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 March 31, 1999 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.
29,766,980 shares of Common Stock, $0.0001 par value, as of May 1, 1999.
<PAGE>
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998............................................. 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998................ ...................... 4
Condensed Consolidated Statements of Cash Flows for the three months
Ended March 31, 1999 and 1998................................. 5
Notes to Condensed Consolidated Financial Statements.............. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 15
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.................... 16
ITEM 6. Exhibits and Reports on Form 8-K............................. 17
Signature............................................................... 17
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------------------- -------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,724,861 $ 2,026,932
Investments 5,394,709 8,068,310
Accounts receivable, less allowance for doubtful accounts of $59,884 and
$45,513 at March 31, 1999 and December 31, 1998,
respectively 521,597 727,999
Net investment in sales-type leases - current 494,257 534,302
Inventories 1,950,743 2,054,542
Other current assets 1,627,796 1,349,995
------------------------- -------------------------
Total current assets 12,713,963 14,762,080
Net investment in sales-type leases - non-current 485,637 574,437
Property and equipment, net 4,130,126 4,511,924
Software development costs, less accumulated amortization of $129,319 and
$111,211 at March 31, 1999 and December 31, 1998,
respectively 1,833,010 1,773,057
Other assets 2,501,256 2,575,377
========================= =========================
Total assets $ 21,663,992 $ 24,196,875
========================= =========================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 186,630 $ 184,619
Accrued expenses 793,030 748,136
Notes payable - 141,480
Current portion of deferred revenue 136,236 144,063
------------------------- -------------------------
Total current liabilities 1,115,896 1,218,298
Deferred revenue 394,345 422,376
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
31,880,880 and 31,572,880 shares at March 31, 1999 and
December 31, 1998, respectively 3,188 3,157
Additional paid-in capital 69,528,881 69,392,545
Deferred compensation (458,999) (489,656)
Treasury stock, at cost (2,161,407 and 2,073,207 shares at March
31, 1999 and December 31, 1998, respectively) (3,487,060) (3,371,297)
Accumulated deficit (45,432,259) (42,978,548)
------------------------- -------------------------
Total stockholders' equity 20,153,751 22,556,201
========================= =========================
Total liabilities and stockholders' equity $ 21,663,992 $ 24,196,875
========================= =========================
</TABLE>
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
------------------------- -------------------------
Revenues:
<S> <C> <C>
Transactions $ 123,546 $ 113,849
Mortgage processing services 113,399 48,432
Sales and rental 4,750 19,500
Professional services - 780,995
Other income 84,264 137,203
------------------------- -------------------------
325,959 1,099,979
Costs and expenses:
Cost of revenues 169,828 435,774
Research and development 299,125 849,274
Selling, general and administrative expenses 2,431,682 3,171,375
------------------------- -------------------------
Total costs and expenses 2,900,635 4,456,423
------------------------- -------------------------
Operating loss (2,574,676) (3,356,444)
Interest income 120,965 359,969
------------------------- -------------------------
Net loss $ (2,453,711) $ (2,996,475)
========================= =========================
Net loss per share - basic and diluted $ (0.08) $ (0.10)
========================= =========================
Shares used in computing net loss per share 29,639,351 30,383,461
========================= =========================
</TABLE>
See accompanying notes.
