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 June 30, 1997 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
28,918,944 shares of Common Stock, $.0001 par value, as of August 1, 1997.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30,
1997 December 31,
(Unaudited) 1996
Assets
Current assets:
Cash and cash equivalents $ 22,519,725 $ 31,563,950
Investments 9,504,426 10,583,997
Accounts receivable, less allowance for doubtful accounts of $200,494
and $198,987 at June 30, 1997 and December 31, 1996, respectively 725,235 812,443
Net investment in sales-type leases - current 960,810 865,380
Inventories 2,714,686 2,804,978
Other current assets 954,532 336,439
------------------- -------------------
Total current assets 37,379,414 46,967,187
Net investment in sales-type leases - non-current 1,808,846 2,386,010
Property and equipment, net 6,944,962 6,073,303
Software development costs, less accumulated amortization of $94,759
and $67,686 at June 30, 1997 and December 31, 1996, respectively 745,042 363,721
Other assets 1,778,721 308,636
=================== ===================
Total assets $ 48,656,985 $ 56,098,857
=================== ===================
Liabilities and stockholders' equity Current liabilities:
Current portion of capital lease obligations to related party $ 59,609 $ 69,987
Accounts payable 291,114 1,442,662
Accrued expenses 1,134,079 1,257,939
Deferred revenue - current 274,715 523,920
------------------- -------------------
Total current liabilities 1,759,517 3,294,508
Capital lease obligations to related party, less current portion 33,307 66,245
Deferred revenue - non current 520,753 403,465
Capital stock of subsidiary held by minority investor - 200,000
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, outstanding
28,917,833 shares at June 30,1997 and 27,879,680 shares
at December 31, 1996 2,911 2,788
Additional paid-in capital 70,337,418 68,777,090
Treasury stock, at cost (216,852 shares at June 30, 1997) (93,165) -
Deferred compensation (3,436,372) (3,939,044)
Accumulated deficit (20,467,384) (12,706,195)
------------------- -------------------
Total stockholders' equity 46,343,408 52,134,639
=================== ===================
Total liabilities and stockholders' equity $ 48,656,985 $ 56,098,857
=================== ===================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
------------------- ------------------ ------------------ ------------------
Revenues:
Initial set-up, transactions and other $ 726,107 $ 426,292 $ 192,523 $ 156,264
Sales and rental 352,047 2,112,021 224,347 1,734,653
License revenue - 1,800,000 - 562,500
------------------- ------------------ ------------------ ------------------
Total revenue 1,078,154 4,338,313 416,870 2,453,417
Costs and expenses:
Cost of revenues 540,956 2,512,807 249,741 1,784,596
Research and development 1,686,874 997,113 843,747 609,676
Selling, general and administrative expenses 7,707,443 2,516,186 4,170,174 1,513,084
------------------- ------------------ ------------------ ------------------
Total costs and expenses 9,935,273 6,026,106 5,263,662 3,907,356
------------------- ------------------ ------------------ ------------------
Operating loss (8,857,119) (1,687,793) (4,846,792) (1,453,939)
Interest income, net 1,095,930 523,029 489,263 507,357
------------------- ------------------ ------------------ ------------------
Net loss $ (7,761,189) $ (1,164,764) $ (4,357,529) $ (946,582)
=================== ================== ================== ==================
Net loss per share $ (0.27) $ (0.06) $ (0.15) $ (0.04)
=================== ================== ================== ==================
Shares used in computing net loss per share 28,338,286 20,388,105 28,609,116 24,080,893
=================== ================== ================== ==================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
1997 1996
------------------- ------------------
Operating activities
Net loss $ (7,761,189) $ (1,164,764)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 952,656 234,302
Amortization of deferred compensation 502,672 471,495
Deferred revenue (131,917) (900,830)
Other 88,583 -
Changes in current assets and liabilities:
Accounts receivable (397,340) (946,918)
Net investment in sales-type leases 481,734 (2,121,941)
Inventories 147,949 (559,488)
Other current assets (149,422) (324,673)
Accounts payable and accrued expenses (1,340,504) 616,022
------------------- ------------------
Net cash used in operating activities (7,606,778) (4,696,795)
Investing activities
Purchases of property and equipment (1,846,625) (1,983,431)
Software development costs (408,394) (55,300)
Purchase of short term investments - (8,570,997)
Proceeds from sale of short term investments 1,079,571 -
