SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
29,499,673 shares of common stock, $.0001 par value, as of November 1, 1998.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
1998 December 31,
(Unaudited) 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,765,309 $ 4,470,185
Investments 8,428,756 19,135,415
Accounts receivable, less allowance for doubtful accounts of $295,147 and
$400,120 at September 30, 1998 and December 31, 1997, respectively
561,582 1,944,947
Net investment in sales-type leases - current 609,096 1,732,928
Inventories 2,418,011 2,960,038
Other current assets 1,364,245 799,628
------------------- -------------------
Total current assets 18,146,999 31,043,141
Net investment in sales-type leases - non-current 762,624 1,328,741
Property and equipment, net 5,190,342 6,028,980
Software development costs, less accumulated amortization of $93,371 and
$117,807 at September 30, 1998 and December 31, 1997, respectively
1,203,808 750,323
Other assets 2,756,671 3,058,385
=================== ===================
Total assets $ 28,060,444 $ 42,209,570
=================== ===================
Liabilities and stockholders' equity Current liabilities:
Current portion of capital lease obligations to related party $ 22,344 $ 64,222
Accounts payable 263,290 666,824
Accrued expenses 922,518 951,975
Deferred revenue - current 138,039 760,560
------------------- -------------------
Total current liabilities 1,346,191 2,443,581
Deferred revenue - non-current 469,005 535,419
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
31,572,880 and 31,550,199 shares at September 30,1998 and December 31,
1997, respectively 3,157 3,155
Additional paid-in capital 69,862,597 69,858,571
Treasury stock, at cost (2,048,207 and 992,207 shares at September 30,
1998 and December 31, 1997, respectively) (3,371,298) (967,035)
Deferred compensation (1,050,158) (1,558,574)
Accumulated deficit (39,199,050) (28,105,547)
------------------- -------------------
Total stockholders' equity 26,245,248 39,230,570
=================== ===================
Total liabilities and stockholders' equity $ 28,060,444 $ 42,209,570
=================== ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Transaction processing fees $ 212,433 $ 220,727 $ 577,316 $ 380,673
Mortgage processing services 104,326 - 260,183 -
Initial set-up 42,452 335,503 272,122 848,295
Sales and rental 4,050 954,701 59,319 1,306,748
Professional services 1,536 159,800 798,597 159,800
Other 77,540 46,688 214,023 100,057
------------------- ------------------ ----------------- ------------------
Total revenue 442,337 1,717,419 2,181,560 2,795,573
Costs and expenses:
Cost of revenues 227,293 798,546 878,784 1,339,502
Research and development 460,886 896,460 2,263,209 2,583,334
Selling, general and administrative expenses 3,528,221 3,755,032 10,989,327 11,462,475
------------------- ------------------ ----------------- ------------------
Total costs and expenses 4,216,400 5,450,038 14,131,320 15,385,311
------------------- ------------------ ----------------- ------------------
Operating loss (3,774,063) (3,732,619) (11,949,760) (12,589,738)
Interest income, net 209,111 472,803 856,257 1,568,733
------------------- ------------------ ----------------- ------------------
Net loss $ (3,564,952) $ (3,259,816) $ (11,093,503) $ (11,021,005)
=================== ================== ================= ==================
Net loss per share - basic and diluted $ (0.12) $ (0.11) $ (0.37) $ (0.39)
=================== ================== ================= ==================
Shares used in computing net loss per share 29,499,673 28,837,376 29,841,090 28,506,406
=================== ================== ================= ==================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
1998 1997
------------------- ------------------
<S> <C> <C>
Operating activities
Net loss $ (11,093,503) $ (11,021,005)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,754,432 1,478,627
Amortization of deferred compensation 508,416 368,128
Provision for doubtful accounts 140,465 209,853
Inventory valuation allowance 720,000 131,240
Deferred revenue (688,935) (110,248)
Other 121,449 67,605
Changes in current assets and liabilities:
Accounts receivable 1,242,900 (1,104,587)
Net investment in sales-type leases 1,155,950 (118,802)
Inventories 389,900 538,040
Other current assets (554,432) (248,772)
Accounts payable and accrued expenses (427,613) (1,535,546)
------------------- ------------------
Net cash used in operating activities (6,730,971) (11,345,467)
Investing activities
Purchases of property and equipment, net (661,631) (2,184,620)
Software development costs (571,442) (444,748)
Sales (purchases) of short term investments, net 10,706,659 (11,867,672)
Other - (300,000)
------------------- ------------------
Net cash (used in) provided by investing activities 9,473,586 (14,797,040)
Financing activities
Payments on capital leases (47,258) (57,396)
Exercise of options 4,029 35,443
Exercise of warrants - 37,490
Purchases of treasury stock (2,404,263) (228,838)
------------------- ------------------
Net cash used in financing activities (2,447,492) (213,301)
------------------- ------------------
Net increase (decrease) in cash 295,123 (26,355,808)
Cash and cash equivalents at beginning of period 4,470,185 31,563,950
=================== ==================
Cash and cash equivalents at end of period 4,765,309 $ 5,208,142
=================== ==================
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Affinity Technology
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The balance sheet at
December 31, 1997 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 1997.