<PAGE>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
--------------------------- -------------------------
Operating activities
<S> <C> <C>
Net loss $ (2,453,711) $ (2,996,475)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 563,268 589,337
Amortization of deferred compensation 30,457 155,421
Provision for doubtful accounts 15,000 30,000
Inventory valuation allowance 30,000 90,000
Deferred revenue (35,858) (515,926)
Other - 53,395
Changes in current assets and liabilities:
Accounts receivable 191,402 1,214,434
Net investment in sales-type leases 128,845 605,805
Inventories 9,779 77,196
Other current assets (277,801) 125,970
Accounts payable and accrued expenses 46,905 (738,611)
--------------------------- -------------------------
Net cash used in operating activities (1,751,714) (1,309,456)
Investing activities
Purchases of property and equipment, net (25,221) (99,796)
Software development costs (78,061) (1,855)
Sales (purchases) of short term investments, net 2,673,601 (692,426)
--------------------------- -------------------------
Net cash provided by (used in) investing activities 2,570,319 (794,077)
Financing activities
Payments on notes payable and capital leases (141,480) (15,170)
Exercise of options 20,804 4,029
Purchases of treasury stock - (942,187)
--------------------------- -------------------------
Net cash used in financing activities (120,676) (953,328)
--------------------------- -------------------------
Net increase (decrease) in cash 697,929 (3,056,861)
Cash and cash equivalents at beginning of period 2,026,932 4,470,185
=========================== =========================
Cash and cash equivalents at end of period $ 2,724,861 $ 1,413,324
=========================== =========================
</TABLE>
See accompanying notes.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Affinity Technology
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The balance sheet at
December 31, 1998 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, 1998.
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") 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. The
Company did not recognize any revenue during the three months ended March 31,
1999 and 1998 associated with contracts subject to SOP 97-2 guidance.
During 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition"
("SOP 98-4), effective as of March 31, 1998. SOP 98-4 postponed the adoption of
a provision of SOP 97-2 for one year.
Also during 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" ("SOP 98-9"). Effective December 15, 1998, SOP 98-9 amends SOP
98-4 to further postpone the adoption of certain provisions of SOP 97-2 as
provided by SOP 98-4, for fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9, which amend certain passages of SOP 97-2, are
effective for transactions entered into in fiscal years beginning after March
15, 1999.
The Company continues to assess the effects that the adoption of SOP
97-2, as amended by SOP 98-4 and SOP 98-9, will have on the presentation of the
Company's financial statements.
The Company has adopted the reporting requirements of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that companies report information about operating segments in annual
and interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In accordance with management's oversight of the Company's operations, the
Company conducts its business within one industry segment - financial services
technology.
Certain amounts in 1998 have been reclassified to conform to 1999
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
<PAGE>
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------- -------------------------
<S> <C> <C>
Electronic parts and other components $ 1,039,953 $ 1,062,180
Work in process 1,232,222 1,207,915
Finished goods 804,266 880,145
------------------------- -------------------------
3,076,441 3,150,240
Reserve for obsolescence (1,125,698) (1,095,698)
========================= =========================
$ 1,950,743 $ 2,054,542
========================= =========================
</TABLE>
3. Loan Warehousing Agreement
Surety Mortgage, Inc., a wholly-owned subsidiary of the Company
("Surety"), has a credit facility with a maximum borrowing amount of $2,000,000.
Pursuant to the terms of the credit facility, 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 March 31, 1999.
4. Stockholders' Equity
During 1997 and 1998, the Company had in place a share repurchase plan
under which the Company was authorized to use up to $4 million of general
corporate funds to acquire from time to time in the open market shares of the
outstanding Common Stock of the Company. As of December 31, 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. No
shares were repurchased during the three months ended March 31, 1999. 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
The Company has adopted 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 weighted average number of shares of Common Stock
outstanding in accordance with SFAS 128. Stock warrants and stock options were
not included in the calculation of diluted loss per share because the Company
has experienced operating losses in all periods presented and, therefore, the
effect would be anti-dilutive.
6. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. In addition, a claim has been filed
by a plaintiff who claims certain rights, damages or interests incidental to the
Company's formation and development. Additionally, a former employee has filed
suit against the Company alleging breach of contract and non-payment of wages.
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
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report (including Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
descriptions of historical facts may be forward-looking statements, such as
statements about the Company's future prospects and cash requirements. Actual
results may vary due 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, 1998. These
and other factors may cause actual results to differ materially from those
anticipated.
Overview
Since its formation in 1994, the Company has concentrated its product
development efforts primarily on developing "closed loop" electronic commerce
systems that enable 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.
