<PAGE> 1
[AFFINITY TECHNOLOGIES LOGO]
INTRODUCTION
Affinity Technology Group, Inc., provides outsourced loan processing
services that enable financial institutions to link their branches, call
centers, Internet customers, indirect agents, and other units electronically to
their credit departments, providing fully automated lending - and, if necessary,
connectivity to a loan officer - through every channel. Affinity's services
include:
rtDS - Internet loan decision service
e-xpertLender - enterprise-wide loan processing service
iDEAL - loan processing for indirect auto lending
Point-of-sale Mortgage System - loan processing for mortgage
lending
For financial institutions, Affinity's services expedite loan decisions
and processing, increase the productivity and capacity of branch personnel,
call~center agents, loan officers, and indirect agents, and improve the customer
experience.
<TABLE>
<S> <C>
Letter to Stockholders .................................................. 2
e-xpertLender ........................................................... 4
iDEAL ................................................................... 5
rtDS .................................................................... 6
Point-of-sale Mortgage System ........................................... 7
Outsourced Loan Processing .............................................. 8
Selected Financial Data ................................................. 9
Management's Discussion & Analysis of Financial Condition and Results of
Operations ........................................................... 10
Consolidated Financial Statements ....................................... 17
Notes to Consolidated Financial Statements .............................. 21
Corporate and Stockholder Information ................................... 32
</TABLE>
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[AFFINITY TECHNOLOGIES LOGO]
LETTER TO OUR STOCKHOLDERS
In 1999 we encountered several significant setbacks, but made solid
progress in a number of key areas. As we entered 1999, our business plan focused
on the deployment of our indirect automobile loan processing system, iDEAL, with
the Citibank Auto Finance unit of Citigroup. Unfortunately, the planned
deployment was delayed and in mid-1999, Citibank elected to exit the indirect
automobile lending business and sold the business to The Dime Savings Bank of
New York. Currently, we have not been successful in deploying iDEAL as we had
expected.
Our inability to deploy iDEAL as anticipated put a significant strain
on our resources, especially our financial resources. In January 2000, we
decisively addressed this issue by reducing our workforce by 47%. This was an
unfortunate, but necessary, step to preserve our remaining financial resources
to exploit opportunities in 2000.
Even though we were unable to execute our 1999 business plan as
expected, we made significant progress in a number of areas. First and foremost,
we deployed iDEAL at Peoples Bank of California. As expected, Peoples has been
able to improve response times and increase productivity using our
fully-automated iDEAL service.
Additionally, during 1999 our technology development professionals
continued to enhance and refine our browser-based core products to accommodate
lending over the Internet. As we move into 2000, we believe that our technology
and flexible systems architecture provide us with a competitive advantage in
meeting the unique requirements of new and exciting business models being
rapidly developed by entrepreneurs and financial institutions focused on
exploiting Internet-based marketing and product delivery opportunities.
In the latter part of 1999, we began to aggressively market our
point-of-sale mortgage loan origination system through our wholly-owned
subsidiary, Surety Mortgage, Inc. The first market segment on which we focused
was real estate brokerage offices. We have deployed a number of units in real
estate offices under the brand name of "SAM", which stands for "Simplified
Automated Mortgage" system. Deployment opportunities and test results have been
very exciting. When coupled with Surety's uniquely designed back office
operations, SAM has consistently provided mortgage loan applicants with a loan
decision in less than one hour followed up by an immediate loan commitment
letter. This performance level far exceeds traditional mortgage lenders'
performance levels and the performance levels of most lenders offering mortgage
loans over the Internet. Our goal is to continue to pursue deployment
opportunities for this product and Surety has recently initiated a marketing
campaign directed at community banks and credit unions.
As we move into the future, our goal is to maximize the value of the
assets we have created and accumulated. One of our key assets is our impressive
patent portfolio. In early 1999, we were granted our first patent covering
automated loan processing. Since that time the U.S. Patent and Trademark Office
("PTO") has granted us a second patent related to
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[AFFINITY TECHNOLOGIES LOGO]
automated loan processing and has issued us a Notice of Allowance on another
patent application covering the automated processing of a financial account,
including credit accounts. To maximize the value of our patent portfolio we
engaged Sage Capital to design and develop a patent licensing program for
Affinity. We were successful in signing one significant patent license agreement
in 1999; however, our efforts have been slowed somewhat by a challenge to our
first loan processing patent which has led to a reexamination by the PTO. The
PTO has issued a preliminary Office Action rejecting the claims of our first
automated loan processing patent. We intend to vigorously defend our claims, but
the timing of our ability to ultimately resolve this matter is uncertain.
We will continue to follow a strategy of taking the actions to enhance
and expand the scope of our patents. This strategy will be executed not only for
our intellectual property rights over the automated processing of loans and
financial accounts, but also for our existing patent covering the automated
processing of insurance policies at a remote point-of-sale device.
Even though we will continue to pursue patent licensing opportunities
with third parties, we also intend to use our intellectual property rights to
provide a competitive advantage to sell and deploy our products and services.
The state-of-the art technologies we have developed over the past several years
is certainly one of our most valuable assets. Our challenge will be to align
ourselves with strategic partners and other third parties who understand the
unique ability of our products and services to accommodate new and evolving
business models, especially Internet-based business models. The recently
announced agreement with Auto Credit Acceptance, LTD, is a substantive first
step in this direction.
Finally, in 2000 and beyond we will endeavor to leverage the value of
our greatest asset, our people. I am truly grateful to our employees for their
deep commitment and dedication to making Affinity a success. It is truly amazing
to observe their creativity and problem solving capabilities. Even though 1999
was a challenging and often frustrating period, our people continued to press
forward and do the things necessary to create positive momentum for Affinity.
I'm sure that our shareholders will join me in offering our heartfelt thanks to
our dedicated employees.
Sincerely yours,
/s/ Joseph A. Boyle
---------------------
Joseph A. Boyle
President and Chief
Executive Officer
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[AFFINITY TECHNOLOGIES LOGO]
E-XPERTLENDER
CONSISTENT, EFFICIENT, AND FLEXIBLE PRODUCT DELIVERY THROUGH MULTIPLE CHANNELS
Consumers expect consistent, efficient, and flexible service from
financial institutions, and Affinity's technologies help financial institutions
meet these expectations. For example, e-xpertLender enables a financial
institution to electronically originate, process, track, and close loans
consistently and efficiently through the consumer's choice of channels.
Affinity provides decision services, both fully automated decisions and
referrals to credit analysts for personal evaluation, based on the lender's own
credit policies. With e-xpertLender, Affinity's customers can accept
applications through branches, call centers, and indirect agents depending on
where the consumer chooses to apply. The service handles personal loans, lines
of credit, credit cards, automobile loans, and demand deposit accounts. In 1999,
Affinity completed the development of its home equity loan and line products and
has added these to its suite of available products.
Customer-side functions in e-xpertLender, such as credit analysis and
application entry, are implemented using standard browser applications and
hardware. A lender's processing personnel can electronically track the status of
applications through the full origination process. When a loan is ready for
fulfillment, e-xpertLender supports closing at a branch, through the mail or
through an indirect agent. The cost and effort required to introduce the service
are much less than for conventional systems that a lender must license,
customize, install, and operate.
[PHOTO]
LENDING EXECUTIVES NEED THE SPEED,
EFFICIENCY & CONTROL PROVIDED
BY E-XPERTLENDER & IDEAL
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[AFFINITY TECHNOLOGIES LOGO]
iDEAL
IMPROVING SERVICE FOR INDIRECT AUTOMOBILE LENDERS
Lenders who deliver automobile loans to customers through automobile
dealerships compete for business through service and performance. Profitability
is based on delivering a rapid and accurate response that considers the
individual merits of each application. In addition, competition increasingly
requires the lender to balance low costs with the need to provide services
outside of normal banking hours such as evenings and weekends when most
consumers shop for automobiles.
Affinity has expanded its e-xpertLender service to enable "indirect"
automobile lenders to meet these important and sometimes conflicting needs
through the use of automation. Affinity's Indirect Electronic Automobile Lending
service (iDEAL) applies the lender's own credit policy, including credit scores
and rules, to determine which applications can be approved or declined
automatically and which require personal attention from a lending officer. Since
iDEAL is fully automated, it is available around the clock, including evenings
and weekends, providing automated decisions during non-traditional banking hours
when automobile dealerships do most of their business.
iDEAL automatically accesses credit reports and auto valuations,
calculates credit scores and financial ratios, and if a personal decision is
necessary, displays all of the information for a lending officer to review. Once
a decision is reached (whether automated or assisted by personnel), iDEAL
automatically generates the required notifications and sets up the dealer's
reserve and payment. When the contract of sale is received from the dealer, the
system funds the loan and transfers the information to the lender's booking and
servicing system.
Like other Affinity services, iDEAL is easy for lenders to install and
requires only standard Windows-based browsers on the lender's desktops.
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[AFFINITY TECHNOLOGIES LOGO]
rtDS
THE SUCCESSFUL DELIVERY OF CREDIT PRODUCTS OVER THE INTERNET REQUIRES A FULLY-
AUTOMATED DECISION AND HIGH APPROVAL RATES, ESPECIALLY WHEN THE DELIVERY OF
CREDIT IS RELATED TO THE PURCHASE OF A HIGH-VALUE PRODUCT SUCH AS AN AUTOMOBILE.
The Internet is emerging and will continue to emerge as an exciting new
marketplace for the marketing and distribution of financial products,
particularly loans. New entrepreneurial business models are rapidly being
developed by new market entrants and financial institutions who wish to exploit
the Internet as a distribution channel for their products and services,
especially in the area of automobile loans. Thus far, distribution of credit
products over the Internet has been hindered by the inability of market
participants to deliver fully-automated loan approvals and processing. Moreover,
the delivery of loan products over the Internet has also been further hindered
by very low loan approval rates. Our goal is to develop and deploy our
technology to fully satisfy these unique demands of consumers and distributors
of products and services over the Internet.
