SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization
57-0991269
(I.R.S. Employer Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
28,200,455 shares of Common Stock, $.0001 par value, as of May 10, 1997.
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1997 1996
(Unaudited) (1)
------------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 25,084,226 $ 31,563,950
Investments 12,507,755 10,583,997
Accounts receivable, less allowance for doubtful accounts of $198,987 at
March 31, 1997 and December 31, 1996 265,100 812,443
Net investment in sales-type leases-current: 899,259 865,380
Inventories 2,760,077 2,804,978
Other current assets 883,674 336,439
------------------- -------------------
Total current assets 42,400,091 46,967,187
Net investment in sales-type leases - non-current: 2,056,260 2,386,010
Property and equipment, net 6,691,979 6,073,303
Software development costs, less accumulated amortization of $81,222
and $67,686 at March 31, 1997 and December 31, 1996, respectively 501,571 363,721
Other assets 274,313 308,636
=================== ===================
Total assets $ 51,924,214 $ 56,098,857
=================== ===================
Liabilities and stockholders' equity Current liabilities:
Current portion of capital lease obligations to related party $ 57,427 $ 69,987
Accounts payable 980,872 1,442,662
Accrued expenses 798,964 1,257,939
Current portion of deferred revenue 522,342 523,920
------------------- -------------------
Total current liabilities 2,359,605 3,294,508
Capital lease obligations to related party, less current portion 49,052 66,245
Deferred revenue 310,230 403,465
Capital stock of subsidiary held by minority investor 200,000 200,000
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued and
outstanding 28,150,603 shares at March 31,1997 and 27,879,680
shares at December 31, 1996. 2,815 2,788
Additional paid-in capital 68,806,068 68,777,090
Deferred compensation (3,693,701) (3,939,044)
Accumulated deficit (16,109,855) (12,706,195)
------------------- -------------------
Total stockholders' equity 49,005,327 52,134,639
=================== ===================
Total liabilities and stockholders' equity $ 51,924,214 $ 56,098,857
=================== ===================
<FN>
(1) The balance sheet at December 31, 1996 has been derived from audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
</FN>
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
1997 1996
------------------ ------------------
Revenues:
Initial set-up, transactions and other $ 533,584 $ 258,653
Sales and rental 127,700 388,743
License revenue - 1,237,500
------------------ ------------------
Total Revenue 661,284 1,884,896
Costs and expenses:
Cost of revenues 291,215 728,211
Research and development 843,127 387,437
Selling, general and administrative expenses 3,537,269 1,003,103
------------------ ------------------
Total costs and expenses 4,671,611 2,118,751
------------------ ------------------
Operating loss (4,010,327) (233,855)
Interest income 606,667 15,673
------------------ ------------------
Net loss $ (3,403,660) $ (218,182)
================== ==================
Net loss per share $ (0.12) $ (0.01)
================== ==================
Shares used in computing net loss per share 28,064,447 16,695,318
================== ==================
<FN>
See accompanying notes.
</FN>
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1997 1996
------------------- ------------------
Operating activities
Net cash used in operating activities $ (3,369,419) $ (1,214,725)
Investing activities
Purchases of property and equipment (1,034,412) (901,147)
Software development costs (151,386) (18,787)
Purchase of short term investments (1,923,758) -
------------------- ------------------
Net cash used in investing activities (3,109,556) (919,934)
Financing activities
Proceeds from notes payable - 911,841
Payments on notes payable and capital leases (29,753) (13,165)
Exercise of options 19,004 -
Exercise of warrants 10,000 -
------------------- ------------------
Net cash provided by (used in) financing activities (749) 898,676
------------------- ------------------
Net decrease in cash (6,479,724) (1,235,983)
Cash and cash equivalents at beginning of period 31,563,950 1,235,983
=================== ==================
Cash and cash equivalents at end of period $ 25,084,226 $ -
=================== ==================
<FN>
See accompanying notes.
</FN>
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of Affinity
Technology Group, Inc. (the "Company") for the year ended December 31, 1996.
2. Inventories
Inventories consist of the following:
March 31, December 31,
1997 1996
------------------------- -------------------------
Electronic parts and other components $1,496,171 $1,166,277
Work in process 364,078 213,646
Finished goods 941,068 1,445,055
------------------------- -------------------------
2,801,317 2,824,978
Reserve for obsolescence (41,240) (20,000)
========================= =========================
$2,760,077 $2,804,978
========================= =========================
3. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of the
consolidated statements of operations have been computed based on the weighted
average number of shares of Common Stock outstanding in accordance with
Accounting Principles Board Opinion No. 15 ("APB 15"). Under this guidance,
options, warrants, convertible preferred stock and other potentially dilutive
securities are considered as outstanding only if their effect is dilutive.