Prior to 1998 the Company's primary products and services consisted of
the Affinity Automated Loan Machine ("ALM"), which captures origination
information for unsecured consumer loan applications and then routes this
information to the Company's proprietary DeciSys/RT for an automated decision,
and e-xpertLender, which connects the Company's automated decisioning system
with a financial institution's delivery channels and its risk management group
and gives the consumer a choice of closing methods that include branches, ALMs,
mail, and third party closing agents. During 1998 and continuing into 1999, the
Company has been developing a system to process and automate decisioning of
automobile loans pursuant to a development contract with Citibank. The Company
is currently developing a generic version of this automobile loan processing and
decisioning system to be sold, under the brand name of iDEAL, to other financial
institutions.
To date, the Company has generated substantial operating losses and
experienced an extremely lengthy sales cycle for its products. Average consumer
use of ALMs in service and average rates of loan approvals have been lower than
most customer expectations. The Company believes that the economic viability of
the ALM as an alternative to traditional and new lending methods has not yet
been established, and several of the Company's ALM customers have terminated
their relationship with the Company. Although the Company has developed and is
developing other products and services to exploit its DeciSys/RT technology, to
date such products and services have not generated substantial revenues, and the
Company has been required to use a substantial amount of existing cash resources
to fund its operations. Although the Company believes that existing cash, cash
equivalents and internally generated funds will be sufficient to fund operations
through 1999, such resources, together with projected revenues that may be
received under existing contracts, will be insufficient to fund the Company's
operations in 2000 and beyond. To remain viable after 1999, the Company must
substantially increase revenues, raise additional capital and/or substantially
reduce its operations. No assurances can be given that the Company will be able
to increase its revenues, raise additional capital or reduce its operations in a
manner that allows it to continue operations in 2000 and beyond.
<PAGE>
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 March 31, 1999 of $45,432,259. The Company expects to incur substantial
additional costs to develop its financial product origination capabilities, to
enhance and market iDEAL, e-xpertLender, the ALM and Decisys/RT, and to develop
any new products and services. 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.
Results of Operations
Revenues
The Company's revenues for the three months ended March 31, 1999 were
$325,959 compared to $1,099,979 for the corresponding period of 1998.
Transaction fees. Revenues from transaction fees were $123,546 for the
three months ended March 31, 1999, compared to $113,849 for the corresponding
period in 1998. The increase during the three months ended March 31, 1999, as
compared to the same period in 1998 is attributable to an increase in the number
of financial service applications processed using DeciSys/RT.
Mortgage Processing Services. Mortgage processing services represents
fees earned by Surety Mortgage, Inc. ("Surety"), a wholly-owned subsidiary of
the Company, for originating and processing mortgage loans. Revenues from
mortgage processing services were $113,399 for the three months ended March 31,
1999, compared to $48,432 for the corresponding period in 1998. The increase
during the three months ended March 31, 1999, as compared to the same period in
1998 is attributable to an increase in the number of mortgage loans originated.
The three months ended March 31, 1998 represents only two months of operations
since Surety commenced originating and processing operations in February of
1998.
Sales and Rental. Sales and rental fees were $4,750 for the three
months ended March 31, 1999, compared to $19,500 for the corresponding period in
1998. The decrease is primarily attributable to a decrease in the number of ALMs
deployed and in service during 1999 as compared to the same period in 1998. In
1998 the Company's relationships with several ALM customers were terminated,
which resulted in a reduction of ALMs in service.
Professional Services. During the three months ended March 31, 1999,
the Company did not recognize any revenue associated with the performance of
professional services. Professional services of $780,995 for the three months
ended March 31, 1998, were associated with a contract to perform services for a
single customer.
Other. Revenues from other fees were $84,264 for the three month ended
March 31, 1999, compared to $137,203 for the corresponding period in 1998. For
the three months ended March 31, 1998, other revenue includes fees associated
with the processing of credit and debit card transactions by the Company's
Transaction Processing Division ("TPS"). During December 1998, the Company sold
TPS to a third party.
