the right to purchase
3,623 shares of Series B Preferred Stock at an exercise price of $10.50 per
share. The warrant was exercised concurrently with the completion of the
Initial Public Offering in May 1996 and automatically converted into 384,038
shares of common stock. The warrant had negligible value at the time of
issuance.
Convertible Notes
During 1995, the Company issued 707,868 shares of Common Stock upon
conversion of the $75,000 notes payable to individuals (issued in 1994) plus
accrued interest of $5,944. Accordingly, the Company transferred $80,944 to
stockholders' equity to record the conversion.
During 1995, the Company issued convertible notes payable for proceeds
totaling $640,000. Subsequently in 1995, these notes and the accrued interest
thereon were converted by the holders into 136,210 shares of Common Stock
and 27,854 shares of Preferred Stock. Accordingly, the Company transferred
$649,656 to stockholders' equity to record the conversion.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Leases
Prior to 1996, the Company entered into a number of capital leases for
computer equipment to be used in the production of ALMs as well as in the
Company's offices, including leases totaling $245,281 in 1995. Future
minimum lease payments under these capital leases in effect at December 31, 1996
are as follows:
1997 $ 92,744
1998 69,558
------------------
Total 162,302
Less amounts representing interest (26,070)
------------------
Capital lease obligation to related party $ 136,232
==================
The Company has noncancellable operating leases for the rental of its office
and ALM assembly operations. Future minimum lease payments under these leases
at December 31, 1996 are as follows:
1997 $ 510,511
1998 482,133
1999 522,501
2000 522,501
2001 348,339
==================
Total $2,385,985
==================
In 1996 and 1995 and the period from inception (January 12, 1994) to December
31, 1994, the Company incurred rent expense of $445,954, $74,773 and $7,799,
respectively.
10. Income Taxes
As of December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $11,464,000. The net operating loss
carryforwards will begin to expire in 2009 if not utilized.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consisted of the following at:
December 31,
1996 1995
---------------- -----------------
Deferred tax assets:
Net operating loss carryforwards $4,351,700 $1,080,600
Other 110,500 96,700
---------------- -----------------
Total deferred tax assets 4,462,200 1,177,300
---------------- -----------------
Deferred tax liabilities:
Capitalized software costs (121,200) (77,000)
Capital leases (92,500) (113,600)
Depreciation (266,000) (51,900)
Other (1,700) (9,200)
---------------- -----------------
Total deferred tax liabilities (481,400) (251,700)
---------------- -----------------
---------------- -----------------
Less:
Valuation allowance (3,980,800) (925,600)
---------------- -----------------
Total net deferred taxes $ - $ -
================ =================
The Company has recorded a valuation allowance for the full amount of its
deferred income tax assets as of December 31, 1996 and 1995, based on
management's evaluation of the negative evidence under the criteria of SFAS
109. The main component of the available negative evidence were the
Company's cumulative pretax losses since inception.
11. Segment Information
The Company conducts its business within one industry segment. To date, all
revenues generated have been from transactions with North American customers.
Two customers accounted for 58% of revenues in 1996 which individually
represented 37% and 21% of revenues, of which $1.8 million or 34% of total
revenues, related to the non-exclusive, perpetual, royalty-free license for
the call center decisioning system; see Note 2 "Summary of Significant
Accounting Policies - Deferred Revenue." Four customers accounted for 83% of
revenues in 1995 which individually represented 26%, 26%, 17% and 14% of
revenues.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of the
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.
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, net loss per share amounts were presented in accordance with APB
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 presented
in accordance with APB 15 as modified by SAB 83 is presented supplementary
below:
Period from
Year ended inception
December 31, (January 12, 1994)
1995 to December 31, 1994
Net loss per share
under APB 15 as
modified by SAB 83 $ (0.09) $ (0.04)
Shares used in
computing net loss
per share under
APB 15 as modified
by SAB 83 25,660,332 18,051,691
13. Other Related Party Transactions
The Company has conducted ALM leasing transactions with a bank which holds a
warrant to acquire shares of Common Stock of the Company. See Note 8. The
Company has installed and otherwise delivered a number of ALMs on behalf
of the bank during 1996 and 1995. The Company had a net investment of
approximately $470,000 in sales-type leases and trade accounts receivable of
approximately $168,000 with the bank as of December 31, 1996. The bank also
provided financing for the Company in the form of an unsecured loan preceding
the Initial Public Offering and provided lease financing for a small portion
of ALM hardware.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies
The Company is subject to legal actions from time to time which 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 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders
to be held on May 20, 1997 under the caption "Board of Directors", which is
incorporated by reference herein.
Item 11. Executive Compensation
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to
be held on May 20, 1997 under the caption "Executive Compensation", which
is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to
be held on May 20, 1997 under the caption "Security Ownership of Management and
Certain Beneficial Owners," which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to
be held on May 20, 1997 under the caption "Certain Transactions" which
is incorporated by reference herein.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following consolidated financial statements of Affinity
Technology Group, Inc. and subsidiaries included in this Annual
Report on Form 10-K are included in Item 8.
i. Report of Independent Auditors
ii. Consolidated Balance Sheets as of December 31, 1996 and 1995.
iii. Consolidated Statement of Operations for the years ended
December 31, 1996 and 1995 and for the period from inception
(January 12, 1994) to December 31, 1994.
iv. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996 and 1995 and for the period from
inception (January 12, 1994) to December 31, 1994.
v. Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and for the period from inception
(January 12, 1994) to December 31, 1994.