Other (300,000) -
------------------- ------------------
Net cash used in investing activities (1,475,448) (10,609,728)
Financing activities
Proceeds from notes payable - 1,450,000
Payments on notes payable and capital leases (43,316) (1,811,425)
Proceeds from sale of capital stock of subsidiary to
minority interest - 62,500
Proceeds from issuance of common stock - 60,102,216
Exercise of options 44,310 -
Exercise of warrants 37,490 45,417
Other (483) -
------------------- ------------------
Net cash provided by financing activities 38,001 59,848,708
------------------- ------------------
Net increase (decrease) in cash (9,044,225) 44,542,185
Cash and cash equivalents at beginning of period 31,563,950 1,235,983
=================== ==================
Cash and cash equivalents at end of period $ 22,519,725 $ 45,778,168
=================== ==================
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements of Affinity Technology
Group, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The balance sheet at
December 31, 1996 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 1996.
2. Inventories
Inventories consist of the following:
June 30, December 31,
1997 1996
------------------------- -------------------------
Electronic parts and other components $1,027,503 $1,166,277
Work in process 910,504 213,646
Finished goods 847,525 1,445,055
------------------------- -------------------------
2,785,532 2,824,978
Reserve for obsolescence (70,846) (20,000)
========================= =========================
$2,714,686 $2,804,978
========================= =========================
3. Stockholders' Equity
On May 7, 1997 the Company acquired the assets of Buy American, Inc.
and Project Freedom, Inc. for aggregate consideration initially consisting of
$300,000 in cash and the issuance of 259,460 shares of restricted common stock.
In addition, on May 21, 1997 the Company issued 666,667 shares of common stock
to an unrelated third party, in exchange for all shares of capital stock of
Affinity Processing Corporation ("APC"), a subsidiary of the Company, held by
such unrelated third party. The unrelated third party acquired the APC capital
stock for aggregate consideration of $200,000.
4. 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.
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 primary and fully diluted earnings
per share for the second quarter ended June 30, 1997 and 1996, since stock
options and warrants are excluded from the computation for each of these
quarters in accordance with APB 15.
5. 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.
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 delivery channels 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. Decisys/RTSM technology is a real-time, closed loop
decision support system designed to automate the processing and closing of
credit, deposit, insurance, mortgage and other financial transactions.
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 June 30, 1997 of $20,467,384, with operating losses of $4,357,529 and
$7,761,189 for the three and six months ended June 30, 1997, respectively. The
Company expects to incur substantial additional costs to develop its financial
product origination capabilities, to enhance and market the ALM and Decisys/RT
and to complete any new products and services that may be developed by the
Company. Accordingly, there can be no assurance that the Company will ever be
able to achieve profitability or, if achieved, sustain such profitability.
Results of Operations
Revenues
The Company's revenues for the three and six months ended June 30, 1997
were $416,870 and $1,078,154, respectively, compared to $2,453,417 and
$4,338,313 for the corresponding periods of 1996.
Initial Set-up, Transactions and Other. Revenues from initial set-up,
transactions and other fees were $192,523 and $726,107 for the three and six
months ended June 30, 1997, respectively, compared to $156,264 and $426,292 for
the corresponding periods in 1996. The increase during the three months ended
June 30, 1997 as compared to the same period in 1996 is primarily attributable
to the addition of consulting revenue and transactional revenue earned for
processing credit card and other electronic payment transactions, offset by a
decrease in aggregate license fees associated with ALM deployments. The increase
during the six months ended June 30, 1997 as compared to the same period in 1996
is primarily attributable to additional license fees earned with regard to a
portion of the ALMs deployed during 1997, consulting revenue, and increase in
ALM transactional revenue and the addition of transactional revenue earned for
processing credit cards and other electronic payment transactions.
