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, 1999 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
29,770,324 shares of Common Stock, $0.0001 par value, as of August 1, 1999.
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30,
1999 December 31,
(Unaudited) 1998
------------------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,580,416 $ 2,026,932
Investments 3,602,491 8,068,310
Accounts receivable, less allowance for doubtful
accounts of $74,884 and $45,513 at June 30, 1999 and
December 31, 1998, respectively 1,358,016 727,999
Net investment in sales-type leases - current 442,108 534,302
Inventories 1,871,706 2,054,542
Other current assets 1,028,200 1,349,995
------------------------- --------------------------
Total current assets 10,882,937 14,762,080
Net investment in sales-type leases - non-current 406,315 574,437
Property and equipment, net 3,687,957 4,511,924
Software development costs, less accumulated amortization
of $204,113 and $111,211 at June 30, 1999 and December 31,
1998, respectively 1,818,095 1,773,057
Other assets 2,427,137 2,575,377
========================= ==========================
Total assets $ 19,222,441 $24,196,875
========================= ==========================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 166,638 $ 184,619
Accrued expenses 639,212 748,136
Notes payable 167,400 141,480
Current portion of deferred revenue 227,509 144,063
------------------------- --------------------------
Total current liabilities 1,200,759 1,218,298
Deferred revenue 321,561 422,376
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized
60,000,000 shares, issued 31,933,880 and 31,572,880
shares at June 30, 1999 and December 31, 1998, respectively 3,193 3,157
Additional paid-in capital 69,550,494 69,392,545
Deferred compensation (418,355) (489,656)
Treasury stock, at cost (2,163,556 and 2,073,207 shares at
June 30, 1999 and December 31, 1998, respectively) (3,490,820) (3,371,297)
Accumulated deficit (47,944,391) (42,978,548)
------------------------- --------------------------
Total stockholders' equity 17,700,121 22,556,201
========================= ==========================
Total liabilities and stockholders' equity $ 19,222,441 $24,196,875
========================= ==========================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------------ ------------------- ----------------- ------------------
Revenues:
Transactions $ 94,389 $ 135,335 $ 217,935 $ 249,184
Mortgage processing services 153,851 107,425 267,250 155,857
Sales and rental 34,213 35,769 38,963 55,269
Professional services 790,452 16,067 790,452 797,061
Other income 95,447 344,648 179,711 481,852
------------------ ------------------- ----------------- ------------------
Total revenue 1,168,352 639,244 1,494,311 1,739,223
Costs and expenses:
Cost of revenues 771,822 215,717 941,650 651,491
Research and development 519,353 953,049 818,478 1,802,323
Selling, general and 2,503,162 4,289,731 4,934,844 7,461,106
administrative expenses
------------------ ------------------- ----------------- ------------------
Total costs and expenses 3,794,337 5,458,497 6,694,972 9,914,920
------------------ ------------------- ----------------- ------------------
Operating loss (2,625,985) (4,819,253) (5,200,661) (8,175,697)
Interest income, net 113,853 287,177 234,818 647,146
------------------ ------------------- ----------------- ------------------
Net loss $ (2,512,132) $ (4,532,076) $ (4,965,843) $ (7,528,551)
================== =================== ================= ==================
Net loss per share - basic and $ (0.08) $ (0.15) $ (0.17) $ (0.25)
diluted
================== =================== ================= ==================
Shares used in computing net loss 29,755,930 29,651,497 29,697,963 30,014,766
per share
================== =================== ================= ==================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
1999 1998
------------------- ------------------
Operating activities
Net loss $ (4,965,843) $ (7,528,551)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 1,195,230 1,170,058
Amortization of deferred compensation 71,300 351,821
Provision for doubtful accounts 30,000 60,000
Inventory valuation allowance 110,000 330,000
Deferred revenue (17,372) (643,932)
Other 10,133 123,819
Changes in current assets and liabilities:
Accounts receivable (660,017) 1,118,054
Net investment in sales-type leases 260,317 906,471
Inventories 8,816 123,448
Other current assets 319,949 (283,273)
Accounts payable and accrued expenses (126,905) (110,784)
------------------- ------------------
Net cash used in operating activities (3,764,392) (4,382,869)
Investing activities
Purchases of property and equipment, net (74,386) (394,574)
Software development costs (137,940) (1,855)
Proceeds from sale of short term investments 4,465,818 3,837,717
------------------- ------------------
Net cash provided by investing activities 4,253,492 3,441,288
Financing activities
Payments on notes payable and capital leases 25,920 (30,915)
Exercise of options 38,464 4,029
Purchases of treasury stock - (2,404,263)
------------------- ----------------
Net cash provided by (used in) financing activities 64,384 (2,431,149)
------------------- ------------------
Net increase (decrease) in cash 553,484 (3,372,730)
Cash and cash equivalents at beginning of period 2,026,932 4,470,185
=================== ==================
Cash and cash equivalents at end of period $ 2,580,416 $ 1,097,455
=================== ==================
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, 1998 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 1998.