[PHOTO]
In 1999, Affinity developed its real-time decisioning service, rtDS, to
accommodate the specific demands associated with Internet lending. rtDS can
deliver a fully automated loan decision to a loan applicant in a matter of
seconds. We are expanding rtDS to take advantage of our ability to evaluate an
Internet loan applicant's credit profile against multiple lenders' underwriting
criteria and match the applicant to the lender best suited to the credit needs
of the applicant. This expansion of rtDS is expected to greatly improve loan
approval rates, which is necessary to implement a successful Internet business
model.
As with other processing services offered by Affinity, rtDS is offered
to lending institutions as an outsourced processing service. Through Affinity's
existing proprietary technology, rtDS accesses the applicant's credit report,
calculates the credit score, calculates financial ratios, applies the lender's
underwriting criteria, and returns a decision to the lender's web server for
immediate communication to the applicant. rtDS in conjunction with e-xpertLender
or iDEAL can also refer selected applications to lender personnel for
platform-assisted decisioning and even arrange for closing through a variety of
channels.
Affinity's rtDS also has the ability to offer multi-lender services.
The rtDS multi-lender capability will benefit both consumers and lending
institutions by appropriately matching a borrower's particular attributes with a
lender's credit policies to determine the various lending alternatives available
to the consumer. The consumer benefits from the quick discovery of available
lending sources, and the lender benefits by achieving a higher loan approval
ratio.
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[AFFINITY TECHNOLOGIES LOGO]
POINT-OF-SALE MORTGAGE ORIGINATION SYSTEM
TAKING OUR TECHNOLOGY TO CONSUMERS
We believe that point-of-sale loan origination systems are very well
suited to the distribution of certain loan products, especially mortgage loans.
Our extensive experience with point-of-sale technologies, such
[PHOTO]
as our original Automated Loan Machine, has provided us with valuable insights
on how to successfully deploy and operate point-of-sale systems. The key to a
successful point-of-sale system is to have a supporting back office system. On
average, we have been able to deliver a mortgage loan decision in less than one
hour.
During 1999, we continued to develop and deploy our point-of-sale
mortgage loan origination system through Surety Mortgage, Inc., a wholly-owned
subsidiary of Affinity. We are deploying this point-of-sale technology in
realtors' and developers' offices under the brand name of "SAM", which is short
for "Simplified Automated Mortgage" system. Additionally, we are pursuing
additional deployment opportunities in community bank and credit union branches.
We continue to believe that point-of-sale technology represents a
superior distribution channel for mortgage loans. SAM can easily be deployed
where consumers are likely to want to apply for a mortgage loan such as in real
estate offices and at their bank's branches. Through its SAM network, Surety has
proven it can provide consumers with a high level of convenience, service, and
cost savings.
SAM can be deployed in a desk or kiosk form. The desk form of SAM
is designed to appear as a quality wooden desk with a finish of red mahogany,
while the kiosk form is similar in appearance to an automated teller machine.
SAM provides consumers with estimates of loan amounts for which they qualify and
calculates the payment for a particular loan amount on an anonymous and
cost-free basis. Consumers shopping for a new home who ask the common questions
"Can I afford it?" and "What will the payments be?" can obtain the answers in a
confidential setting and without further obligation.
Using simple and easy-to-follow touch screen sequences, consumers can
complete a standard mortgage loan application using SAM. Because SAM automates
tedious tasks such as the entry of existing debts, consumers can prepare and
sign their loan applications in a matter of minutes. By the time they are
finished, SAM has obtained the necessary credit reports and transmitted the
credit reports and loan application to Surety, where processing can begin
immediately. Compared with the traditional method of obtaining a mortgage
through a loan officer, SAM can save hundreds of dollars in origination costs
and significantly reduce the time required, both of which benefit the consumer.
[PHOTO]
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[AFFINITY TECHNOLOGIES LOGO]
OUTSOURCED LOAN PROCESSING SERVICES
AS AN APPLICATION SERVICE PROVIDER ("ASP"), AFFINITY MAINTAINS FLEXIBLE,
SCALABLE AND RELIABLE LOAN PROCESSING CAPABILITIES.
Integral to our product delivery strategy is our ability to operate
rtDS, e-xpertLender and iDEAL as an ASP. We have built a state-of-the art
Operations Center to deliver consistent and efficient service to our customers.
Our Operations Center is at the core of our product delivery
capabilities. The Center is in operation 24 hours a day, 7 days a week. Our
Operations Center closely monitors the central servers that coordinate the flow
of data between the point of origination, third-party information sources, and
points of evaluation and fulfillment. The central servers also implement
customer-specific logic that applies our customers' credit policy to each
application.
The use of client-server technology permits us to scale-up our
operations quickly and in a cost effective manner, as new systems and customers
come on line and as transaction volumes increase. We process transactions
through secure communication links that connect our central servers to each of
our customers.
Our operating capabilities are supplemented by a specialist who advises
customers on the implementation of their specific credit policy in a fully
automated processing environment and technical support staff who configure and
set up systems according to specific customer requirements. We also maintain a
help desk service which is available during our customers' business hours to
provide timely assistance and support.
Finally, to ensure reliable and uninterrupted services to our
customers, our operating systems are distributable and supported by fully
functional remote disaster recovery facilities.
[PHOTO]
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[AFFINITY TECHNOLOGIES LOGO]
SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company 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.
<TABLE>
<CAPTION>
Years ended
December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 2,874,901 $ 2,656,259 $ 4,146,899 $ 5,081,818 $ 1,524,911
Costs and expenses:
Cost of revenues 2,262,468 1,644,653 2,125,646 3,088,321 1,101,330
Research and development 1,870,509 2,559,600 3,526,257 2,905,232 368,452
Selling, general and
administrative expenses 11,208,310 14,358,335 15,892,560 10,819,381 2,305,653
------------ ------------ ------------ ------------ ------------
Total costs and expenses 15,341,287 18,562,588 21,544,463 16,812,934 3,775,435
------------ ------------ ------------ ------------ ------------
Operating loss (12,466,386) (15,906,329) (17,397,564) (11,731,116) (2,250,524)
Interest income 375,514 1,044,251 2,033,571 2,099,004 48,476
Interest expense (3,764) (10,923) (35,359) (60,083) (105,981)
------------ ------------ ------------ ------------ ------------
Net loss $(12,094,636) $(14,873,001) $(15,399,352) $ (9,692,195) $ (2,308,029)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.41) $ (0.50) $ (0.54) $ (0.40) $ (0.15)
============ ============ ============ ============ ============
Shares used in computing
net loss per share 29,738,459 29,755,034 28,477,880 24,136,480 15,044,286
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,116,016 $ 2,026,932 $ 4,470,185 $ 31,563,950 $ 1,235,983
Short-term investments 1,474,949 8,068,310 19,135,415 10,583,997 --
Working capital (deficit) 4,637,238 13,543,782 28,599,560 43,672,679 (1,134,465)
Net investment in sales-type
leases, less current portion 249,830 574,347 1,328,741 2,386,010 860,295
Total assets 13,129,528 24,196,875 42,209,570 56,098,857 4,591,168
Notes payable, less current portion -- -- -- -- 222,399
Capital lease obligations to related
party, less current portion -- -- -- 66,245 148,119
Capital stock of subsidiary held
by minority investor -- -- -- 200,000 137,500
Stockholders' equity 10,670,980 22,556,201 39,230,570 52,134,639 617,412
</TABLE>
As of March 16, 2000, there were 289 stockholders of record of the Common Stock.
<TABLE>
<CAPTION>
SALES PRICE PER SHARE
---------------------
HIGH LOW
---- ----
<S> <C> <C>
1998:
First Quarter 3.03 2.25
Second Quarter 2.25 0.69
Third Quarter 1.09 0.50
Fourth Quarter 0.97 0.22
1999:
First Quarter 2.50 0.63
Second Quarter 3.81 1.19
Third Quarter 1.78 0.69
Fourth Quarter 1.31 0.41
</TABLE>
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. On two separate
occasions, the Company has been notified by the Nasdaq Stock Market, Inc.
("Nasdaq") that the Company was not in compliance with Nasdaq's listing
standards that require the Company's stock to maintain a minimum bid price of
$1.00 or more. On March 22, 2000, the Company was notified of a decision by
Nasdaq to transfer the Company from the Nasdaq National Market to the Nasdaq
SmallCap Market. The Company's continued listing on the Nasdaq SmallCap Market
is contingent upon successful completion of an application and review process.
SmallCap issuers must maintain a $1.00 minimum bid price and have net tangible
assets of $2 million, a $35 million market capitalization or $500,000 in net
income, among other requirements. There can be no assurances that the Company's
Common Stock will not be delisted from the Nasdaq SmallCap Market or that the
Company will be able to maintain compliance with Nasdaq listing standards in the
future.
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[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1994 to develop and market technologies that
enable financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. From the period
of inception (January 12, 1994) through December 31, 1994, the Company was a
development stage company, and its activities principally related to developing
its DeciSys/RT technology (formerly known as the "DSS System") and the Affinity
ALM, raising capital and recruiting personnel.
Until early 1997 the Company's primary products and services consisted
of the 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 a call center decisioning system that
provided financial institutions with the ability to originate unsecured consumer
loans with reduced or no human intervention. During 1997, the Company developed
e-xpertLender, which connects all of a financial institution's delivery
channels, its automated decisioning system, 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, the Company began developing
a system to process automobile loans pursuant to a development contract with
Citibank. In 1999 Citibank sold its indirect automobile loan business to Dime
Savings Bank. In 1998 and 1999, the Company also renewed its efforts to design
additional products available through point-of-sale devices similar to the ALM.