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"),
effective for transactions entered into in fiscal years beginning after December
15, 1997. SOP 97-2 provides guidance on software revenue recognition associated
with the licensing and selling of computer software. During the nine months
ended September 30, 1998, the Company did not enter into any new agreements for
the sale or licensing of computer software for which revenue was recognized
during the period. The Company has adopted SOP 97-2 and continues to assess the
impact it will have on the presentation of the Company's financial statements.
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the disclosure of financial and
descriptive information pertaining to an enterprise's reportable operating
segments in annual and interim financial statements. SFAS 131 is not required to
be applied to interim period financial statements in the initial year of
adoption. The Company will make the disclosures required by SFAS 131, if
applicable, in its financial statements for the year ended December 31, 1998.
Certain amounts in 1997 have been reclassified to conform to 1998
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------------- -------------------------
<S> <C> <C>
Electronic parts and other components $ 1,251,534 $ 1,396,826
Work in process 1,159,621 829,269
Finished goods 894,679 906,950
------------------------- -------------------------
3,305,834 3,133,045
Reserve for obsolescence (887,823) (173,007)
========================= =========================
$ 2,418,011 $ 2,960,038
========================= =========================
</TABLE>
<PAGE>
3. Loan Warehousing Agreement
During June 1998, Surety Mortgage, Inc. a wholly owned subsidiary of
the Company ("Surety"), entered into an agreement with a lender to establish a
credit facility with a maximum borrowing amount of $2,000,000. Pursuant to the
terms of the agreement, Surety may obtain advances from the lender for funding
of mortgage loans made by Surety during the interim period between the funding
and sale of the loans to permanent investors. All advances made pursuant to the
agreement are secured by a security interest in the rights and benefits due
Surety in conjunction with the making of the underlying loan. The credit
facility bears interest at the lender's prime rate plus 50 basis points and
expires on June 1, 1999. There were no outstanding borrowings under the Loan
Warehousing Agreement as of September 30, 1998.
4. Stockholders' Equity
During 1997, the Company adopted a share repurchase plan under which
the Company was authorized to use up to $2 million of general corporate funds to
acquire from time to time in the open market shares of the outstanding common
stock of the Company. During the first quarter of 1998, the Company expanded its
share repurchase plan by authorizing the use of an additional $2 million of
general corporate funds under the plan. As of September 30, 1998, the Company
had repurchased a total of 1,417,000 shares at an average price of $2.31 per
share for an aggregate cost of $3,271,700 under the share repurchase plan. In
addition, during 1997 the Company repurchased an aggregate of 643,066 shares of
its common stock from former employees of the Company at an aggregate cost of
$484 pursuant to stock purchase agreements with such former employees.
5. Net Loss Per Share of Common Stock
During 1997, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Net loss per share of common stock amounts presented on the face of the
consolidated statements of operations have been computed based on a weighted
average number of shares of common stock outstanding in accordance with SFAS
128.
6. Commitments and Contingencies
Certain claims have been filed by individuals who claim certain rights,
damages or interests incidental to the Company's formation and development. The
Company intends to vigorously contest all such actions and, in the opinion of
management, the Company has meritorious defenses and the resolution of such
actions will not materially affect the financial position of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its formation in 1994, the Company has concentrated its product
development efforts primarily on developing 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 and link all distribution channels electronically to their
credit departments.
The Company's first product, the Automated Loan Machine ("ALM"),
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 Affinity ALM is a fully automated
system that utilizes the Company's proprietary DeciSys/RT(R) 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 services transactions such as the establishment of savings and
checking accounts, the consummation of joint loans, certain secured loans and
credit consolidation loans, and the issuance of credit cards.