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), effective for transactions entered into in fiscal years beginning
after December 15, 1997. SOP 97-2 provides guidance on software revenue
recognition associated with the licensing and selling of computer software. The
Company did not recognize any revenue during the three and six months ended June
30, 1999 and 1998 associated with contracts subject to SOP 97-2 guidance.
During 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition"
("SOP 98-4"), effective as of March 31, 1998. SOP 98-4 postponed the adoption of
a provision of SOP 97-2 for one year.
Also during 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" ("SOP 98-9"). Effective December 15, 1998, SOP 98-9 amends SOP
98-4 to further postpone the adoption of certain provisions of SOP 97-2 as
provided by SOP 98-4, for fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9, which amend certain provisions of SOP 97-2,
are effective for transactions entered into in fiscal years beginning after
March 15, 1999.
The Company continues to assess the effects that the adoption of SOP
97-2, as amended by SOP 98-4 and SOP 98-9, will have on the presentation of the
Company's financial statements.
The Company has adopted the reporting requirements of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that companies report information about operating segments in annual
and interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In accordance with management's oversight of the Company's operations, the
Company conducts its business within one industry segment - financial services
technology.
Certain amounts in 1998 have been reclassified to conform to 1999
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
2. Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
------------------------- -------------------------
Electronic parts and other components $ 1,046,747 $ 1,062,180
Work in process 1,230,755 1,207,915
Finished goods 799,902 880,145
------------------------- -------------------------
3,077,404 3,150,240
Reserve for obsolescence (1,205,698) (1,095,698)
========================= =========================
$ 1,871,706 $ 2,054,542
========================= =========================
3. Loan Warehousing Agreement
Surety Mortgage, Inc., a wholly-owned subsidiary of the Company
("Surety"), has a credit facility with a maximum borrowing amount of $2,000,000.
Pursuant to the terms of the credit facility, Surety may obtain advances from
the lender for funding of mortgage loans made by Surety during the interim
period between the funding and sale of the loans to permanent investors. All
advances made pursuant to the agreement are secured by a security interest in
the rights and benefits due Surety in conjunction with the making of the
underlying loan. The credit facility bears interest at the lender's prime rate
plus 50 basis points and expires on June 1, 2000. As of June 30, 1999,
outstanding borrowings under the credit facility were approximately $167,000
bearing a weighted average interest rate of 8.37%.
4. Stockholders' Equity
During 1997 and 1998, the Company had in place a share repurchase plan
under which the Company was authorized to use up to $4 million of general
corporate funds to acquire from time to time in the open market shares of the
outstanding Common Stock of the Company. As of December 31, 1998, the Company
had repurchased a total of 1,417,000 shares at an average price of $2.31 per
share for an aggregate cost of $3,271,700 under the share repurchase plan. No
shares were repurchased during the six months ended June 30, 1999.
5. Net Loss Per Share of Common Stock
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). Net loss per share of Common Stock
amounts presented on the face of the condensed consolidated statements of
operations 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 were not included in the calculation of diluted loss per share because
the Company has experienced operating losses in all periods presented and,
therefore, the effect would be anti-dilutive.
6. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. In addition, a claim was filed by a
plaintiff who claimed certain rights, damages or interests incidental to the
Company's formation and development. The claim resulted in a jury verdict of
$68,000 and the plaintiff subsequently requested, and was granted, a new trial.