The primary product developed during this time period is the Mortgage ALM, which
captures information necessary to originate a mortgage loan. During 1999, the
Company completed the development of its general release version of an
automobile loan processing system, which is being offered under the brand name
of iDEAL.
During 1999, the Company committed significant development and other
internal resources to enhancing its e-xpertLender product, fulfilling its
obligations under its Dime contracts and completing iDEAL for general release.
As a result, the Company was unable to, and did not, devote significant
resources to the development, sales and marketing of any of its other products
and services. The Company deployed no ALMs during 1999. Average consumer use of
ALMs and average rates of loan approvals have been lower than most customer
expectations. The Company believes that the ALM has not proven to be a viable
channel for the delivery of consumer loans and other products in a
fully-automated manner. Accordingly, the Company did not devote significant
resources to the development of the ALM product during 1999, nor does it
contemplate the allocation of significant resources to the ALM product in the
future. Most of the Company's ALM customers have terminated their relationship
with the Company and at December 31, 1999, there were 68 ALMs in operation.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
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
during 2000, such resources, together with projected revenues that may be
received under existing contracts, may be insufficient to fund the Company's
operations in 2001 and beyond. To remain viable after 2000, 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 will allow it to continue operations in 2001 and beyond.
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, 1999 of $55,073,184 with net losses of $12,094,636,
$14,873,001 and $15,399,352 for the years ended December 31, 1999, 1998 and
1997, respectively. The Company expects to incur substantial additional costs to
develop its financial product origination capabilities, to enhance and market
iDEAL, e-xpertLender, and Decisys/RT and to complete zany new products and
services that may be developed. 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.
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[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
The Company's revenues were $2,874,901, $2,656,259 and $4,146,899 for
the years ended December 31, 1999, 1998 and 1997, respectively. The types of
revenue recognized by the Company in the years ended December 31, 1999, 1998 and
1997 are as follows:
TABLE 1-REVENUES
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- --------------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transaction fees $ 538,073 18.7 $ 750,936 28.3 $ 545,551 13.2
Mortgage processing fees 397,024 13.8 453,657 17.1 -- --
Initial set-up fees -- -- 91,000 3.4 638,687 15.4
Sales and rental fees 48,962 1.7 66,369 2.5 1,590,620 38.4
Professional services fees 850,497 29.6 797,301 30.0 792,734 19.1
Patent license revenue 645,000 22.4 -- -- -- --
Other income 395,345 13.8 496,996 18.7 579,307 13.9
---------- ----- ---------- ----- ---------- -----
$2,874,901 100.0 $2,656,259 100.0 $4,146,899 100.0
========== ===== ========== ===== ========== =====
</TABLE>
The nature and types of revenues earned by the Company has changed
significantly in the three-year period ended December 31, 1999. During 1997,
53.8% of the Company's revenues were derived from initial set-up fees and sales
and rental fees, most of which was associated with the deployment of ALMs under
sales-type leases. Revenue associated with ALM deployments was significantly
diminished in 1998 and 1999. In 1997, the Company entered into two contracts to
customize its core technology to accommodate specific customer requests. The
Company entered into a contract to provide professional services to a specific
customer to customize its core technology to accommodate an enterprise-wide loan
processing system, which became the basis for the Company's e-xpertLender
System. Additionally, in 1997 the Company entered into a contract to provide
professional services to a specific customer to customize an indirect automobile
loan processing system, which became the basis for the Company's iDEAL product.
The delivery of professional services under both contracts continued into 1998
and 1999. In addition, the Company began processing mortgage loans through
Surety in 1998. In 1999, the Company was granted a patent covering its
consumer-directed fully-automated lending system, and recognized $645,000 in
patent license revenue in 1999.
Transaction fees. The decrease in transaction fees in 1999 compared to
1998 is attributable primarily to the sale of the Company's former Transaction
Processing Division ("TPS") in December 1998. Transaction fees associated with
processing credit and debit card transactions through the Company's TPS division
were approximately $218,000 in 1998. The increase in transaction fees in 1998
compared to 1997 is attributable primarily to the deployment in mid-1997 of the
Company's first e-xpertLender System. Transaction fees processed through such
system were generated during the entire year of 1998. Transaction fees
associated with processing credit and debit card transactions through the
Company's TPS division decreased slightly from approximately $245,000 in 1997 to
approximately $218,000 in 1998.
Mortgage processing fees. Surety Mortgage, Inc. ("Surety"), a wholly
owned subsidiary of the Company, engages in mortgage brokerage activities which
involve originating, processing and selling mortgage loan products to outside
investors. Surety originates and processes mortgage loans directly with
consumers or on behalf of correspondents, and immediately sells such loans to
institutions that sponsor the loan programs offered by Surety. Surety only
offers loans that will be acquired by such institutions under such programs.
Upon making the loan commitment to the borrower, Surety immediately receives a
commitment from an institution to acquire the loan upon closing. Mortgage
processing fees include gains on sales of mortgage loans to institutions and
loan fees received for originating and processing the loan. Loan origination
fees and all other direct costs associated with originating loans are recognized
at the time the loans are sold. The decrease in mortgage processing fees in 1999
compared to 1998 is attributable to the processing of fewer loans in 1999
compared to 1998. In 1999, Surety processed and closed an aggregate principal
balance of loans of approximately $17,408,000 compared with approximately
$21,745,000 in 1998. The Company did not generate revenues from mortgage
processing services prior to 1998.
Initial set-up fees. The Company did not deploy any ALMs in 1999 and,
accordingly, recognized no set-up fees. Set-up fees recognized in 1998 relate to
the deployment of one ALM and the
11
<PAGE> 12
[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
recognition of previously deferred set-up fees associated with a customer's
decision not to deploy ALMs. Set-up fees in 1997 relate to the deployment of 53
ALMs.
Sales and rental fees. The decrease in sales and rental revenue in 1999
compared to 1998 is due to a decrease in the number of ALMs deployed under
operating leases in 1999 compared to 1998 for which there were scheduled rental
payments. The decrease in sales and rental revenue in 1998 compared to 1997 is
attributable to a substantial decrease in ALM deployments in 1998 compared to
1997. Amounts recognized in 1998 also consisted of rental payments received on
ALMs deployed under operating leases in prior years. In 1997, the Company
recognized sales revenue associated with the deployment of 28 ALMs under
sales-type leases as well as rental revenue associated with ALMs deployed under
operating leases.
Professional services fees. When the Company agrees to provide
professional services to customize its core technology to conform to a specific
customer request, the Company generally enters into a contract with the customer
for the performance of these services which typically defines deliverables,
specific delivery and acceptance dates and specified fees for such services.
Upon completion and acceptance of the specific deliverables by the customer, the
Company recognizes the corresponding revenue as professional services revenue.
The level of professional services revenue remained relatively consistent for
the years 1999, 1998 and 1997. In 1999, 64% and 36% of professional services
fees were associated with the customization of the Company's e-xpertLender and
iDEAL systems, respectively. This customization was performed during the year to
meet the specific requirements of two of the Company's customers. These two
customers represent 100% of the amounts recognized in 1999 for customization of
the e-xpertLender and iDEAL Systems. In 1998 and 1997, professional services
revenue related primarily to the customization of the Company's e-xpertLender
System to meet a specific customer's requirements. Such customer represented 97%
and 91% of professional services revenue in 1998 and 1997, respectively.
Patent license revenue. The Company was granted two patents in 1999
covering automated loan processing. Patent license revenue recognized in 1999
relates to certain patent licenses granted by the Company. Licensing agreements
with one customer and an affiliate of that customer constituted 93% of the
patent license revenue recognized in 1999.
As indicated above, two customers accounted for 100% of professional
services fees recognized in 1999. Moreover, in 1999 the development contract
under which the Company recognized 36% of its professional services revenue was
assigned to the Company's other customer which accounted for 64% of its 1999
professional services revenue. When combined, one current customer, therefore,
accounted for 100% of professional services revenue in 1999. Additionally, when
combined with other revenue associated with services provided to this customer,
the customer accounted for 49% of total revenue recognized by the Company in
1999. This same customer accounted for 99.1% of professional services revenue
for 1998 and 60.2% and 91.3% of ALM sales and rental and professional services
revenue, respectively, during 1997. This same customer accounted for 49.1% and
48.0% of total revenue for 1998 and 1997, respectively. One other customer
accounted for 13% of total revenue during 1997. For information relating to
customer revenue concentrations, see Note 12 of "Notes to Consolidated Financial
Statements - Segment Information." The loss of this customer or any other
significant customer may 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. Additionally, revenue associated
with the Company's patent licensing program was 22% of total revenue in 1999.
One of the Company's patents is currently being reexamined by the PTO and has
resulted in a preliminary rejection of the patent claims. Such reexamination
could result in a loss or otherwise limit the previously issued claims which
could negatively affect the Company's ability to maintain or expand its patent
licensing program. 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 the Company's
products and services.
COSTS AND EXPENSES
COSTS OF REVENUES. Costs of revenues for the years ended December 31,
1999, 1998 and 1997 were $2,262,468, $1,644,653, and $2,125,646, respectively.
Cost of revenues includes the direct costs associated with the generation of
specific types of revenue and the allocation of certain indirect costs when such
costs are specifically identifiable and allocable to revenue producing
activities. During the three years ended December 31, 1999, the nature and
amounts of costs, as well as gross profit margins, associated with certain
revenue producing activities varied significantly due to changes in the nature
of the services offered by the
12
<PAGE> 13
[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company and due to different pricing structures offered to certain customers.