The Company's e-xpertLender system permits an employee of a financial
institution to input consumer applicant information similar to the type of
information captured by the ALM and to use DeciSys/RT to process financial
services transactions available through the ALM. In addition to its financial
services processing capabilities, e-xpertLender also provides inquiry, routing
and tracking functions for applications that are not automatically approved.
To date, the Company has generated minimal operating revenues, has
incurred significant losses and has experienced substantial negative cash flow
from operations. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly technology-based companies operating in
unproven markets with unproven products. The Company had an accumulated deficit
as of September 30, 1998 of $39,199,050, with operating losses of $3,564,952 and
$11,093,503 for the three and nine months ended September 30, 1998,
respectively. The Company expects to incur additional costs to develop its
financial product origination capabilities, to enhance and market the ALM,
e-xpertLender 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.
<PAGE>
Results of Operations
Revenues
The Company's revenues for the three and nine months ended September
30, 1998 were $442,337 and $2,181,560, respectively, compared to $1,717,419 and
$2,795,573 for the corresponding periods of 1997.
Transaction Processing Fees. Revenues from transaction fees were
$212,433 and $577,316 for the three and nine months ended September 30, 1998,
respectively, compared to $220,727 and $380,673 for the corresponding periods in
1997. The slight decrease during the three months ended September 30, 1998, as
compared to the same period in 1997 is attributable to a decrease in the
quantity of credit card and other debit card transactions processed. The slight
decrease was partially offset by an increase in the number of financial service
applications processed using DeciSys/RT. The increase during the nine months
ended September 30, 1998 as compared to the same period in 1997 is attributable
to an increase in quantity of financial service applications processed using
DeciSys/RT.
Mortgage Processing Services. Mortgage processing services represents
fees earned by Surety Mortgage, Inc., a wholly-owned subsidiary of the Company,
for underwriting and processing mortgage loans. Revenues from mortgage
processing services were $104,326 and $260,183 for the three and nine months
ended September 30, 1998, respectively. During the three and nine months ended
September 30, 1997, the Company did not perform services of this nature.
Initial Set-up Fees. Revenues from initial set-up fees were $42,452 and
$272,122 for the three and nine months ended September 30, 1998, respectively,
compared to $335,503 and $848,295 for the corresponding periods in 1997. The
overall decrease in initial set-up fees for the three and nine months ended
September 30, 1998, is attributable to fewer ALM deployments during 1998
compared to 1997.
Sales and Rental. Sales and rental fees were $4,050 and $59,319 for the
three and nine months ended September 30, 1998, respectively, compared to
$954,701 and $1,306,748 for the corresponding periods in 1997. The decrease is
primarily attributable to a decrease in the number of ALMs deployed and in
service during 1998 as compared to the same periods in 1997. In 1997, the
Company deployed 25 ALMs under a short-term pilot program agreement which was
subsequently terminated during July 1997 by the customer. In addition, in late
1997 and 1998 the Company's relationships with one significant ALM customer and
several smaller ALM customers were terminated, which resulted in a substantial
reduction of ALMs in service.
Professional Services. Professional services were $1,536 and $798,597
for the three and nine months ended September 30, 1998, respectively, compared
to $159,800 for each of the same periods in 1997. Professional services reflect
fees associated with a contract to perform professional services for one
customer. Prior to June 30, 1997, the Company did not perform services of this
nature.
Other. Revenues from other fees were $77,540 and $214,023 for the three
and nine months ended September 30, 1998, respectively, compared to $46,688 and
$100,057 for the corresponding periods in 1997.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended
September 30, 1998 was $227,293 and $878,784, respectively, compared to $798,546
and $1,339,502 for the corresponding periods in 1997. Cost of revenues for the
three months ended September 30, 1998, consisted primarily of direct costs of
processing financial service applications, depreciation associated with ALMs
under operating leases and direct costs associated with underwriting and
processing mortgage loans. Cost of revenues for the nine months ended September
30, 1998, consisted primarily of the items described in the preceding sentence
plus labor and other direct costs and allocation of indirect costs relating
principally to the performance of professional services.