The Company is appealing the grant of a new trial. Additionally, a former
employee has filed suit against the Company alleging breach of contract and
non-payment of wages. The Company intends to vigorously contest all such actions
and, in the opinion of management, the Company has meritorious defenses and the
resolution of such actions will not materially affect the financial position of
the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report (including Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
descriptions of historical facts may be forward-looking statements, such as
statements about the Company's future prospects and cash requirements. Such
statements are subject to a number of risks and uncertainties, including
economic, competitive and technological factors affecting the Company's
operations, markets, products, services and prices, as well as other specific
factors discussed in the Company's filings with the Securities and Exchange
Commission, including the information set forth under the caption "Business
Risks" in Item 1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. These and other factors may cause actual results to differ
materially from those anticipated.
Overview
Since its formation in 1994, the Company has concentrated its product
development efforts primarily on developing "closed loop" electronic commerce
systems that enable financial institutions to automate the processing and
consummation of consumer loans and other financial services at the point of
sale. This technology is designed to enable financial institutions to open new
distribution channels and link all distribution channels electronically to their
credit departments.
Prior to 1998, the Company's primary products and services consisted of
the Affinity Automated Loan Machine ("ALM") and e-xpertLender. The ALM captures
origination information for unsecured consumer loan applications and then routes
this information to the Company's proprietary DeciSys/RT for an automated
decision. e-xpertLender connects the Company's automated decisioning system with
a financial institution's delivery channels and its risk management group and
gives the consumer a choice of closing methods that include branches, ALMs,
mail, and third party closing agents. During 1998 and continuing into 1999, the
Company has been developing a system to process and automate decisioning of
automobile loans pursuant to a development contract with Citibank. The Company
is currently developing a generic version of this automobile loan processing and
decisioning system to be sold, under the brand name of iDEAL, to other financial
institutions. In addition, in 1999, the Company began development of its
Internet product to be marketed under the name rtDS ("real time Decision
Service"), which is an outsourced service enabling lenders to deliver decisions
to web loan applicants.
To date, the Company has generated substantial operating losses and
experienced an extremely lengthy sales cycle for its products. Average consumer
use of ALMs in service and average rates of loan approvals have been lower than
customer expectations. The Company believes that the economic viability of the
ALM as an alternative to traditional and new lending methods has not yet been
established, and several of the Company's ALM customers have terminated their
relationship with the Company. Although the Company has developed and is
developing other products and services to exploit its DeciSys/RT technology, to
date such products and services have not generated substantial revenues, and the
Company has been required to use a substantial amount of existing cash resources
to fund its operations. Although the Company believes that existing cash, cash
equivalents and internally generated funds will be sufficient to fund operations
through 1999, such resources, together with projected revenues that may be
received under existing contracts, will be insufficient to fund the Company's
operations in 2000 and beyond. To remain viable after 1999, the Company must
substantially increase revenues, raise additional capital and/or substantially
reduce its operations. No assurances can be given that the Company will be able
to increase its revenues, raise additional capital or reduce its operations in a
manner that allows it to continue operations in 2000 and beyond.
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, 1999 of $47,944,391. The Company expects to incur substantial
additional costs to develop its financial product origination capabilities, to
enhance and market iDEAL, e-xpertLender, the ALM, Decisys/RT and rtDS, and to
develop any new products and services. Accordingly, there can be no assurance
that the Company will ever be able to achieve profitability or, if achieved,
sustain such profitability.
The market for the Company's products and services is new, evolving and
uncertain, and it is difficult to determine the size and predict the future
growth rate, if any, of this market. In addition, the market for products and
services that enable electronic commerce is highly competitive and is subject to
rapid innovation and competition from traditional products and services having
all or some of the same features as products and services enabling electronic
commerce. Competitors in this market have frequently taken different strategic
approaches and have launched substantially different products or services in
order to exploit the same perceived market opportunity. Until the market has
validated a strategy through widespread acceptance of a product or service, it
is difficult to identify all current or potential market participants or gauge
their relative competitive position.
Results of Operations
Revenues
The Company's revenues for the three and six months ended June 30, 1999
were $1,168,352 and $1,494,311, respectively, compared to $639,244 and
$1,739,223 for the corresponding periods of 1998.