Costs of revenues and the percentage of the costs of revenues to total
costs of revenues for the years ended December 31, 1999, 1998 and 1997 are as
follows:
TABLE 2-COSTS OF REVENUES
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- --------------------------
Amount % of Total Amount % of Total Amount % of Total
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Transaction fees $ 209,424 9.2 $ 388,734 23.6 $ 328,067 15.4
Mortgage processing fees 194,239 8.6 192,726 11.7 -- --
Initial set-up fees -- -- -- -- 232,077 10.9
Sales and rental fees 445,581 19.7 379,775 23.1 1,041,455 49.0
Professional services fees 573,381 25.3 204,058 12.4 524,047 24.7
Patent license revenue 64,500 3.0 -- -- -- --
Contract loss provision 775,343 34.2 479,360 29.2 -- --
---------- ----- ---------- ----- ---------- -----
$2,262,468 100.0 $1,644,653 100.0 $2,125,646 100.0
========== ===== ========== ===== ========== =====
</TABLE>
Costs of transaction fees. The cost of transaction fees consists
primarily of the direct costs incurred by the Company to process loan
applications and debit and credit card transactions through its systems. Such
direct costs are associated with services provided by third parties and includes
the cost of credit reports, fraud reports and communications networks used by
the Company. The cost of transaction fees decreased in 1999 compared to 1998 and
increased in 1998 compared to 1997 in direct correlation to a decrease in 1999
from 1998, and an increase in 1998 from 1997, of the volume of transactions the
Company processed through its systems compared with the previous period.
Costs of mortgage processing fees. The costs of mortgage processing
fees consist of the direct cost incurred by Surety associated with the
underwriting, processing and closing of mortgage loans. Such costs include
credit reports, appraisal reports, flood certifications, administration fees
charged by the purchasers of loans and fees paid to other lenders that provide
certain processing services associated with loans originated by Surety. The
costs of mortgage processing fees remained consistent in 1999 compared to 1998
even though Surety originated fewer loans. Accordingly, costs of mortgage
processing fees increased on a loan-for-loan basis in 1999 compared to 1998.
This increase was due to Surety's increased use of other lenders to provide
certain processing services in 1999 compared to 1998.
Costs of initial set-up fees. The costs of initial set-up fees are
related to the initial costs incurred to deploy and install ALMs. Such costs
include the allocation of direct and indirect labor and certain other indirect
costs associated with the initial preparation and deployment of ALMs for the
Company's customers. Additionally, the costs include direct costs incurred by
the Company, including shipping costs and amounts paid to third parties.
The Company deployed no ALMs in 1999 and no costs associated with
set-up fees were incurred during 1998. In 1997 the Company deployed 53 ALMs
under both sales-type and operating leases.
Costs of sales and rental fees. Costs of sales and rental fees are
related to the cost of ALM hardware components associated with ALMs deployed
under sales-type leases, maintenance of installed ALMs, amortization associated
with capitalized ALM and related systems development costs, and depreciation
associated with ALMs deployed under operating leases. Costs associated with
sales and rental fees remained consistent in 1999 compared to 1998 and reflected
an increase in amortization and depreciation related to ALMs deployed under
operating leases and related systems. Such increase was offset by lower ALM
maintenance costs in 1999 compared to 1998. In 1998 the costs of sales and
rental fees consisted primarily of depreciation related to ALMs deployed under
operating leases and the costs associated with maintaining the Company's
installed base of ALMs. Costs of sales and rental revenues were significantly
lower in 1998 compared to 1997 primarily as a result of the deployment in 1997
of 28 ALMs under sales-type leases compared to only 1 ALM deployed under a
sales-type lease in 1998.
Under the terms of an agreement with one customer covering 30 ALMs, the
customer's payment obligation to the Company is based on ALM performance, which
has resulted in revenues insufficient to cover the depreciation expense
recognized by the Company. Accordingly, the cost of sales and rental revenues
exceeded the sales and rental revenues recognized by the Company for such
contract. This contract will expire in early 2000 at which time the related ALMs
will be fully depreciated.
Costs of professional services fees. The costs of professional services
fees consist of the costs of the direct labor and the allocation of certain
indirect costs associated with performing software and system customization
services for customers. The costs of providing professional services will vary
depending upon the nature
13
<PAGE> 14
[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
of professional services rendered, the level of developers assigned to specific
projects and the duration of the project. Accordingly, the margins recognized by
the Company may vary significantly depending upon the nature of the project. The
costs of providing professional services increased in 1999 compared to 1998
primarily as a result of the greater amount of time to conclude certain projects
in 1999 compared to 1998. Similarly, costs of professional services decreased in
1998 compared to 1997 as a result of the shorter average duration of projects in
1998 compared to 1997.
Costs of patent license revenue. Costs of patent license revenue
recognized in 1999 consists of commissions paid to the Company's patent
licensing agent and is associated with such agent's commissions for patent
licenses granted by the Company. The Company commenced its patent licensing
program in 1999.
Contract loss provision. The Company periodically enters long-term
development contracts to design, develop and install loan processing systems for
its customers. In conjunction with such contracts the Company periodically
evaluates whether costs incurred and estimated future costs exceed revenues
under the contract. To the extent such costs exceed contracted revenues, the
Company records a charge to costs of revenues. In 1999 and 1998, the Company
recorded contract loss provisions of $775,343 and $479,360, respectively.
RESEARCH AND DEVELOPMENT. The Company accounts for research and
development costs as operating costs and expenses such costs in the 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 labor costs.
Research and development expenses for the year ended December 31, 1999
were approximately $1,871,000, compared to $2,560,000 and $3,526,000 for 1998
and 1997, respectively. The decrease in research and development expense in 1999
compared to 1998 is due to an overall decrease in the number of employees
involved in development activities in 1999 compared to 1998. The decrease in
research and development expenses in 1998 compared to 1997 is also due to an
overall decrease in the number of employees involved in developmental activities
in 1998 compared to 1997 as well as the progression of certain development
activities in 1998 to a point where the costs of such activities were
capitalized pursuant to applicable accounting guidelines.
During 1999, 1998 and 1997, the Company capitalized approximately
$138,000, $1,041,000, and $568,744, respectively, of software development costs
related primarily to the development of certain financial service applications
processed using DeciSys/RT. When a product is available for general release to
customers, capitalization of such costs is discontinued and amounts capitalized
are generally amortized over a 48 month period. 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, 1999 were
$11,208,310, compared to $14,358,335 and $15,892,560 for the years ended
December 31, 1998 and 1997, respectively.
SG&A expenses during 1999 consisted primarily of personnel expense of
approximately $4,283,000; professional fees of approximately $969,000;
depreciation and amortization expense of approximately $1,695,000; rent expense
of approximately $903,000; provision for excess rental capacity of approximately
$449,000; writedown of deferred software development costs of approximately
$370,000; and, travel costs of approximately $270,000. SG&A expenses during 1998
consisted primarily of personnel costs of approximately $6,283,000; professional
fees of approximately $1,722,000; depreciation and amortization of approximately
$1,693,000; rent expense of approximately $915,000; advertising and marketing
costs of approximately $193,000; deferred compensation expense amortization of
approximately $599,000; and, travel costs of approximately $437,000. SG&A
expenses during 1997 consisted primarily of personnel
14
<PAGE> 15
[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
costs of approximately $7,207,000; professional fees of approximately
$1,892,000; advertising and marketing costs of approximately $1,488,000;
deferred compensation expense amortization of approximately $481,000; and travel
costs of approximately $935,000.
The decrease in SG&A expense in 1999 compared to 1998 is due to a
substantial reduction in the Company's work force in the fourth quarter of 1998.
Other than certain increases associated with contract services, the provision
for excess rental capacity, and certain amounts the Company wrote off related to
capitalized software development costs, SG&A expenses were lower in all material
categories in 1999 compared with 1998. The decrease in SG&A expense in 1998, as
compared to 1997 is primarily attributable to a decrease in: (i.) employment
costs, primarily wage and recruiting costs associated with an overall reduction
in the Company's employee base; (ii.) advertising and marketing costs; (iii.)
professional fees consisting primarily of legal, accounting, recruiting and
relocation fees; and (iv.) travel costs. The decrease in SG&A expenses in 1998
compared to 1997 was partially offset by an increase in: (i.) depreciation and
amortization expense associated with an overall increase in the Company's
depreciable assets; (ii.) an increase in inventory valuation allowances
associated with potentially obsolete ALM shells due to planned design
improvements; and (iii.) costs associated with benefits including severance
benefits for certain employees terminated during 1998.
INTEREST INCOME
Interest income of $375,514, $1,044,251, and $2,033,571 during 1999,
1998 and 1997, respectively, 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. The decrease in interest
income in 1999 compared to 1998 is attributable to a decrease in the average
cash and cash equivalents and investment balances in 1999 compared to 1998. The
decrease in interest income in 1999 and 1998 compared to the previous periods is
due to a lesser extent to a decrease in the amount of amortization of deferred
interest income associated with ALMs under sales-type lease agreements.
Similarly, the decrease in interest income in 1998 compared to 1997 was
attributable to a decrease in the average cash and cash equivalents and
investment balances in 1998 compared to 1997.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1999 was $3,764,
compared to $10,923 and $35,359 for 1998 and 1997, respectively. The nominal
amount of interest expense recognized by the Company in 1999 was attributable to
use of a line of credit for short-term loan funding by the Company's wholly
owned subsidiary Surety. The decrease for the year ended December 31, 1998 as
compared to 1997, is due primarily to payments made under the terms of capital
lease obligations. The Company had no outstanding capital lease obligations
outstanding at December 31, 1998.
INCOME TAXES
The Company has recorded a valuation allowance for the full amount of
its net deferred income tax assets as of December 31, 1999, 1998, and 1997,
based on management's evaluation of the recognition criteria as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses of $55,073,184 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.