<PAGE>
Costs and Expenses
Costs of Revenues. Costs of revenues for the three months ended March
31, 1999 were $169,828, compared to $435,774 for the corresponding period in
1998. Costs of revenues for the three months ended March 31, 1999, were lower
than costs of revenues for the same period in 1998 because of the recognition in
1998 of labor and other direct and indirect costs associated with the
performance of professional services delivered during the three months ended
March 31, 1998, reduced maintenance and depreciation expense associated with
fewer ALMs in service under operating leases in 1999 and the sale of the
Company's TPS division in December 1998. The decrease in costs of revenues were
partially offset by an increase in the direct costs associated with originating
and processing mortgage loans due to an increase in the quantity of mortgage
loans originated and processed by Surety.
Research and Development. Costs incurred for research and development
for the three months ended March 31, 1999, totaled $229,125, compared to
$849,274 for the corresponding period in 1998. The decrease in research and
development costs for the three months ended March 31, 1999, reflects a decrease
in the number of employees involved in development activities and the deferral
of certain costs associated with the performance of professional services. Costs
associated with the performance of professional services are deferred until the
professional services are completed by the Company and accepted by the customer.
Upon acceptance by the customer, the corresponding revenue and deferred costs
are recognized by the Company. 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 $2,431,682 for the three months ended March 31,
1999, as compared to $3,171,375 for the corresponding period in 1998. The
decrease for the three months ended March 31, 1999, as compared to the
corresponding period of 1998 is primarily attributable to a decrease in
employment costs associated with an overall reduction in the number of employees
and a decrease in deferred compensation expense due to significant forfeitures
of common stock options granted under the Company's 1995 Stock Option Plan.
Interest Income/Expense. Interest income for the three months ended
March 31, 1999, totaled $122,327, compared to $365,402 for the corresponding
period in 1998. The decrease in interest income for the three months ended March
31, 1999, is due to a decrease in cash and cash equivalents and investments
balances as compared to the same period of 1998, 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 months ended March
31, 1999, was $1,362, as compared to $5,433 for the corresponding period in
1998.
Liquidity and Capital Resources
The Company has generated operating losses of $45,432,259 since its
inception and has financed its operations primarily through net proceeds from
its initial public offering in May 1996. Prior to the Company's initial public
offering, the Company's operations were financed 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 $60,088,516.
<PAGE>
The Company continues to use a substantial amount of existing cash
resources to fund its operations. If the Company continues to use cash resources
at the rate used in 1997 and 1998, the Company would deplete its existing cash
resources in the latter part of 1999; however, the Company has taken certain
measures to reduce its cash depletion rate, including decreasing its employee
base. The Company believes existing cash, cash equivalents and internally
generated funds will be sufficient to meet the Company's currently anticipated
cash requirements 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 1999. Moreover, existing cash resources and projected revenues
that may be received under existing contracts will be insufficient to fund the
Company's operations for 2000 and thereafter. Accordingly, to remain viable
after 1999, the Company must substantially increase revenues, raise additional
capital and/or substantially reduce its operations. No assurances can be given
that the Company will be able to increase its revenues, raise additional capital
or reduce its operations in a manner that would allow it to continue operations
in 2000 and beyond. In order to fund operations, the Company may need to raise
additional funds through the issuance of equity securities, in which case 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 continue operations;
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.
Net cash used during the three months ended March 31, 1999, to fund
operations was approximately $1,752,000 compared to approximately $1,309,000 for
the same period in 1998. Proceeds from the offering and other sources of cash
were used to fund current period operations, research and development of
approximately $299,000, payments on notes payable of approximately $141,000 and
software development of approximately $78,000. During the three months ended
March 31, 1998, net proceeds from the offering and other sources of cash were
used to fund operations, research and development of approximately $849,000,
capital expenditures of approximately $100,000 and repurchase of outstanding
shares of the Company's common stock of approximately $942,000. At March 31,
1999, cash and liquid investments were $8,119,570, as compared to $10,095,242 at
December 31, 1998. At March 31, 1999 working capital was $11,598,067, as
compared to $13,543,782 at December 31, 1998.
Surety has established a credit facility with a maximum borrowing
amount of $2,000,000. Pursuant to the terms of the credit facility, 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. Surety had no outstanding
borrowings under the Loan Warehousing Agreement as of March 31, 1999.