(2) No financial statement schedules are filed with this Annual Report
on Form 10-K due to the absence of the conditions under which they
are required or because the required information is included within
the consolidated financial statements or the notes thereto included
herein.
<PAGE>
(3) Exhibits:
Exhibit Number Description
3.1 Certificate of Incorporation of Affinity
Technology Group, Inc. which is hereby
incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 of Affinity
Technology Group, Inc. (File No. 333-1170).
3.2 By-laws of Affinity Technology Group, Inc.
which is hereby incorporated by reference to
Exhibit 3.2 to the Registration Statement on
Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
4.1 Specimen Certificate of Common Stock which is
hereby incorporated by reference to Exhibit 4.1
to the Registration Statement on Form S-1 of
Affinity Technology Group, Inc. (File No.
333-1170).
4.2 Stock Subscription Warrant, dated September 6,
1995, for the purchase of up to 11,353 shares of
Common Stock which is hereby incorporated by
reference to Exhibit 4.2 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
4.3 Stock Subscription Warrant, dated September 6,
1995, for the purchase of up to 11,353 shares of
Common Stock which is hereby incorporated by
reference to Exhibit 4.3 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
4.4 Stock Subscription Warrant, dated September 11,
1995, for the purchase of up to 2,838 shares of
Common Stock which is hereby incorporated by
reference to Exhibit 4.4 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
4.5 Stock Subscription Warrant, dated September 11,
1995, for the purchase of up to
5,676 shares of Common Stock which is hereby
incorporated by reference to Exhibit 4.5 to
the Registration Statement on Form S-1 of
Affinity Technology Group, Inc. (File No.
333-1170).
4.6 Series A Common Stock Warrant, dated September
1995, for the purchase of up to 11,351 shares of
Common Stock which is hereby incorporated by
reference to Exhibit 4.6 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
4.7 Warrant to Purchase Common Stock of Affinity
Technology Group, Inc. date November 8, 1995,
for the purchase, subject to certain conditions,
up to 6,666,340 shares of Common Stock which is
hereby incorporated by reference to Exhibit 4.7
to the Registration Statement on Form S-1 of
Affinity Technology Group, Inc. (File No.
333-1170).
4.8 Sections 4, 7 and 8 of the Certificate of
Incorporation of Affinity Technology Group, Inc.,
as amended, and Article II, Sections 3, 9, and 10
of the By-laws of Affinity Technology Group,
Inc., as amended which are incorporated by
reference to Exhibits 3.1 and 3.2, respectively.
4.9 Loan Agreement, dated as of March 1, 1996, by
and between Affinity Technology Group, Inc.
and all of its wholly owned subsidiaries and
NationsBank, N.A. which is hereby incorporated
by reference to Exhibit 4.9 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.1* Employment Agreement, dated June 1, 1995,
between Affinity Technology Group, Inc. and Paul
A. Jones, Jr. which is hereby incorporated by
reference to Exhibit 10.1 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.2* Stock Purchase Agreement, dated June 15, 1995,
between Affinity Technology Group, Inc. and
Paul A. Jones, Jr. which is hereby incorporated
by reference to Exhibit 10.2 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.3* Employment Agreement, dated October 1, 1995,
between Affinity Technology Group, Inc. and Carl
M. Donnelly which is hereby incorporated by
reference to Exhibit 10.3 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.4* Employment Agreement, dated May 3, 1994,
between Affinity Technology Group, Inc. and Mel
Ray which is hereby incorporated by reference to
Exhibit 10.4 to the Registration Statement on
Form S-1 of Affinity Technology Group, Inc. (File
No. 333-1170).
10.5* Stock Purchase Agreement, dated October 2, 1994,
between Affinity Technology Group, Inc. and Mel
Ray which is hereby incorporated by reference
to Exhibit 10.5 to the Registration Statement on
Form S-1 of Affinity Technology Group,
Inc. (File No. 333-1170).
10.6 Letter Agreement, dated March 13, 1995, between
Affinity Technology Group, Inc. and Alan H.
Fishman which is hereby incorporated by
reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.7* Form of Stock Option Agreement (1995 Stock
Option Plan) which is hereby incorporated by
reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.8* Form of Stock Option Agreement (1996 Stock
Option Plan) which is hereby incorporated by
reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.9* Form of Stock Option Agreement (Directors'
Stock Option Plan) which is hereby incorporated
by reference to Exhibit 10.9 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.10* 1995 Stock Option Plan of Affinity Technology
Group, Inc. which is hereby incorporated by
reference to Exhibit 10.10 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.11* 1996 Stock Option Plan of Affinity Technology
Group, Inc. which is hereby incorporated by
reference to Exhibit 10.11 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.12* Non-Employee Directors' Stock Option Plan of
Affinity Technology Group, Inc. which is
hereby incorporated by reference to Exhibit 10.12
to the Registration Statement on Form S-1 of
Affinity Technology Group, Inc. (File No.