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 1999, the Company will deplete its existing cash resources in the second
quarter of 2000. 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 49% less than it was at December 31, 1999, 53%
less than it was December 31, 1998 and 73% less than it was at December 31,
1997. The Company believes existing cash, cash equivalents and internally
generated funds will be sufficient to meet the Company's currently anticipated
cash requirements during 2000. However, no assurances can be given that the
Company's existing cash resources will be sufficient to fund the Company's cash
requirements for 2000. Moreover, existing cash resources and projected revenues
that may be received under existing contracts will be insufficient to
15
<PAGE> 16
[AFFINITY TECHNOLOGIES LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
fund the Company's operations for 2001 and thereafter. Accordingly, to remain
viable in 2001, 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 through 2001. 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 acceptable 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 year ended December 31, 1999, to fund
operations was approximately $6,101,000 compared to approximately $9,498,000 and
$15,395,000 for the same periods in 1998 and 1997, respectively. Proceeds from
the offering and other sources of cash were used to fund current period
operations, research and development of approximately $1,871,000, software
development of approximately $138,000 and capital expenditures of approximately
$195,000. During 1998, proceeds from the offering and other sources of cash were
used to fund current period operations, research and development of
approximately $2,560,000, software development of approximately $1,041,000,
capital expenditures of approximately $696,000 and the repurchase of outstanding
shares of the Company's common stock of approximately $2,404,000. During 1997,
proceeds from the offering and other sources of cash were used to fund
operations, research and development of approximately $3,526,000, capital
expenditures of approximately $1,687,000, repurchase of outstanding shares of
the Company's common stock of approximately $872,000 and software development of
approximately $569,000. At December 31, 1999, 1998 and 1997, cash and liquid
investments were $3,590,965, $10,095,242, and $23,605,600, and working capital
was $4,637,238, $13,543,782, and $28,599,560, respectively.
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 December 31, 1999, 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 repurchase agreements with such former employees.
During June 1999, Surety renewed its agreement with a lender to
maintain 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, 2000. Surety had no outstanding borrowings under
the Loan Warehousing Agreement as of December 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 call option by the Company and put option by the sellers. Under such
agreement, the sellers had an option to sell any or all the shares of restricted
common stock held by them to the Company at a price of $3.47 per share. These
options were exercisable for a 30 day period ending May 31, 1999. In April 1999,
the Company and the sellers of Buy American, Inc. and Project Freedom, Inc.
agreed to cancel their respective call and the put options.
IMPLICATIONS OF YEAR 2000 ISSUES
The Company's operational transition into the year 2000 was uneventful
and the Company is unaware of any material problems or issues with the operation
of its Systems as a result of Year 2000 issues. In addition, the Company is
unaware of any material problems or issues with critical third party systems and
services utilized by the Company. The Company's incremental costs associated
with Year 2000 issues have been insignificant and the Company does not believe
that significant future costs will be incurred in remediation of Year 2000
issues.
16
<PAGE> 17
[AFFINITY TECHNOLOGIES LOGO]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,116,016 $ 2,026,932
------------ ------------
Investments 1,474,949 8,068,310
Accounts receivable, less allowance for doubtful accounts of $105,076
and $45,513 at December 31, 1999 and 1998, respectively 713,644 727,999
Net investment in sales-type leases - current: 324,485 534,302
Inventories 1,224,532 2,054,542
Other current assets 626,354 1,349,995
------------ ------------
Total current assets 6,479,980 14,762,080
Net investment in sales-type leases - non-current: 249,830 574,437
Property and equipment, net 2,921,770 4,511,924
Software development costs, less accumulated
amortization of $368,033 and $111,211 at
December 31, 1999 and 1998, respectively 1,199,053 1,773,057
Other assets 2,278,895 2,575,377
------------ ------------
Total assets $ 13,129,528 $ 24,196,875
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 215,897 184,619
Accrued expenses 788,763 388,466
Accrued compensation and related benefits 759,372 359,670
Notes payable -- 141,480
Current portion of deferred revenue - third parties 78,710 144,063
------------ ------------
Total current liabilities 1,842,742 1,218,298
Deferred revenue 615,806 422,376
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000
shares, issued 31,961,956 shares in 1999 and
31,572,880 shares in 1998 3,196 3,157
Additional paid-in capital 69,394,954 69,392,545
Deferred compensation (163,167) (489,656)
Treasury stock, at cost (2,163,556 and 2,073,207 shares at
December 31, 1999 and 1998, respectively) (3,490,819) (3,371,297)
Accumulated deficit (55,073,184) (42,978,548)
------------ ------------
Total stockholders' equity 10,670,980 22,556,201
------------ ------------
Total liabilities and stockholders' equity $ 13,129,528 $ 24,196,875
============ ============
</TABLE>
See accompanying notes.
17
<PAGE> 18
[AFFINITY TECHNOLOGIES LOGO]
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Transactions $ 538,073 $ 750,936 $ 545,551
Mortgage processing services 397,024 453,657 --
Initial set-up -- 91,000 638,687
Sales and rental 48,962 66,369 1,590,620
Professional services 850,497 797,301 792,734
Patent license revenue 645,000 -- --
Other income 395,345 496,996 579,307
------------- ------------- -------------
2,874,901 2,656,259 4,146,899
Costs and expenses:
Cost of revenues 2,262,468 1,644,653 2,125,646
Research and development 1,870,509 2,559,600 3,526,257
Selling, general and administrative expenses 11,208,310 14,358,335 15,892,560
------------- ------------- -------------
Total costs and expenses 15,341,287 18,562,588 21,544,463
------------- ------------- -------------
Operating loss (12,466,386) (15,906,329) (17,397,564)
Interest income 375,514 1,044,251 2,033,571
Interest expense (3,764) (10,923) (35,359)
------------- ------------- -------------
Net loss $ (12,094,636) $ (14,873,001) $ (15,399,352)
============= ============= =============
Net loss per share - basic and diluted $ (0.41) $ (0.50) $ (0.54)
============= ============= =============
Shares used in computing net loss per share 29,738,459 29,755,034 28,477,880
============= ============= =============
</TABLE>
See accompanying notes.
18
<PAGE> 19
[AFFINITY TECHNOLOGIES LOGO]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Deferred Treasury Accumulated Stockholders'
Stock Capital Compensation Stock Deficit Equity
------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $2,788 $ 68,777,090 $(3,939,044) $ -- $(12,706,195) $ 52,134,639
Exercise of warrants 4 37,473 -- -- -- 37,477
Exercise of warrants by
related party 240 -- -- -- -- 240
Exercise of stock options 30 144,034 -- -- -- 144,064
Amortization of deferred
compensation -- -- 480,534 -- -- 480,534
Forfeiture of stock options -- (1,899,936) 1,899,936 -- -- --
Purchase of treasury stock -- -- -- (967,035) -- (967,035)
Issuance of common stock in
exchange for capital stock of
subsidiary held by minority
investor 67 1,599,933 -- -- -- 1,600,000
Issuance of common stock
for acquisition 26 1,199,977 -- -- -- 1,200,003
Net loss -- -- -- -- (15,399,352) (15,399,352)
------ ------------ ----------- ------------ ------------ ------------
Balance at December 31, 1997 3,155 69,858,571 (1,558,574) (967,035) (28,105,547) 39,230,570
Exercise of stock options 2 4,228 -- -- -- 4,230
Amortization of deferred
compensation -- -- 598,664 -- -- 598,664
Forfeiture of stock options -- (470,254) 470,254 -- -- --
Purchase of treasury stock -- -- -- (2,404,262) -- (2,404,262)
Net loss -- -- -- -- (14,873,001) (14,873,001)
------ ------------ ----------- ------------ ------------ ------------
Balance at December 31, 1998 3,157 69,392,545 (489,656) (3,371,297) (42,978,548) 22,556,201
Exercise of stock options 39 173,209 -- (119,522) -- 53,726
Amortization of deferred
compensation -- -- 155,689 -- -- 155,689
Forfeiture of stock options -- (170,800) 170,800 -- -- --
Net loss -- -- -- -- (12,094,636) (12,094,636)
------ ------------ ----------- ------------ ------------ ------------
Balance at December 31, 1999 $3,196 $ 69,394,954 $ (163,167) $ (3,490,819) $(55,073,184) $ 10,670,980
====== ============ =========== ============ ============ ============
</TABLE>
See accompanying notes.
19
<PAGE> 20
[AFFINITY TECHNOLOGIES LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (12,094,636) $ (14,873,001) $ (15,399,352)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,449,521 2,369,220 2,066,270
Amortization of deferred compensation 155,689 598,664 480,534
Writedown of software development costs 369,787 -- --
Provision for doubtful accounts 60,000 370,000 456,841
Inventory valuation allowance 694,940 1,060,000 230,000
Contract loss provision 775,343 479,360 --
Deferred revenue 128,077 187,175 368,594
Other 24,837 94,808 195,505
Changes in current assets and liabilities:
Accounts receivable (45,645) 543,906 (2,073,893)
Net investment in sales-type leases 534,425 937,388 189,721
Inventories 71,051 450,258 (755,248)
Other assets (55,395) (1,029,727) (6,633)
Accounts payable 31,278 (482,205) (775,838)
Accrued expenses 400,297 (2,118) (477,046)
Accrued compensation and related benefits 399,702 (201,721) 105,986
------------- ------------- -------------
Net cash used in operating activities (6,100,729) (9,497,993) (15,394,559)
Investing activities
Purchases of property and equipment (194,726) (696,122) (1,683,755)
Proceeds from sale of property and equipment 16,872 47,622 144,535
Software development costs (137,940) (1,041,091) (568,744)
Purchases of short-term investments (2,474,949) (9,436,211) (34,345,695)
Sales of short-term investments 9,068,310 20,503,316 25,794,277
Other -- -- (300,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities 6,277,567 9,377,514 (10,841,942)
Financing activities
Proceeds from notes payable to third parties -- 141,480 --
Principal payments on capital leases -- (64,222) (72,010)
Payments on notes payable to third parties (141,480) -- --
Purchase of treasury stock -- (2,404,262) (871,775)
Exercise of warrants -- -- 37,717
Exercise of options 53,726 4,230 48,804
Net cash used in financing activities (87,554) (2,322,774) (857,264)
------------- ------------- -------------
Net (decrease) increase in cash 89,084 (2,443,253) (27,093,765)
Cash and cash equivalents at beginning of year 2,026,932 4,470,185 31,563,950
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,116,016 $ 2,026,932 $ 4,470,185
============= ============= =============
</TABLE>
See accompanying notes.