<PAGE>
The decrease during the three months ended September 30, 1998, as
compared to the same period in 1997 is attributable to the decrease in ALMs
deployed under sales-type leases in 1998, reduced depreciation expense
associated with fewer ALMs in service under operating leases in 1998 and a
decrease in the quantity of credit card and other debit card transactions
processed in 1998. The decrease in cost of revenues was partially offset by an
increase in the number of financial service applications processed using
DeciSys/RT and the addition in 1998 of expenses associated with the underwriting
and processing of mortgage loans.
The decrease during the nine months ended September 30, 1998, as
compared to the same period in 1997 is attributable to the decrease in ALMs
deployed under sales-type leases in 1998 as compared to the same period in 1997,
depreciation expense associated with fewer ALMs in service under operating
leases in 1998 compared to the same period in 1997 and a reduction in labor and
other direct and indirect costs associated with professional services performed.
The decrease in cost of revenues was partially offset by an increase in the
number of financial service applications processed using DeciSys/RT, the
addition of expense associated with the underwriting and processing of mortgage
loans and an increase in the quantity of credit card and other debit card
transactions processed.
Research and Development. Costs incurred for research and development
for the three and nine months ended September 30, 1998 totaled $460,886 and
$2,263,209, respectively, compared to $896,460 and $2,583,334 for the
corresponding periods in 1997. The decrease in research and development costs
for the three and nine months ended September 30, 1998, reflects a decrease in
the number of employees involved in development activities and the progression
of certain development activities to a point where the costs of such activities
are capitalized pursuant to applicable accounting guidelines. The Company
continues to commit resources to initiatives associated with the technological
enhancement of the Company's DeciSys/RT technology and its financial product
origination capabilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $3,528,221and $10,989,327 for the three and nine
months ended September 30, 1998, respectively, as compared to $3,755,032 and
$11,462,475 for the corresponding periods in 1997.
The decrease for the three months ended September 30, 1998, as compared
to the corresponding period of 1997 is attributable to a decrease in certain
employment costs, primarily wage and recruiting costs associated with an overall
reduction in the number of employees, and travel costs. The decrease in selling,
general and administrative expense was partially offset by an increase in
inventory valuation allowances associated with potentially obsolete ALM shells
due to design improvements, deferred compensation expense due to the significant
forfeitures of common stock options, granted under the Company's 1995 Stock
Option Plan, during the three months ended September 30, 1997 and costs
associated with termination benefits to be paid to certain employees during
1998.
The decrease for the nine months ended September 30, 1998 as compared
to the corresponding period of 1997 is primarily attributable to a decrease in:
(i.) advertising and marketing costs; (ii.) employment costs, primarily wage and
recruiting costs associated with an overall reduction in the number of
employees; (iii.) travel costs; and, (iv.) professional fees consisting
primarily of legal, accounting, recruiting and relocation fees. The decrease in
selling, general and administrative expense was partially offset by an increase
in depreciation and amortization expense associated with an overall increase in
the Company's depreciable assets and costs associated with termination benefits
to be paid to certain employees during 1998.
Interest Income/Expense. Interest income for the three and nine months
ended September 30, 1998, totaled $210,156 and $866,963, respectively, as
compared to $479,326 and $1,598,104 for the corresponding periods in 1997. The
decrease in interest income for the three and nine months ended September 30,
1998, is due to a decrease in cash and cash equivalents and investments balances
as compared to the same periods of 1997 coupled with a decrease in the amount of
amortization of deferred interest income associated with ALMs under sales-type
lease agreements. Interest expense for the three and nine months ended September
30, 1998, was $1,045 and $10,706 compared to $6,523 and $29,371, for the
corresponding periods in 1997.
Liquidity and Capital Resources
The Company has generated operating losses of $39,199,050 since its
inception and has financed its operations primarily through net proceeds from
its initial public offering in May 1996 and, prior to such offering, through the
private sale of debt and equity securities, capital lease obligations, bank
financing, factoring of ALM rental contracts, and loans from affiliates. Net
cash used during the nine months ended September 30, 1998, to fund operations
was $6,730,971 compared to $11,395,467 for the same period in 1997. Proceeds
from the offering and other sources of cash were used to fund current period
operations, research and development of $2,263,209, software development of
$571,442, capital expenditures of $661,631 and the repurchase of outstanding
shares of the Company's common stock of $2,404,263. At September 30, 1998, cash
and liquid investments were $13,194,065 and working capital was $16,800,808.