333-1170).
10.13 Series A Preferred Stock Purchase Agreement,
dated June 30, 1995, between Affinity
Technology Group, Inc. and certain
investors which is hereby incorporated by
reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.14 Series B Preferred Stock Purchase Agreement,
dated October 20, 1995, between Affinity
Technology Group, Inc. and certain investors
which is hereby incorporated by reference to
Exhibit 10.14 to the Registration Statement on
Form S-1 of Affinity Technology Group, Inc. (File
No. 333-1170).
10.15 Stock Rights Agreement, dated October 20, 1995,
between Affinity Technology Group, Inc. and
certain investors which is hereby incorporated
by reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.16 Joint Venture Agreement, dated March 1996, by
and among Affinity Processing Corporation,
Affinity Technology Group, Inc. and Union
Planters Corporation which is hereby incorporated
by reference to Exhibit 10.16 to the Registration
Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.17** Automated Loan System Agreement, dated October
4, 1995, between Affinity Bank Technology
Corporation and Banco Popular de Puerto
Rico which is hereby incorporated by reference
to Exhibit 10.17 to the Registration Statement
on Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
10.18** Master Equipment Rental Agreement, dated October
4, 1995, between Affinity Credit
Corporation and Banco Popular de Puerto
Rico which is hereby incorporated by reference
to Exhibit 10.18 to the Registration Statement
on Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
10.19** Operating Agreement, dated March 15, 1996,
between Affinity Clearinghouse Corporation
and Banc One Financial Services, Inc. which is
hereby incorporated by reference to Exhibit
10.19 to the Registration Statement on Form
S-1 of Affinity Technology Group, Inc. (File No.
333-1170).
10.20 Form of Bill of Sale between Affinity Technology
Group, Inc. and Association Member Services,
Inc. which is hereby incorporated by reference
to Exhibit 10.20 to the Registration Statement on
Form S-1 of Affinity Technology Group,
Inc. (File No. 333-1170).
21 Subsidiaries of Affinity Technology Group, Inc.
which is hereby incorporated by reference to
Exhibit 21 to the Registration Statement on
Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
* Denotes a management contract or compensatory plan or arrangement.
** The registrant has requested that certain provisions of these exhibits
be given confidential treatement.
<PAGE>
(b) Reports on Form 8-K filed in the 4th quarter of 1996:
The Registrant did not file any Current Reports on Form 8-K during the last
fiscal quarter of the period covered by this report.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed
herewith and incorporated by reference herein. The response to this portion
of Item 14 is submitted under Item 14(a) (3).
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted under
Item 14(a)(2).
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registration has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
Date: March 31, 1997 By:/s/ Jeff A. Norris
-------------------------------
Jeff A. Norris, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Jeff A. Norris March 31, 1997
- ---------------------- ------------------------------
Jeff A. Norris President, Chief Executive
Officer and Director
(principal executive officer)
/s/ Alan H. Fishman March 31, 1997
- ----------------------- ------------------------------
Alan H. Fishman Chairman and Director
March 31, 1997
- ------------------------ ------------------------------
Steven J. Gilbert Director
/s/ Robert M. Price March 31, 1997
- ------------------------ ------------------------------
Robert M. Price Director
/s/ Edward J. Sebastian March 31, 1997
- ------------------------ ------------------------------
Edward J. Sebastian Director
March 31, 1997
- ------------------------ ------------------------------
Peter R. Wilson, Ph.D. Director
/s/ Joseph A. Boyle March 31, 1997
- ------------------------ ------------------------------
Joseph A. Boyle Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ Richard R. Butcher March 31, 1997
- ------------------------ ------------------------------
Richard R. Butcher Controller
(principal accounting officer)
<PAGE>
Exhibit Index
Exhibit Number Description
- -------------- ----------------------------
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-10435) pertaining to the Affinity Technology Group, Inc.
1995 Stock Option Plan, 1996 Stock Option and Non-Employee Directors' Stock
Option Plan, of our report dated February 12, 1997, with respect to the
consolidated financial statements included in the Annual Report (Form 10-K)
of Affinity Technology Group, Inc., for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 31, 1997
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 31,563,950
<SECURITIES> 10,583,997
<RECEIVABLES> 812,443
<ALLOWANCES> 0
<INVENTORY> 2,804,978
<CURRENT-ASSETS> 46,967,187
<PP&E> 7,015,611
<DEPRECIATION> 942,308
<TOTAL-ASSETS> 56,098,857
<CURRENT-LIABILITIES> 3,294,508
<BONDS> 0
0
0
<COMMON> 2,788
<OTHER-SE> 52,131,851
<TOTAL-LIABILITY-AND-EQUITY> 56,098,857
<SALES> 0
<TOTAL-REVENUES> 5,081,818
<CGS> 0
<TOTAL-COSTS> 16,812,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 170,000
<INTEREST-EXPENSE> (2,038,921)
<INCOME-PRETAX> (9,692,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,692,195)
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