During 1997 in connection with its acquisition of Buy American, Inc.
and Project Freedom, Inc., the Company issued restricted common stock subject to
a put option by the sellers and a call option by the Company. Under such
acquisition agreement, the sellers had an option to sell any or all of the
shares of restricted common stock held by them to the Company at a price of
$3.47 per share and the Company had a single option to repurchase any or all of
the shares of restricted common stock at a price of $5.78 per share. These
options were exercisable for a 30 day period ending May 31, 1999. During April
1999, the Company and the former owners of Buy American, Inc. and Project
Freedom, Inc. entered into an agreement whereby the Company and the former
owners of Buy American, Inc. and Project Freedom, Inc. terminated their
respective rights under these options.
<PAGE>
Implications of Year 2000 Issues
Year 2000 issues generally involve the potential impact on a company if
computer systems fail to accurately interpret data after December 31, 1999.
Since many computer programs have historically been designed to read and
interpret years in a two-digit format, a computer program or system that is not
redesigned or otherwise updated may be incapable of distinguishing between the
year 2000 and the year 1900, which may result in systems failure or the
generation of inaccurate data. The risks associated with Year 2000 issues are
significant due to the reliance of most companies on interaction with automated
information or services provided by third parties that may be subject to Year
2000 issues. Moreover, it is frequently difficult to assess a third party's
ability, diligence, and success in addressing Year 2000 issues. In many cases,
reliance must be placed on representations received from third parties regarding
the existence of Year 2000 issues that may affect the continuity or quality of
critical services they provide.
The Company's business primarily involves the automated processing of
financial service transactions through both internally developed and externally
purchased computer software and hardware systems. Additionally, the Company is
dependent on third parties to deliver certain automated services essential to
support the Company's internal operations and its ability to process financial
services transactions for its customers. The computer systems used by the
Company to process financial services transactions are generally interfaced with
its customers' systems and, accordingly, the Company's ability to deliver
uninterrupted service may be adversely affected if its customers have not
adequately addressed Year 2000 issues.
The Company has undertaken various initiatives to date to address Year
2000 issues. Such initiatives have included an evaluation of its information
technology ("IT"), which consists of computer hardware and software, and
non-information technology ("Non-IT"), which generally includes systems that
rely on imbedded chip technology. The Company anticipates that its Year 2000
assessment, remediation, testing and implementation efforts will be completed by
September 30, 1999. The Company does not anticipate that any material
modification or refinement of its IT or Non-IT systems will be necessary to
adequately address and resolve Year 2000 issues; however, failure to identify,
assess, remediate, test and implement solutions to Year 2000 issues could result
in a system failure or the use of inaccurate data, which could disrupt the
Company's operations and adversely affect its ability to provide uninterrupted
services to its customers.
The Company divided its activities into two categories for purposes of
evaluating and tracking issues related to the Year 2000. "Services Systems" are
those computer software and hardware systems, including third party services,
used to provide processing services for the Company's customers. "Operations
Systems" are those computer software and hardware systems, including third party
services, utilized by the Company for internal operating and administrative
purposes.
Services Systems
The Company's processing services are delivered through ALMs or web
server-based systems, both of which are connected to the Company's Network
Operating Center ("NOC"). The NOC uses multiple servers to process financial
services transactions and is connected to various third party systems that
provide essential information required for the processing of financial services
transactions. Such third party services include, but are not limited to, credit
bureaus, credit scoring agencies, consumer identification sources and other
fraud detection service providers. Moreover, the Company's ALMs and web
server-based systems are connected to the NOC through communications networks
and links provided by third parties. The Company's ALMs, web server-based
systems and the NOC consist of both IT and Non-IT systems.