During June 1998, Surety Mortgage, Inc. a wholly owned subsidiary of
the Company ("Surety"), entered into an agreement with a lender to establish a
credit facility with a maximum borrowing amount of $2,000,000. Pursuant to the
terms of the agreement, Surety may obtain advances from the lender for funding
of mortgage loans made by Surety during the interim period between the funding
and sale of the loans to permanent investors. All advances made pursuant to the
agreement are secured by a security interest in the rights and benefits due
Surety in conjunction with the making of the underlying loan. The credit
facility bears interest at the lender's prime rate plus 50 basis points and
expires on June 1, 1999. There were no outstanding borrowings under the Loan
Warehousing Agreement as of September 30, 1998.
The Company continues to use a substantial amount of existing cash
resources to fund its operations. If the Company continued to use cash resources
at the rate used in 1997 and the first nine months of 1998, the Company would
deplete its existing cash resources in the latter part of 1999. The Company has
taken certain measures to reduce its cash depletion rate, including decreasing
its employee base. Currently, the Company's employee base is approximately 40%
less than it was at December 31, 1997. The Company expects that its cost
reduction measures will allow it to operate into the first quarter of 2000 with
existing cash resources not including revenues that may be received under
existing customer contracts. Including revenues that may be received from
completion of existing customer contracts, the Company expects cash reserves to
last until mid-2000. Accordingly, the Company believes existing cash, cash
equivalents, internally generated funds and available borrowings will be
sufficient to meet the Company's currently anticipated operating expenditure
requirements during the remainder of 1998 and through 1999. However no
assurances can be given that the Company's existing cash resources will be
sufficient to fund the Company's cash requirements for the entire part of 1999.
During the remainder of 1998 and 1999, the Company expects to continue
to use a significant amount of existing cash, cash equivalents and internally
generated funds to fund operations, capital expenditures and research and
development. 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 a material adverse effect on the
Company's business, operating results and financial condition.
<PAGE>
During 1997, the Company adopted a share repurchase plan under which
the Company was authorized to use up to $2 million of general corporate funds to
acquire from time to time in the open market shares of the outstanding common
stock of the Company. During the first quarter of 1998, the Company expanded its
share repurchase plan by authorizing the use of an additional $2 million of
general corporate funds under the plan. During the three months ended September
30, 1998, the Company did not repurchase any shares of its outstanding common
stock under this plan. As of September 30, 1998, the Company had repurchased a
total of 1,417,000 shares at an average price of $2.31 per share for an
aggregate cost of $3,271,700 under the share repurchase plan. In addition,
during 1997 the Company repurchased an aggregate of 643,066 shares of its common
stock from former employees of the Company at an aggregate cost of $484 pursuant
to stock purchase agreements with such former employees.
Possible Delisting of Securities From Nasdaq Stock Market
The Company has been notified by the Nasdaq Stock Market, Inc.
("Nasdaq") that the Company is not in compliance with Nasdaq listing standards
that require the Company's stock to maintain a minimum bid price of $1.00 or
more. As a result, the Company has been provided a period which expires December
2, 1998, to regain compliance with such standards. If the Company's common stock
does not regain compliance within the specified period (which would require the
common stock to have a closing bid price of $1.00 or more for at least ten
consecutive business days, the Company's stock would be delisted at the opening
of business on December 4, 1998. The Company may, and intends to, request a
review prior to December 2, 1998, which will generally stay delisting for an
indeterminable period of time after December 4, 1998. In the event of delisting
by Nasdaq, trading in the Company's common stock would thereafter be conducted
in the over-the-counter markets. Consequently, the liquidity of the Company's
common stock would be impaired, not only in the number of securities that could
be bought and sold, but also through delays in the timing of transactions and
lower or higher prices for the Company's common stock that might otherwise be
attained. Further, the delisting of the Company's common stock would have a
material adverse effect on the ability of the Company to raise capital through
the sale of equity securities.
Year 2000 Compliance
The current versions of the Company's internally developed software are
Year 2000 compliant. Versions of the Company's software installed at customer
sites are also year 2000 compliant. The Company does not expect to incur
significant expenses or disruptions in revenues in connection with Year 2000
issues related to its own software products. Additionally, the Company has
completed its Year 2000 assessment of internal systems and applications and has
determined that all of its internally developed systems are Year 2000 compliant.