20
<PAGE> 21
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN
To date, the Company has generated operating losses, has experienced an
extremely lengthy sales cycle for its products and has been required to use a
substantial amount of existing cash resources to fund its operations. If the
Company continues to use cash at the rate used during 1999, the Company will
deplete its existing cash reserves in the second quarter of 2000. Although the
Company has taken steps to reduce its operating expenses and believes that
existing cash, cash equivalents and internally generated funds will be
sufficient to fund operations during 2000, such resources, together with
projected revenues that may be received under existing contracts, will be
insufficient to fund the Company's operations in 2001 and beyond. To remain
viable after 2000, the Company must substantially increase revenues, raise
additional capital and/or substantially reduce its operations.
Management's plan includes increased sales with new customer
relationships established during 1999, sales growth through deployment of
existing product offerings to new customers, deployment of a recently developed
Internet product, and continued cost curtailment. In addition, the Company
believes it is due significant amounts related to a development contract and
certain other amounts and is pursuing collection on these balances. The Company
also has several patents which management would consider selling, if necessary.
Additionally, management intends to continue discussions with investment bankers
and venture capital firms regarding additional financing.
2. 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
5,060,000 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 $65,780,000. Proceeds to the Company, net of
underwriters' discount and total offering expenses, were approximately
$60,089,000.
Simultaneously with the offering, 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), was automatically converted
into an aggregate of 6,018,362 shares of Common Stock.
Since its formation the Company has concentrated its product
development efforts primarily on a "closed loop" electronic commerce system that
utilizes its proprietary Decisys/RT technology and 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 assets and revenues and broadening
customer relationships while reducing their operating and infrastructure costs.
The Company has developed several products which utilize its DeciSys/RT
technology to process certain types of loans with little or no human
intervention. The Company's iDEAL System allows the automated decisioning and
processing of automobile loans originating at an automobile dealership. Similar
to iDEAL, the Company's e-xpertLender System allows the automated decisioning
and processing of loans originating at bank or other financial institution
branches. The Company's Automated Loan Machine ("ALM") which is similar in
appearance to an automated teller machine allows consumers to apply for, and if
approved, receive a loan, including the loan proceeds and underlying
documentation in as little as 10 minutes.
3. 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 Mortgage Technology, Inc.,
decisioning.com and Multi Financial Services, Inc. and its wholly owned
subsidiary Surety Mortgage, Inc., ("Surety"). All significant intercompany
balances and transactions have been eliminated in consolidation.
21
<PAGE> 22
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
INVESTMENTS
The Company classifies its investments as held to maturity or available
for sale. At December 31, 1999, the Company's investments of approximately
$1,475,000 were all classified as held to maturity. Investments consist of
investments in certificates of deposit, or other similar money market
investments with maturities of less than three months. The Company had no
unrealized holding gains or losses associated with investments classified as
available for sale during the years ended December 31, 1999, 1998 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, investments, accounts receivable, net investment in sales-type
leases, accounts payable and notes payable approximate their fair values. Fair
values of investments are based on quoted market prices.
INVENTORIES
Inventories at December 31, 1999 and 1998 are stated at the lower of
cost or market. Cost is determined using the first-in, first-out ("FIFO") cost
flow assumption.
OTHER CURRENT ASSETS
Other current assets at December 31, 1999 consisted of deferred
contract costs of $329,266, prepaid expenses of $275,954 and interest receivable
of $21,134. At December 31, 1998, other current assets consisted of deferred
contract costs of $810,457, prepaid expenses of $418,781 and interest receivable
of $120,757.
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) was approximately $1,807,000, $1,893,000 and
$1,799,000 during 1999, 1998 and 1997, 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. The net realizable value of unamortized capitalized costs is
periodically evaluated and, to the extent such costs exceed the net realizable
value, unamortized amounts are reduced to net realizable value.
Amortization of capitalized software development was approximately
$342,000, $82,000 and $65,000 during 1999, 1998 and 1997, respectively. In 1999,
capitalized software development costs were written down to approximately
$370,000 to net realizable value.
VALUATION OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), the Company periodically evaluates the carrying
value of long-lived assets to be held and used, including property and equipment
and goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In the event of such, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily
22
<PAGE> 23
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Based on the anticipated cash flows from the Company's business plan,
management believes that no impairment writedown is required for long-lived
assets for the year ended December 31, 1999.
INTANGIBLE ASSETS
Intangible assets arising from the excess of cost over acquired assets
are amortized by the straight line method over their estimated useful life of
ten years. Intangible assets, primarily goodwill, consisted of approximately
$1,470,000 which was recorded in conjunction with the acquisition of Buy
American, Inc. and Project Freedom, Inc. (see Note 8), and approximately
$1,400,000 which was recorded in conjunction with the exchange of APC common
stock for ATG common stock. See "Minority Investor" below. Accumulated
amortization associated with these intangible assets approximated $661,000 and
$373,000 at December 31, 1999 and 1998, respectively.
MINORITY INVESTOR
An unrelated third party exchanged 240,570 shares of APC common stock
for 666,667 shares of ATG Common Stock on May 21, 1997. The exchange was
accounted for as a purchase of minority interest in a majority-owned subsidiary.
The fair market value of the ATG Common Stock at the time of the exchange was
approximately $1,600,000. The unrelated third party had previously acquired the
shares of APC common stock for aggregate consideration of $125,000, and 90,988
shares of APC convertible preferred stock, which was acquired for aggregate
consideration of $75,000. These holdings represented a 24.9% minority interest
in APC at the date of exchange.
SOFTWARE REVENUE RECOGNITION
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended, 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 1999 or 1998
associated with contracts subject to SOP 97-2 guidance.
REVENUE RECOGNITION
Transaction fees - Transaction fee revenue is recognized as the related
transactions are processed. Transaction processing fees revenue represented
approximately 19%, 28% and 13% of total revenue during 1999, 1998 and 1997,
respectively.
Mortgage processing services - Surety engages in mortgage brokerage
activities which generally involve originating, processing, and selling mortgage
loan products to outside investors. Surety originates and/or processes mortgage
loans directly with consumers or on behalf of correspondents and immediately
sells such loans to investors that sponsor the loan programs offered by Surety.
Surety only offers loans that will be acquired by the investors under such
programs. Upon making the loan commitment to the borrower, Surety immediately
receives a commitment from an investor to acquire the loan upon closing. Loan
origination fees include gains on sales of mortgage loans to investors and loan
origination fees received for originating and processing the loan. Loan
origination fees and all direct costs associated with originating loans are
recognized at the time the loans are sold.
Initial set-up - 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.
Sales and rental - Revenue and costs related to leases of ALM equipment
are recognized in accordance with Statement of Financial Accounting Standards
No. 13,
23
<PAGE> 24
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"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.
Professional services - In conjunction with the installation of the
Company's technology, periodically additional customer specific technology
development is performed by the Company in the form of professional services.
The Company generally enters into a contract with the customer for the
performance of these services. Upon completion and acceptance of professional
services by the customer, the Company recognizes the corresponding revenue.
Patent licensing - The Company recognizes revenue from patent licensing
activities pursuant to the provision of each license agreement which specify the
periods to which the related license and corresponding revenue applies.
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. 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 revenues relate to unearned revenue on ALM
leases and certain other amounts billed to customers for which acceptance of the
underlying product or service is not fully complete.
COST OF REVENUES
Cost of revenues consists of costs associated with initial set-up,
transaction fees, sales and rental revenues, professional services and mortgage
processing services. Additionally, contract loss provisions are charged to cost
of revenues. Costs associated with initial set-up fees include labor, other
direct costs and an allocation of related indirect costs. The Company did not
deploy any ALMs during 1999 and deployments were insignificant in 1998 and no
costs were incurred in 1999 and 1998 in association with initial set-up revenue
recognized. Labor and other direct costs associated with initial set-up fees
were approximately $232,000 for the year ended December 31, 1997. Costs
associated with transaction fees includes the direct costs incurred by the
Company related to transactions it processes for its customers. Costs of
transaction fees approximated $209,000, $389,000 and $328,000 in 1999, 1998 and
1997, 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 approximately $446,000,
$380,000 and $1,041,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Costs associated with professional services include labor, other
direct costs and an allocation of related indirect costs. Labor and other direct
and allocation of indirect costs associated with professional services totaled
approximately $573,000, $204,000 and $524,000 for the years ended December 31,
1999, 1998, and 1997 respectively. Costs associated with mortgage processing
services include direct costs associated with originating and processing
mortgage loans and totaled approximately $194,000 and $193,000 for the years
ended December 31, 1999 and 1998, respectively. Prior to 1998 the Company did
not perform services of this nature. Costs of patent license revenues consist of
commissions paid by the Company to its patent licensing agent and totaled
$64,500 in 1999. In 1999 and 1998, the Company recorded contract loss provisions
of approximately $775,000 and $480,000, respectively.
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
24
<PAGE> 25
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"), 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 pro forma effect
on net income and earnings per share were not material for the years ended
December 31, 1999, 1998 and 1997. The Company intends to continue to account for
stock based compensation arrangements under APB No. 25 and has adopted the pro
forma disclosure requirements of SFAS 123.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Advertising and
marketing expense was approximately $77,000, $193,000 and $1,488,000 during
1999, 1998 and 1997, respectively.