Transaction fees. Revenues from transaction fees were $94,389 and
$217,935 for the three and six months ended June 30, 1999, respectively,
compared to $135,335 and $249,184 for the corresponding periods in 1998. The
decrease in transaction fees during the three and six months ended June 30,
1999, as compared to the same periods in 1998 is attributable to a decrease in
the number of financial service applications processed using DeciSys/RT.
Mortgage Processing Services. Revenues from mortgage processing
services earned by Surety were $153,851 and $267,250 for the three and six
months ended June 30, 1999, respectively, compared to $107,425 and $155,857 for
the corresponding periods in 1998. The increase in mortgage processing services
revenue during the three and six month periods ended June 30, 1999, compared to
the corresponding periods in 1998 is attributable to the origination and
processing of more loans in both periods in 1999 compared to the corresponding
periods in the previous year. Surety was formed in February 1998, and during the
first several months of operation was primarily involved in developing an
infrastructure to support its operations. During the first six months of 1999,
Surety has devoted additional resources to marketing its products which has
resulted in increased loan production.
Sales and Rental. Sales and rental fees were $34,213 and $38,963 for
the three and six months ended June 30, 1999, respectively, compared to $35,769
and $55,269 for the corresponding periods in 1998. The decrease in sales and
rental revenue is attributable to a decrease in the number of ALMs deployed and
in service during 1999 as compared to the same periods in 1998. In 1998 the
Company's relationship with several ALM customers was terminated, which resulted
in a reduction of ALMs in service.
Professional Services. Professional services revenue for the three and
six months ended June 30, 1999 were $790,452, as compared to $16,067 and
$797,061 for the corresponding periods of 1998. The Company performs
professional services pursuant to specific contracts with certain of its
customers. Such services usually involve developing or enhancing systems for the
Company's customers. The Company recognizes professional services revenues when
it has completed its obligations under the specific terms of the contract.
Professional services performed by the Company are performed as needed or
requested by the Company's customers and are not usually recurring in nature.
For the six month period ended June 30, 1999, the Company recognized revenues,
all of which were recognized in the second quarter of 1999, associated with two
contracts. During the first quarter of 1998, the Company recognized revenue of
$780,994 associated with a contract with a single customer.
Other Income. Other income for the three and six months ended June 30,
1999 was $95,447 and $179,711, respectively, compared to $344,648 and $481,852
for the corresponding periods in 1998. Other income for the three and six months
ended June 30, 1998 includes fees associated with the processing of credit and
debit card transactions by the Company's Transaction Processing Division
("TPS"). During December 1998, the Company sold TPS to a third party.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and six months ended
June 30, 1999 were $771,822 and $941,650, respectively, compared to $215,717 and
$651,491 for the corresponding periods in 1998.
Cost of revenues consist primarily of the costs to process
transactions, the costs incurred by Surety to process mortgage loans,
depreciation and other costs associated with ALMs deployed under operating
leases and the direct and indirect costs associated with performing professional
services. The increase in the cost of revenues for the three month period ended
June 30, 1999, compared to the corresponding period in 1998 is attributable to
the recognition of the direct and indirect costs associated with certain
professional services contracts for which revenues were recognized in the second
quarter of 1999 and the increase in the costs associated with the processing of
mortgage loans by Surety due to higher loan production levels. The overall
increase in the cost of revenues in the three month period ended June 30, 1999,
compared to the corresponding period in 1998 is partially offset by a decrease
in the quantity, and therefore the costs, of transactions processed through the
Company's DeciSys/RT system and the elimination of costs associated with
processing certain other transactions through the Company's TPS division, which
was sold in December 1998.
The increase in the cost of revenues for the six month period ended
June 30, 1999, compared to the corresponding period in 1998 is attributable to a
higher level of direct and indirect costs in relation to revenue recognized in
accordance with the performance of professional services in 1999 compared to the
cost associated with the delivery of professional services in 1998. The overall
increase in the cost of revenues in the six month period ended June 30, 1999,
compared to the corresponding period in 1998 is also attributable to the
increased costs associated with the higher quantity of mortgage loans processed
by Surety and is offset by the decrease in costs associated with processing
fewer transactions through the DeciSys/RT system and the elimination of costs
associated with processing certain transactions processed through TPS.