However, the Company is still in the process of testing hardware systems for
Year 2000 compliance. Based on its current assessment of Year 2000 testing and
conversion work for internal systems, the Company estimates that the costs of
Year 2000 compliance for such systems will not have a material adverse effect on
the Company's business, results of operations or financial condition. However,
there can be no assurances that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its internal systems.
The Company has also initiated communications with third parties on
which it is dependent for essential software and services (including services
necessary to operate the Company's products) to determine how they are
addressing Year 2000 issues and to evaluate any impact on the Company's
operations. Although the Company intends to work with these third parties to
resolve Year 2000 compliance issues, the lack of resolution of Year 2000 issues
by these parties could have a material adverse effect on the Company's future
business operations, financial condition and results of operations. At this time
the Company cannot quantify the potential impact of the third-party Year 2000
issues, nor has it developed contingency plans for the possibility that one or
more of such third parties experiences a significant disruption due to Year 2000
issues.
<PAGE>
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report that are not descriptions of historical
facts, including the statements made regarding the depletion of existing cash
resources and the effect of Year 2000 issues, may be forward-looking statements
that are subject to risks and uncertainties, including economic, competitive and
technological factors affecting the Company's operations, markets, products,
services and prices, as well as other specific factors discussed in the
Company's filings with the Securities and Exchange Commission, including the
information set forth under the caption "Business Risks" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. These
and other factors may cause actual results to differ materially from those
anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Part II. Other Information
Items 1, 3, 4 and 5 are not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company's registration statement on Form S-1 (File No.
333-1170) with regard to an initial public offering of 5,060,000
shares of common stock, par value $.0001 per share, of the Company
was declared effective by the Securities and Exchange Commission
on April 24, 1996. As set forth in the Company's Form SR, Report
of Sales of Securities and Use of Proceeds Therefrom, Montgomery
Securities and Donaldson, Lufkin & Jenrette Securities Corporation
acted as the managing underwriters for the offering, which
commenced April 25, 1996. As of September 30, 1998, the Company
has used net proceeds of $60,078,000 from the offering as follows:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the issuer or their
associates; to persons owning ten
percent or more of any class of
equity securities of the issuer; Direct or indirect
and to affiliates of the issuer. payments to others
------------------------------------- --------------------------
<S> <C> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 5,206,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 24,714,039
Temporary investments:
US Treasury obligations 6,907,612
Commercial paper 1,521,144
Money market / cash 4,765,309
Other purposes
Marketing 4,104,001
Research & development 8,278,895
Purchase of software 2,510,000
<FN>
1 Reflects the repayment of debt owned to Carolina First Corporation, as
described under the caption "Use of Proceeds" in the Company's Prospectus, dated
April 25, 1996.
</FN>
</TABLE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10 - Nonqualified Stock Option Agreement, dated as of July 29, 1998,
between Affinity Technology Group, Inc. and R. Murray Smith.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
Joseph A. Boyle
Senior Vice President, Chief Financial Officer and Treasurer
Date: November 4, 1998
<PAGE>
Exhibit 27 - Financial Data Schedule
This schedule contains summary financial information extracted from the
consolidated financial statements for the three and nine months ended September
30, 1998 and is qualified in its entirety by reference to such statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 4,765,309 4,765,309
<SECURITIES> 8,428,756 8,428,756
<RECEIVABLES> 856,729 856,729
<ALLOWANCES> 295,147 295,147
<INVENTORY> 2,418,011 2,418,011
<CURRENT-ASSETS> 18,146,999 18,146,999
<PP&E> 9,017,846 9,017,846
<DEPRECIATION> 3,827,504 3,827,504
<TOTAL-ASSETS> 28,060,444 28,060,444
<CURRENT-LIABILITIES> 1,346,191 1,346,191
<BONDS> 0 0
0 0
0 0
<COMMON> 3,157 3,157
<OTHER-SE> 26,242,091 26,242,091
<TOTAL-LIABILITY-AND-EQUITY> 28,060,444 28,060,444
<SALES> 0 0
<TOTAL-REVENUES> 442,337 2,181,560
<CGS> 227,293 878,784
<TOTAL-COSTS> 4,216,400 14,131,320
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 470,465 860,465
<INTEREST-EXPENSE> (209,111) (856,257)
<INCOME-PRETAX> (3,564,952) (11,093,503)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,564,952) (11,093,503)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,564,952) (11,093,503)
<EPS-PRIMARY> (0.12) (0.37)
<EPS-DILUTED> (0.12) (0.37)
</TABLE>