NET LOSS PER SHARE OF COMMON STOCK
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128")
effective for fiscal years ending after December 15, 1997, which superseded
Accounting Principles Board Opinion No. 15 "Earnings Per Share" ("APB 15"). SFAS
128 changed the method used to compute earnings per share and requires companies
to restate all prior periods where applicable. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options and
warrants are to be excluded. The Company adopted SFAS 128 in 1997 and all net
loss per share of Common Stock amounts presented have been computed based on the
weighted average number of shares of Common Stock outstanding in accordance with
SFAS 128. Stock warrants and stock options are not included in the calculation
of dilutive loss per common share because the Company has experienced operating
losses in all periods presented and, therefore, the effect would be
antidilutive.
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").
CONCENTRATIONS OF CREDIT RISK
The Company markets its products and services to financial institutions
throughout the United States. The Company performs ongoing credit evaluations of
customers and retains a security interest in leased equipment related to
sales-type leases.
SEGMENT INFORMATION
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") in its financial statements for
the year ended December 31, 1998. SFAS No. 131 establishes standards for the way
that companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers as well as the reporting of
selected information about operating segments in interim financial reports to
stockholders. In accordance with management's oversight of the Company's
operations, the Company conducts its business within one industry segment -
financial services technology.
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
25
<PAGE> 26
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain amounts in 1998 and 1997 have been reclassified to conform to
1999 presentations for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
4. SALES-TYPE AND OPERATING LEASES
The components of the net investment in sales-type leases are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Total minimum lease
payments receivable $ 628,081 $ 1,244,355
Less unearned
interest income (53,766) (135,616)
----------- -----------
Net investment in sales-type
leases $ 574,315 $ 1,108,739
=========== ===========
Net investment in sales-type
leases is classified as:
Current $ 324,485 $ 534,302
Non-current 249,830 574,437
----------- -----------
$ 574,315 $ 1,108,739
=========== ===========
</TABLE>
Future minimum lease payments to be received on sales-type leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SALES-TYPE
-----------
<S> <C>
2000 $ 364,441
2001 257,676
-----------
$ 628,081
===========
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Electronic parts and
other components $ 976,345 $ 1,062,180
Work in process 1,189,766 1,207,915
Finished goods 772,407 880,145
----------- -----------
2,938,518 3,150,240
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Reserve for obsolescence (1,713,986) (1,095,698)
----------- -----------
$ 1,224,532 $ 2,054,542
=========== ===========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ALM equipment leased to
others under operating
leases $ 424,518 $ 676,326
Data processing equipment 2,594,052 2,622,410
Demonstration equipment 1,080,259 687,632
Office furniture and fixtures 2,337,307 2,359,147
Automobiles 72,003 72,003
Purchased software 2,173,584 2,164,463
----------- -----------
8,681,723 8,581,981
Less accumulated depreciation
and amortization (5,759,953) (4,070,057)
----------- -----------
$ 2,921,770 $ 4,511,924
=========== ===========
</TABLE>
Accumulated depreciation of ALM equipment leased to others was
approximately $394,000 and $455,000 at December 31, 1999 and 1998, respectively.
7. NOTES PAYABLE
During June 1998, 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, 2000. There were no outstanding borrowings under
the Loan Warehousing Agreement as of December 31, 1999 and outstanding
borrowings at December 31, 1998 were $141,480 bearing an interest rate of 8.25%.
26
<PAGE> 27
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY PREFERRED STOCK
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, conversion 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, 1999 there are no shares of
preferred stock issued or outstanding.
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. At December 31,
1999, approximately 200,000 options were exercisable. At December 31, 1999, the
weighted average exercise price was $0.44 and the weighted average remaining
contractual life was 6.8 years. This plan closed during April 1996.
In April 1996, the Company adopted the 1996 Incentive Stock Option
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.
In addition, the 1996 Stock Option Plan was amended and restated
effective May 28, 1999, to increase the number of shares of common stock
available for issuance from 1,900,000 to 2,900,000 and to permit non-employee
directors to participate in the 1996 Stock Option Plan. As a result of the
amendment, non-employee directors will receive options to purchase 5,000 shares
of Common Stock of the company on the 5th business day after each annual
shareholder meeting.
A summary of activity under the 1996 and 1995 Option Plans is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER PRICE
FOR GRANT OF SHARES PER SHARE
---------- ---------- ----------
<S> <C> <C> <C>
1995 STOCK OPTION PLAN
Balance at December 31, 1996 -- 1,633,142 $ 0.44
Options canceled/forfeited -- (426,544) $ 0.44
Options exercised -- (319,202) $ 0.44
---------- ---------- ----------
Balance at December 31, 1997 -- 887,396 $ 0.44
Options canceled/forfeited -- (175,642) $ 0.44
Options exercised -- (9,540) $ 0.44
---------- ---------- ----------
Balance at December 31, 1998 -- 702,214 $ 0.44
Options canceled/forfeited -- (69,324) $ 0.44
Options exercised -- (387,076) $ 0.44
---------- ---------- ----------
Balance at December 31, 1999 -- 245,814 $ 0.44
========== ========== ==========
1996 STOCK OPTION PLAN
Balance at December 31, 1996 1,802,500 97,500 $ 11.88
Options granted (744,225) 744,225 $ 6.07
Options canceled/forfeited 125,525 (125,525) $ 7.17
---------- ---------- ----------
Balance at December 31, 1997 1,183,800 716,200 $ 6.66
Options granted (1,544,255) 1,544,255 $ 1.03
Options canceled/forfeited 636,805 (636,805) $ 5.63
---------- ---------- ----------
Balance at December 31, 1998 276,350 1,623,650 $ 1.55
Shares reserved 1,000,000 -- --
Options granted (235,200) 235,200 $ 1.52
Options canceled/forfeited 316,310 (316,310) $ 1.20
Options exercised -- (2,000) $ 0.91
---------- ---------- ----------
Balance at December 31, 1999 1,357,460 1,540,540 $ 1.63
========== ========== ==========
</TABLE>
A summary of stock options exercisable and stock options outstanding
under the 1996 Option Plan is as follows:
<TABLE>
<CAPTION>
1996 STOCK OPTION PLAN
OPTIONS EXERCISABLE
AT DECEMBER 31, 1999
---------------------------------------------------
WEIGHTED
RANGE OF NUMBER AVERAGE PRICE
EXERCISE PRICES EXERCISABLE PER SHARE
------------------- ----------- -------------
<S> <C> <C>
$ 0.50 - $ 0.94 220,585 $ 0.90
$ 1.50 - $ 3.75 45,219 $ 3.35
$ 6.75 - $ 7.38 42,690 $ 7.34
---------
$ 0.50 - $ 7.38 308,494 $ 2.15
=========
</TABLE>
27
<PAGE> 28
[AFFINITY TECHNOLOGIES LOGO]
<TABLE>
<CAPTION>
1996 STOCK OPTION PLAN OPTIONS OUTSTANDING
AT DECEMBER 31, 1999
---------------------------------------------------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER WEIGHTED AVERAGE CONTRACTUAL
EXERCISE PRICES OUTSTANDING PRICE PER SHARE LIFE (YEARS)
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$0.50 - $0.94 1,097,865 $ 0.90 8.6
$1.50 - $3.75 335,450 $ 2.21 8.8
$6.75 - $7.38 107,205 $ 7.34 7.0
---------
$0.50 - $7.38 1,540,520 $ 1.63 8.5
=========
</TABLE>
The Company has recorded in 1996 and 1995 deferred compensation expense
totaling approximately $5,492,000 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. During 1997, the Company adjusted the deferred compensation
expense to reflect actual compensation expense earned by terminated employees.
The Company continues to amortize the deferred compensation of the remaining
individuals still employed by the Company over the vesting period of the
individual's options. The vesting period for other options is generally 60
months. Amortization of deferred compensation in 1999, 1998 and 1997 totaled
approximately $156,000, $599,000 and $481,000, respectively.
During July 1998, independent of the 1995 and 1996 Incentive Stock
Option Plans and in connection with the employment of the President and Chief
Executive Officer of the Company, the Company issued an option to purchase
250,000 shares of Common Stock of the Company at an exercise price of $0.94 per
share. The exercise price equaled the estimated fair market value on the date of
grant and the vesting of this option was ratable over a 60 month term. The
President and Chief Executive Officer resigned on January 10, 2000 and the
option was terminated. Also in conjunction with the President and Chief
Executive Officer's resignation and the termination of his option to purchase
250,000 shares of Common Stock of the Company, the Company's Board of Directors
voted to accelerate the vesting of options granted under the 1996 Stock Option
Plan to purchase 50,000 shares of the Common Stock of the Company.
During 1994 and 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 were subject to repurchase by the
Company based on cost on a sliding scale over a 60 month term (resulting in a
reduced number of shares subject to repurchase) if the related employment
arrangements terminated. During 1997 the two officers terminated their
employment and the Company repurchased 643,066 shares pursuant to the provisions
of the employment agreements.
During 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 lapsed since the Company did not meet certain 1997
operating results. In addition, of the total options granted during 1997,
131,100 were performance based stock options awarded in connection with
employment agreements with key employees. Under the terms of these agreements,
84,000 lapsed during 1997 and 47,100 lapsed during 1998 because the required
performance measures were not met.
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 had the
right to purchase up to an aggregate of 6,666,340 shares of common stock at a
purchase price of approximately $0.0001 per share. The agreement also specified
that the warrant could be exercised in whole or in part at any time prior to
December 31, 2015 only if, absent prior written regulatory approval, after
giving effect of such exercise, the party beneficially owns less than five
percent of the outstanding shares of the Company's common stock. During 1997,
the party obtained written regulatory approval to exercise the warrant in its
entirety. The warrant is not transferable without regulatory approval. On
December 31, 1997 and December 28, 1995, the party exercised portions of the
warrant and acquired 2,400,000 and 795,000 shares of Common Stock, respectively.