Research and Development. Costs incurred for research and development
totaled $519,353 and $818,478 for the three and six months ended June 30, 1999,
respectively, compared to $953,049 and $1,802,323 for the corresponding periods
in 1998. The decrease in research and development costs for the three and six
months ended June 30, 1999, primarily reflects a decrease in the number of
employees involved in development activities and the treatment of certain costs
associated with the performance of professional services as cost of revenues.
Costs associated with the performance of professional services are deferred
until the professional services are completed by the Company and accepted by the
customer. Upon acceptance by the customer, the corresponding revenue and
deferred costs are recognized by the Company. The Company continues to commit
resources to initiatives associated with the technological enhancement of the
Company's DeciSys/RT technology and its financial product origination
capabilities.
Selling, General and Administrative Expenses. For the three and six
months ended June 30, 1999, selling, general and administrative expenses totaled
$2,503,162 and $4,934,844, respectively, as compared to $4,289,731 and
$7,461,106 for the corresponding periods in 1998. The decrease for the three and
six months ended June 30, 1999, as compared to the corresponding periods of 1998
is primarily attributable to a decrease in employment costs associated with an
overall reduction in the number of employees and a decrease in deferred
compensation expense due to significant forfeitures of common stock options
granted under the Company's 1995 Stock Option Plan.
Interest Income/Expense. Interest income for the three and six months
ended June 30, 1999, totaled $115,358 and $237,685, compared to $291,407 and
$656,809 for the corresponding periods in 1998. The decrease in interest income
for the three and six months ended June 30, 1999, is due to a decrease in cash
and cash equivalents and investments balances as compared to the same periods of
1998, coupled with a decrease in the amount of amortization of deferred interest
income associated with ALMs under sales-type lease agreements. Interest expense
for the three and six months ended June 30, 1999, was $1,505 and $2,867,
respectively, as compared to $4,230 and $9,663 for the corresponding periods in
1998.
Liquidity and Capital Resources
The Company has generated operating losses of $47,944,391 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 1997 and 1998, the Company would deplete its existing cash
resources in the latter part of 1999; however, the Company has taken certain
measures to reduce its cash depletion rate, including decreasing its employee
base. The Company believes existing cash, cash equivalents and internally
generated funds will be sufficient to meet the Company's currently anticipated
cash requirements through 1999. However no assurances can be given that the
Company's existing cash resources will be sufficient to fund the Company's cash
requirements for 1999. Moreover, existing cash resources and projected revenues
that may be received under existing contracts will be insufficient to fund the
Company's operations for 2000 and thereafter. Accordingly, to remain viable
after 1999, the Company must substantially increase revenues, raise additional
capital and/or substantially reduce its operations. No assurances can be given
that the Company will be able to increase its revenues, raise additional capital
or reduce its operations in a manner that would allow it to continue operations
in 2000 and beyond. In order to fund operations, the Company may need to raise
additional funds through the issuance of equity securities, in which case the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to common stock. There can be no
assurance that additional financing will be available when needed on terms
favorable to the Company or at all. If adequate funds are not available or not
available on acceptable terms, the Company may be unable to continue operations;
develop, enhance and market products; retain qualified personnel; take advantage
of future opportunities; or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition.
Net cash used during the six months ended June 30, 1999, to fund
operations was $3,764,392 compared to $4,382,869 for the same period in 1998.
Proceeds from the offering and other sources of cash were used to fund current
period operations, research and development of $818,478, capital expenditures of
$74,386, and software development of $137,940. During the six months ended June
30, 1998, net proceeds from the offering and other sources of cash were used to
fund operations, research and development of $1,802,323, capital expenditures of
$394,574 and repurchase of outstanding shares of the Company's common stock of
$2,404,263. At June 30, 1999, cash and liquid investments were $6,182,907 and
working capital was $9,682,178. At December 31, 1998, cash and liquid
investments were $10,095,242 and working capital was $13,543,782.