For periods presented prior to the Company's initial public offering on
May 1, 1996, net loss per share amounts were presented in accordance with APB 15
as modified by Staff Accounting Bulletin No. 83 ("SAB 83") of the Securities and
Exchange Commission. Under SAB 83, all issuances of options, warrants,
convertible preferred stock and other potentially dilutive securities, at prices
below the initial public offering price during the twelve month period preceding
the offering, were included as Common Stock equivalents as if they had been
issued at the Company's inception, regardless of whether the effect was dilutive
or anti-dilutive. SAB 83 applies to all periods presented prior to the Company's
initial public offering. The net loss per share of Common Stock presented in
accordance with APB 15 as modified by SAB 83 is presented supplementary below:
Period ended
March 31,
1996
--------------------------
Net loss per share under APB 15 as modified by
SAB 83 $ (0.007)
Shares used in computing net loss per share
under APB 15 as modified by SAB 83 30,422,971
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is required to be adopted for years ending after December 15, 1997.
Under SFAS 128 the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods where applicable.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options and warrants are to be excluded. SFAS No. 128
is not expected to impact the calculation of fully diluted earnings per share
for the first quarter ended March 31, 1997 and 1996, since stock options and
warrants are excluded from the computation for each of these quarters in
accordance with APB 15.
4. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. Certain claims have also been filed
by plaintiffs who claim certain rights, damages or interests incidental to the
Company's formation and development. The Company intends to vigorously contest
all such actions and, in the opinion of management, the Company has meritorious
defenses and the resolution of such actions will not materially affect the
financial position of the Company.
5. Subsequent Events
Pursuant to a definitive agreement entered on April 24, 1997, the
Company acquired on May 7, 1997 the assets of Buy American, Inc. and Project
Freedom, Inc, closely held corporations that have developed a patented
kiosk-based system which enables consumers to apply for automobile insurance
binders. The purchase price consisted of cash of approximately $300,000 plus
259,460 restricted shares of common stock of the Company. The restricted common
stock is subject to a repurchase agreement which will allow the shareholders of
Buy American, Inc. and Project Freedom, Inc. to sell the restricted shares of
common stock to the Company at the end of two years for $900,000, and which will
allow the Company to repurchase the restricted shares of common stock at the end
of two years for $1.5 million. In addition, the Company will pay additional
consideration over five years based on the volume of insurance products sold.
The aggregate additional consideration will not exceed $6 million and will be
paid in additional shares of common stock and, in certain cases, cash.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company was formed in January 1994 to develop and market
technologies that enable financial institutions and other businesses to provide
consumer financial services electronically with reduced or no human
intervention. The Company's current products and services consist of the
Affinity Automated Loan Machine ("ALM(R)") and a call center decisioning system
which accesses the Company's proprietary Decision Support System/Real Time
("Decisys/RTSM") technology.
To date, the Company has generated minimal operating revenues, has
incurred significant losses and has experienced substantial negative cash flow
from operations. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly technology-based companies operating in
unproven markets with unproven products. The Company had an accumulated deficit
as of March 31, 1997 of $16,109,855, with operating losses of $3,403,660 for the
three months ended March 31, 1997. The Company expects to incur substantial
additional costs to develop its financial product origination capabilities, to
enhance and market the ALM and Decisys/RT and to complete any new products and
services that may be developed by the Company. Accordingly, there can be no
assurance that the Company will ever be able to achieve profitability or, if
achieved, sustain such profitability.
Results of Operations
Revenues
The Company's revenues were $661,284 and $1,884,896 for the three
months ended March 31, 1997 and 1996, respectively.
Initial Set-up, Transactions and Other. Revenues from initial set-up,
transactions and other fees were $533,584 and $258,653 for the three months
ended March 31, 1997 and 1996, respectively. The increase resulted primarily
from set-up fees associated with an increase in the deployment of ALMs under
operating leases in the first quarter of 1997 as compared to the first quarter
of 1996. During 1997, the Company deployed 25 ALMs under operating leases, as
compared to 16 for the three months ended March 31, 1996. The Company also
experienced an increase in transaction revenues which is a result of
significantly more ALMs in service.
Sales and Rental. Sales and rental fees were $127,700 and $388,743 for
the three months ended March 31, 1997 and 1996, respectively. The net decrease
is attributable to a decrease in the number of ALMs deployed under sales-type
capital leases. During the quarter ended March 31, 1996, 8 ALMs were deployed
under sales-type lease with associated revenue of $322,077. All ALMs deployed in
the quarter ended March 31, 1997 were reported as operating leases. Rental
revenue associated with ALM operating leases was $127,700 in the quarter ended
March 31, 1997 compared to $66,666 in the corresponding period in 1996. The
increase is attributable to the larger number of ALMs deployed under operating
losses during the quarter ended March 31, 1997 compared to the corresponding
period in 1996.