<PAGE>
ALM Systems. ALMs are freestanding kiosks that consist of hardware,
software and communications systems. The Company's customers have deployed ALMs
to serve as a point of entry for consumer information as well as a delivery
vehicle to fulfill financial services transactions. ALM systems, including
software applications, hardware and component devices and communications
connection to the NOC, have been tested using certain date testing parameters as
follows: December 31, 1999; January 3, 2000; February 28, 2000; February 29,
2000; and March 1, 2000. The Company has requested that third party providers of
IT and Non-IT components and systems used in or in conjunction with the ALM
systems provide evidence of their system's compliance with Year 2000 issues. To
date, the Company has received no communication that any third party service
providers are non-compliant with Year 2000 issues. Evidence supporting
compliance has been received from most third parties that provide critical
systems or service used in the ALM system. During the course of its evaluation
of Year 2000 issues pertaining to the ALM system, the Company identified one
operating software system that will require an upgrade to remediate Year 2000
issues. The Company expects that the required upgrades will be completed by
September 1, 1999.
Certain of the Company's services are accessed and utilized by external
systems of its customers. The Company has published an interface standard for
access to its services by these external systems, and the data elements of this
interface are Year 2000 compliant. This includes the interface to customer
created and maintained web pages for providing the Company's services using the
Internet.
Web Server-based Systems. The Company also provides services to its
customers using web server-based systems. These systems provide access to the
Company's services through customer maintained computer networks such as call
centers and indirect lending operations systems. The web server-based systems
access the Company's NOC through browser based applications which are
independent of the operating systems and hardware environments utilized by the
Company's customers. As a result, customers must ensure that these operating
system and hardware environments are Year 2000 compliant. Testing of these
systems is in process and is expected to be completed along with all necessary
remediation by September 1, 1999. Completion of the Company's Year 2000
initiatives with respect to its web server-based systems is dependent upon
completion of Year 2000 initiatives surrounding testing and implementation of
certain third party systems and services. Additionally, web server-based systems
are connected to the Company's NOC through dedicated third party communications
systems, and the Company has received statements from the provider of these
communications systems that such systems will operate in the Year 2000 and
beyond.
NOC Systems. The Company's NOC uses multiple servers to enable services
provided by its ALM and web server-based systems. These servers are
interconnected using standard Ethernet network facilities using TCP/IP
protocols. The Company is conducting tests on these servers and their operating
systems. All testing is expected to be completed along with all necessary
remediation by September 1, 1999. In addition, the Company is in the process of
soliciting and receiving statements from the various third party providers of
the IT and Non-IT components of these server systems regarding compliance with
Year 2000 issues.
The Company is dependent on services and systems provided by third
parties to maintain continuous and uninterrupted service to its customers.
Moreover, the Company's ability to fully certify its systems is dependent upon
successful implementation of Year 2000 compliant systems by third party service
providers. The Company anticipates that it will complete its assessment of Year
2000 issues related to third parties by September 1, 1999. The Company believes
that if certain third parties that provide essential services to the Company are
unable to demonstrate compliance with Year 2000 issues, the Company can switch
to alternative third party service providers and obtain substantially comparable
services at substantially the same cost.
<PAGE>
Operations Systems
Operations Systems are those computer hardware and software systems
utilized by the Company for internal operating and administrative purposes.
Certain systems utilized by the Company for operating purposes are also
dependent on third party service providers, however, to a much lesser extent
than the systems utilized by the Company to provide services to its customers.
Operations systems include, but are not limited to, those systems used for
accounting, billing, human resources, payroll, internal communications and
management of software resources. Additionally, Operations Systems include other
devices used for ongoing operations such as telephone and PBX systems, personal
and network computers and fax machines. Third party services used in the
Company's internal operations include Internet and telephone services and other
communications services.
The Company is completing its remediation, testing and implementation
activities with respect to its Operations Systems. During the course of its
assessment the Company identified one Operations System that was not year 2000
compliant. The Company anticipates that remediation will be completed by
September 1, 1999.
Operations Non-IT systems may contain imbedded chip technology, which
complicates the Company's Year 2000 identification, assessment, remediation and
testing efforts. Based upon its identification and assessment efforts to date,
the Company believes that no replacement of critical computer equipment or
software will be necessary. In addition, in the ordinary course of replacing
computer equipment and software, the Company attempts to obtain replacements
that are Year 2000 compliant.