28
<PAGE> 29
[AFFINITY TECHNOLOGIES LOGO]
In 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 $0.88, and accordingly, the warrants represented rights to
purchase 42,571 shares of Common Stock. During 1997 all of these warrants were
exercised pursuant to the terms of the agreements. The warrants had negligible
value at the time of issuance.
9. ACQUISITION
On May 7, 1997, the Company acquired the assets of Buy American, Inc.
and Project Freedom, Inc., two related companies, for aggregate consideration
consisting of $300,000 in cash and issuance of 259,460 shares of restricted
common stock. The acquisition was accounted for as a purchase. The results of
operations of Buy American, Inc. and Project Freedom, Inc. are included in the
consolidated financial statements from the date of acquisition. The consolidated
results of operations for the period ended December 31, 1997 would not be
materially different had the acquisition taken place at the beginning of the
year.
The restricted common stock issued in association with the acquisition
was subject to a call option by the Company and put option by the sellers. The
Company had a single option to repurchase any or all shares of restricted common
stock at a price of $5.78 per share. The sellers of Buy American, Inc. and
Project Freedom, Inc. had a single option to sell any or all the shares of
restricted common stock to the Company at a price of $3.47 per share. In April
1999, the Company and sellers of Buy American, Inc. and Project Freedom, Inc.
cancelled the call and put options.
Additionally, performance consideration in the form of future issuances
of common stock and cash payments are contingent upon specified performance
objectives and continued employment of a principal officer of Buy American, Inc.
and Project Freedom, Inc. by the Company. The contingent performance
consideration encompasses the five year period following the date of acquisition
of the assets of Buy American, Inc. and Project Freedom, Inc. Future issuance of
common stock and disbursement of cash will result in an additional element of
the purchase price.
10. LEASES
The Company has noncancelable operating leases for the rental of its
offices and ALM assembly operations. Future minimum lease payments under these
leases at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 728,858
2001 428,387
-----------
Total $ 1,157,245
===========
</TABLE>
In 1999, 1998 and 1997 the Company incurred rent expense, including
rent associated with cancelable rental agreements, of approximately $903,000,
$915,000 and $799,000, respectively. Additionally, in 1999 the Company recorded
approximately $449,000 for excess rent capacity as other operating expense.
11. INCOME TAXES
As of December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $52,261,000. The net operating
loss carryforwards will begin to expire in 2009, if not utilized.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $19,493,400 $15,860,400
Inventory valuation reserve 639,300 415,900
Capital leases -- 343,800
Other 374,100 156,600
----------- -----------
Total deferred tax assets 20,506,800 16,276,700
=========== ===========
</TABLE>
29
<PAGE> 30
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Capitalized software costs $ (447,200) $ (673,000)
Depreciation (154,900) (301,600)
Other (113,300) --
------------ ------------
Total deferred tax liabilities (715,400) (974,600)
------------ ------------
Less:
Valuation allowance (19,791,400) (15,302,100)
------------ ------------
Total net deferred taxes $ -- $ --
============ ============
</TABLE>
The Company has recorded a valuation allowance for the full amount of
its net deferred tax assets as of December 31, 1999 and 1998, based on
management's evaluation of the evidential recognition requirements under the
criteria of SFAS 109. The main component of the evidential recognition
requirements was the Company's cumulative pretax losses since inception.
12. SEGMENT INFORMATION
The Company conducts its business within one industry segment -
financial services technology. To date, all revenues generated have been from
transactions with North American customers. One customer accounted for 35%, 49%
and 48% of revenues in 1999, 1998 and 1997, respectively. Two other customers
accounted for 20% of revenues in 1997. See Note 2 "Summary of Significant
Accounting Policies - Deferred Revenue." All other segment disclosures required
by SFAS 131 are included in the consolidated financial statements or in the
notes to the consolidated financial statements.
13. OTHER RELATED PARTY TRANSACTIONS
The Company had leased ALMs to a bank which holds a warrant to acquire
shares of common stock of the Company. See Note 7. The Company had installed and
otherwise delivered a number of ALMs on behalf of the bank during 1996 and 1995.
In 1998, pursuant to a termination agreement executed between the bank and the
Company, amounts due the Company totaling approximately $505,000 were settled in
consideration of a $50,000 payment and the return of the ALMs to the Company.
The amount due the Company was charged to the allowance for doubtful accounts of
as of December 31, 1998. 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.
During February 1998, Surety entered into an agreement with Resource
Bancshares Mortgage Group, Inc. ("RBMG"), pursuant to which the Company will
underwrite and process mortgage loans in accordance with guidelines specified by
RBMG. The Company receives a fee from RBMG for the underwriting and processing
services performed. During 1999, the Company processed and sold to RBMG
approximately $12,369,000 in mortgage loans resulting in approximately $286,000
in revenue for the Company. The Chairman of the Board and Chief Executive
Officer of RBMG during 1999 is a member of the Company's Board of Directors.
14. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1999 Surety had $1,062,600 in commitments
outstanding to originate and sell mortgage loans. Commitments to originate
mortgage loans represent mortgage loan applications where the borrower has
locked in the interest rate. Commitments to sell mortgage loans to investors
represent optional commitments to sell mortgage loans at a future date and at a
specified price.
The Company is subject to legal actions from time to time which have
arisen in the ordinary course of business. A certain claim was filed by a
plaintiff who claimed certain rights, damages or interests incidental to the
Company's formation and development. In accordance with such claim, a jury
returned a verdict against the Company. The plaintiff has been granted a new
trial and the Company is appealing such grant. 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 to such actions.
30
<PAGE> 31
[AFFINITY TECHNOLOGIES LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 325,959 $ 1,168,352 $ 879,581 $ 501,009
Gross Profit 156,131 137,676 30,618 288,008
Net loss per share (2,453,711) (2,512,132) (3,305,997) (3,822,796)
-- basic and diluted (0.08) (0.08) (0.11) (0.13)
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,099,979 $ 639,244 $ 442,337 $ 474,699
Gross Profit 664,205 423,527 215,044 (291,169)
Net loss (2,996,475) (4,532,076) (3,564,952) (3,779,498)
Net loss per share
-- basic and diluted (0.10) (0.15) (0.12) (0.13)
</TABLE>
Gross profit in the second quarter of 1999, the third quarter of 1999 and the
fourth quarter of 1998 have been adjusted from amounts previously reported to
reflect the reclassification of contract loss provisions as a component of cost
of revenues. Previously reported amounts were $396,530, $547,110 and $188,190,
respectively. The sum of net loss per share for the first through fourth
quarters of 1999 differs from the annual results due to the effect of rounding
quarterly results.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Affinity Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Affinity Technology Group, Inc. and subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
Greenville, South Carolina
March 29, 2000 /s/ ERNST & YOUNG LLP
31
<PAGE> 32
AFFINITY TECHNOLOGIES
CORPORATE AND STOCKHOLDER INFORMATION
BOARD OF DIRECTORS
Alan H. Fishman, Chairman
President, Columbia Financial Partners,
and President and Chief Executive Officer,
Conti-Financial Corporation
Joseph A. Boyle
President and Chief Executive Officer,
Affinity Technology Group, Inc.
Robert M. Price, Jr.
President
PSV, Inc.
Edward J. Sebastian
Member
R. Murray Smith
Member
Peter M. Wilson, Ph.D.
Associate Professor
Fuqua School of Business
Duke University
EXECUTIVE OFFICERS
Joseph A. Boyle
Director, President and
Chief Executive Officer
John D. Rogers
Senior Vice President &
General Manager of
Affinity Processing Services
Terrence J. Sabol, Sr.
Senior Vice President of Technology & Internet
Product Manager
CORPORATE OFFICE
1201 Main Street
Suite 2080
Columbia, SC 29201
(803) 758-2511
http://www.affi.net
COMMON STOCK
The Common Stock of
Affinity Technology Group, Inc.
is traded on the Nasdaq SmallCap Market,
under the symbol "AFFI".
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
STOCKHOLDER INQUIRIES
Affinity welcomes inquiries from stockholders and other interested investors.
The Form 10-K will be provided without charge to any stockholder who writes to
the address as set forth below. The Form 10-K and other financial materials are
also available electronically via the World Wide Web at http://www.affi.net.
General stockholder and investor questions may be directed to:
Heidi Willis
Investor Relations
1201 Main Street, Suite 2080
Columbia, SC 29201
(803) 758-2555
ANNUAL MEETING
All stockholders and other interested parties are invited to attend the
Company's annual stockholders' meeting scheduled for May 26, 2000, at 10:00 a.m.
at the Columbia Museum of Art, Main and Hampton Streets, Columbia, South
Carolina.
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Insignia Financial Plaza
Suite 800
Greenville, SC 29603
LEGAL COUNSEL
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street
Suite 1900
Charlotte, NC 28246
FORWARD LOOKING STATEMENTS
The forward looking statements contained in this document with respect to, among
other things, products and applications in development, projected financial
performance, market acceptance of the Company's products and services and market
conditions in general, involve risks and uncertainties, and are subject to
change based on various factors, including unforeseen design or engineering
problems with the Company's products and applications in development; failure of
either the providers of consumer financial services or the consumers of such
services to quickly accept electronic commerce 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; unforeseen legal or regulatory issues that impede or
prevent use by financial institutions of the Company's products and services;
and the failure by the Company to achieve broad distribution of its products and
services through its relationships with strategic alliances and other third
parties. Certain additional factors that may cause the Company's actual results
to differ materially from expected or historical results have been identified in
the Company's 1999 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000.
32