License Revenue. Non-recurring license fees of $1,237,500 during 1996
reflect one-time license fees paid by Union Planters Corporation ("Union
Planters") to Affinity Processing Corporation ("APC"), a majority owned
subsidiary of the Company, for a perpetual, royalty-free license to use the
Company's call center decisioning system (formerly known as "Assets(3)") in
North America. Pursuant to a joint venture arrangement among the Company, APC
and Union Planters, all amounts paid by Union Planters to APC as license fees
were paid by APC to the Company as license and management fees.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three months ended March 31,
1997 and 1996 was $291,215 and $728,211, respectively. All ALM deployments in
the quarter ended March 31, 1997 were reported as operating leases and no
amounts associated with ALM hardware costs were charged to cost of revenues.
During the quarter ended March 31, 1996, 8 ALM deployments were reported as
sales-type leases with approximately $344,007 associated with ALM hardware costs
reported as cost of revenues.
Research and Development. Costs incurred for research and development
for the three months ended March 31, 1997 and 1996 totaled $843,127 and
$387,437, respectively. The increase in research and development costs as
compared to the corresponding period in 1996 is attributable to increased
staffing and continued technological development associated with the enhancement
of the Company's Decisys/RT technology and its financial product origination
capabilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $3,537,269 and $1,003,103 for the three months
ended March 31, 1997 and 1996, respectively. The increase is primarily
attributable to the increase in the number of employees in the quarter ended
March 31, 1997 compared to the corresponding period in 1996. The increase is
also attributable to increased business activities associated with expanded
marketing, sales and operating activities.
Interest Income/Expense. Interest income for the three months ended
March 31, 1997 and 1996 totaled $622,034 and $37,174, respectively. The increase
in interest income as compared to the first quarter of 1996 is due to interest
earned on the investment of proceeds from the Company's initial public offering
in May 1996 and the amortization of deferred interest income relating to ALMs
under sales-type lease agreements. Interest expense for the three months ended
March 31, 1997 and 1996 totaled $15,367 and $21,501, respectively.
Liquidity and Capital Resources
The Company has generated operating losses of $16,109,855 since its
inception and has financed its operations primarily through net proceeds from
its initial public offering in May 1996 and, prior to such offering, through the
private sale of debt and equity securities, capital lease obligations, bank
financing, factoring of ALM rental contracts, and loans from affiliates. Net
cash used during the three months ended March 31, 1997 to fund operations was
$3,369,419. Proceeds from the offering and other sources of cash were used to
fund current period operations, including research and development and marketing
activities, capital expenditures of $1,034,412 and software development efforts
of $151,386. At March 31, 1997, cash and cash equivalents were $37,591,981 and
working capital was $40,040,486.
The Company had entered into a revolving line of credit with a lender
providing for a maximum borrowing amount of up to $2,000,000 (the "Line of
Credit") which expired in May 1997. The Company had no outstanding borrowings
under the Line of Credit as of March 31, 1997.
The Company believes existing cash, cash equivalents, internally
generated funds and available borrowings will be sufficient to meet the
Company's currently anticipated operating expenditure requirements during 1997.
During 1997, the Company expects to continue to use a significant amount of
existing cash, cash equivalents and internally generated funds to fund research
and development, marketing efforts designed to promote consumer awareness and
use of its products and services and capital expenditures. In order to fund more
rapid expansion, to develop new or enhanced products or to address liquidity
needs caused by shortfalls in revenues, the Company may need to raise additional
capital in the future. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the stockholders of the Company
will be reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to Common Stock.
There can be no assurance that additional financing will be available when
needed on terms favorable to the Company or at all. If adequate funds are not
available or not available on acceptable terms, the Company may be unable to
develop, enhance and market products, retain qualified personnel, take advantage
of future opportunities, or respond to competitive pressures, any of which could
have material adverse effect on the Company's business, operating results and
financial condition.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed in the Company's filings with the Securities and
Exchange Commission, including the information set forth under the caption "Risk
Factors" in the Company's Registration Statement on Form S-1 (File No. 333-1170)
and under the caption "Business Risks" in Item 1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. These and other factors may
cause actual results to differ materially from those anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market risk.
Not applicable
Part II. Other Information
Item 1, 2, 3 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
Joseph A. Boyle
Senior Vice President, Chief Financial Officer and Treasurer
Date: May 15, 1997