The Company is completing its assessment regarding certain non-critical
Operations Systems and services provided by third parties. The assessment of
critical Operations Systems and services by third parties has been completed
which generally included obtaining representations that such systems were Year
2000 compliant. The Company is in the process of soliciting and obtaining
representations regarding all other systems and services provided by third
parties with respect to Year 2000 issues. The Company currently does not have
sufficient information to ascertain whether all third party system and service
providers will be Year 2000 compliant by September 1, 1999.
Costs of Addressing Year 2000 Issues
The automated systems developed by the Company and upon which it is
primarily dependent to deliver services to its customers were designed and
developed in consideration of Year 2000 issues. Accordingly, the incremental
cost associated with addressing Year 2000 issues in the initial design and
development of the Company's systems has been insignificant. Similarly, the
Company's internally developed operating systems have been developed since 1994,
and the incremental costs associated with Year 2000 issues have been
insignificant. The costs associated with Year 2000 issue assessment,
identification, remediation and testing have not been significant, and the
Company does not believe that significant future costs will be incurred to
complete its assessment and remediation of Year 2000 issues.
Risks Associated with Year 2000 Issues
The Company is still evaluating Year 2000 issues and there can be no
assurance that the Company will be completely successful in its efforts to
assess, identify, remediate and test all Year 2000 issues including the Year
2000 issues which may affect critical services supplied by third parties. If the
Company is unable to complete its assessment or otherwise improperly assesses or
fails to adequately remediate Year 2000 issues, the Company may be unable to
provide continuous and uninterrupted services to its customers. Accordingly, the
Company could suffer the loss of revenue, customers and future sales as well as
expose itself to litigation. Similarly, the Company may be exposed to the
disruption of its business activities and diversion of resources that could
materially and adversely affect the operations and activities of the Company.
Any amount of potential lost revenue or liability related to year 2000 issues
cannot be reasonably estimated at this time.
<PAGE>
To address the uncertainty and risks associated with Year 2000 issues,
the Company is developing contingency and recovery plans. Such plans are being
developed based on an assessment of possible scenarios that may result from Year
2000 issues and include the possible failure of the Company's systems and third
party systems and services. The Company anticipates that its planning efforts
and development of contingency plans will be complete by September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investments and the Company's
mortgage brokerage business. The Company does not believe such risk is material.
The Company's cash and cash equivalents consist of highly liquid investments
with maturities of three months or less. At March 31, 1999, short term
investments consist of approximately $1,500,000 in a certificate of deposit with
a maturity of less than three months and approximately $3,900,000 in U.S.
Government securities with maturities greater than three months when purchased,
which are currently held as available for sale. Further, when the Company
receives a commitment to originate a mortgage loan from a consumer or
correspondent, the Company immediately receives a commitment from an investor to
buy such mortgage loan. The Company does not believe that its mortgage brokerage
business exposes it to significant market risk for changes in interest rates.
<PAGE>
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 $0.0001 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 March 31, 1999, 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 5,574,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 28,644,000
Temporary investments:
US Treasury obligations 5,738,000
Commercial paper 1,521,000
Money market / cash 860,000
Other purposes
Marketing 4,560,000
Research & development 8,874,000
Purchase of software 2,236,000
</TABLE>
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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
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: May 14, 1999
<PAGE>
Exhibit 27 - Financial Data Schedule
This schedule contains summary financial information extracted from the
consolidated financial statements for the three months ended March 31,
1999 and is qualified in its entirety by reference to such statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,724,861
<SECURITIES> 5,394,709
<RECEIVABLES> 581,481
<ALLOWANCES> 59,884
<INVENTORY> 1,950,743
<CURRENT-ASSETS> 12,713,963
<PP&E> 8,671,223
<DEPRECIATION> 4,541,097
<TOTAL-ASSETS> 21,663,992
<CURRENT-LIABILITIES> 1,115,896
<BONDS> 0
0
0
<COMMON> 3,188
<OTHER-SE> 20,150,563
<TOTAL-LIABILITY-AND-EQUITY> 21,663,992
<SALES> 0
<TOTAL-REVENUES> 325,959
<CGS> 169,828
<TOTAL-COSTS> 2,900,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> (120,965)
<INCOME-PRETAX> (2,453,711)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,453,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,453,711)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