Sales and Rental. Sales and rental fees were $224,347 and $352,047 for
the three and six months ended June 30, 1997, respectively, compared to
$1,734,653 and $2,112,021 for the corresponding periods in 1996. The net
decrease is primarily attributable to a decrease in the number of ALMs deployed
during 1997 under sales-type leases.
License Revenue. Non-recurring license fees of $1,800,000 during 1996
reflect one-time license fees paid by Union Planters Corporation ("Union
Planters") to Affinity Processing Corporation ("APC"), a 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 formerly in effect 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 and six months ended
June 30, 1997 was $249,741 and $540,956, respectively, compared to $1,784,596
and $2,512,807 for the corresponding periods in 1996. The decrease during the
three and six months ended June 30, 1997 as compared to the same periods in 1996
is attributable to a decrease in ALMs deployed under sales-type leases in 1997,
offset by an increase in depreciation expense in 1997 associated with an
increase in ALMs in service under operating leases in 1997.
Research and Development. Costs incurred for research and development
for the three and six months ended June 30, 1997 totaled $843,747 and
$1,686,874, respectively, as compared to $609,676 and $997,113 for the
corresponding periods in 1996. The increase in research and development costs 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 $4,170,174 and $7,707,443 for the three and six
months ended June 30, 1997, respectively, as compared to $1,513,084 and
$2,516,186 for the corresponding periods in 1996. The increase is primarily
attributable to the increase in the number of employees during the three and six
months ended June 30, 1997 compared to the corresponding periods in 1996
associated with the Company's product and channel development, expanded
marketing, sales initiatives and operating activities.
Interest Income/Expense. Interest income for the three and six months
ended June 30, 1997 totaled $496,744 and $1,118,778, respectively, as compared
to $531,941 and $569,115 for the corresponding periods in 1996. The increase in
interest income for the three and six months ended June 30, 1997 as compared to
the comparable periods 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 and six months ended June 30, 1997
was $7,481 and $22,848, respectively, compared to $24,584 and $46,086 for the
corresponding periods in 1996.
Liquidity and Capital Resources
The Company has generated operating losses of $20,467,384 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 six months ended June 30, 1997 to fund operations was
$7,606,778. 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 $1,846,625 and software development efforts
of $408,394. At June 30, 1997, cash and liquid investments were $32,024,151 and
working capital was $35,619,897.
The Company believes existing cash, cash equivalents, internally
generated funds and available borrowings will be sufficient to meet the
Company's currently anticipated operating expenditure requirements during the
remainder of 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, 3 and 5 are not applicable.
Item 2. Changes in Securities
On May 7, 1997 the Company acquired the assets of Buy American, Inc.
and Project Freedom, Inc. for aggregate consideration consisting initially of
$300,000 in cash and the issuance of 259,460 shares of common stock. In
addition, on May 21, 1997 the Company issued 666,667 shares of common stock to
Union Planters Corporation ("UPC") in exchange for all shares of capital stock
of APC held by UPC. The Company issued shares of its common stock in both
transactions in reliance on the exemption from registration provided by Section
4(2) and Rule 506 under the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Affinity Technology Group,
Inc. was held May 20, 1997 (the "Annual Meeting"). At the Annual Meeting,
Alan H. Fishman, Jeff A. Norris, Robert M. Price, Edward J. Sebastian and
Peter R. Wilson were duly elected to the Board of Directors of the Company
and the selection of Ernst & Young, LLP as independent accountants for
the year ending December 31, 1997 was ratified. Votes cast by the
stockholders of the Company at the Annual Meeting are as follows:
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
Alan H. Fishman 19,478,431 3,374,219 -
Jeff A. Norris 19,463,031 3,389,619 -
Robert M. Price 22,687,376 165,274 -
Edward J. Sebastian 22,778,331 74,319 -
Peter R. Wilson 22,781,031 71,619 -
Ratification of the selection of Ernst & Young LLP.
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
22,778,586 36,810 37,254 -
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 June 30, 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, Secretary and Treasurer
Date: August 14, 1997