Surety has established a credit facility with a maximum borrowing
amount of $2,000,000. Pursuant to the terms of the credit facility, Surety may
obtain advances from the lender for funding of mortgage loans made by Surety
during the interim period between the funding and sale of the loans to permanent
investors. All advances made pursuant to the agreement are secured by a security
interest in the rights and benefits due Surety in conjunction with the making of
the underlying loan. The credit facility bears interest at the lender's prime
rate plus 50 basis points and expires on June 1, 2000. Outstanding borrowings
under the credit facility as of June 30, 1999 were approximately $167,000
bearing a weighted average interest rate of 8.37%.
During 1997, in connection with its acquisition of Buy American, Inc.
and Project Freedom, Inc., the Company issued restricted common stock subject to
a put option by the sellers and a call option by the Company. Under such
acquisition agreement, the sellers had an option to sell any or all of the
shares of restricted common stock held by them to the Company at a price of
$3.47 per share and the Company had a single option to repurchase any or all of
the shares of restricted common stock at a price of $5.78 per share. These
options were exercisable for a 30 day period ending May 31, 1999. During April
1999, the Company and the former owners of Buy American, Inc. and Project
Freedom, Inc. entered into an agreement whereby the Company and the former
owners of Buy American, Inc. and Project Freedom, Inc. terminated their
respective rights under these options.
Implications of Year 2000 Issues
Year 2000 issues generally involve the potential impact on a company if
computer systems fail to accurately interpret data after December 31, 1999.
Since many computer programs have historically been designed to read and
interpret years in a two-digit format, a computer program or system that is not
redesigned or otherwise updated may be incapable of distinguishing between the
year 2000 and the year 1900, which may result in systems failure or the
generation of inaccurate data. The risks associated with Year 2000 issues are
significant due to the reliance of most companies on, and interaction with,
automated information or services provided by third parties that may be subject
to Year 2000 issues. Moreover, it is frequently difficult to assess a third
party's ability, diligence, and success in addressing Year 2000 issues. In many
cases, reliance must be placed on representations received from third parties
regarding the existence of Year 2000 issues that may affect the continuity or
quality of critical services they provide.
The Company's business primarily involves the automated processing of
financial services transactions through both internally developed and externally
purchased computer software and hardware systems. Additionally, the Company is
dependent on third parties to deliver certain automated services essential to
support the Company's internal operations and its ability to process financial
services transactions for its customers. The computer systems used by the
Company to process financial services transactions are generally interfaced with
its customers' systems and, accordingly, the Company's ability to deliver
uninterrupted service may be adversely affected if its customers have not
adequately addressed Year 2000 issues.
The Company has undertaken various initiatives to date to address Year
2000 issues. Such initiatives have included an evaluation of its information
technology ("IT"), which consists of computer hardware and software, and
non-information technology ("Non-IT"), which generally includes systems that
rely on imbedded chip technology. The Company anticipates that its Year 2000
assessment, remediation, testing and implementation efforts will be completed by
September 30, 1999. The Company does not anticipate that any material
modification or refinement of its IT or Non-IT systems will be necessary to
adequately address and resolve Year 2000 issues; however, failure to identify,
assess, remediate, test and implement solutions to Year 2000 issues could result
in a system failure or the use of inaccurate data, which could disrupt the
Company's operations and adversely affect its ability to provide uninterrupted
services to its customers.
The Company divided its activities into two categories for purposes of
evaluating and tracking issues related to the Year 2000. "Services Systems" are
those computer software and hardware systems, including third party services,
used to provide processing services for the Company's customers. "Operations
Systems" are those computer software and hardware systems, including third party
services, utilized by the Company for internal operating and administrative
purposes.
Services Systems
The Company's processing services are delivered through ALMs or web
server-based systems, both of which are connected to the Company's Network
Operating Center ("NOC"). The NOC uses multiple servers to process financial
services transactions and is connected to various third party systems that
provide essential information required for the processing of financial services
transactions. Such third party services include, but are not limited to, credit
bureaus, credit scoring agencies, consumer identification sources and other
fraud detection service providers. Moreover, the Company's ALMs and web
server-based systems are connected to the NOC through communications networks
and links provided by third parties. The Company's ALMs, web server-based
systems and the NOC consist of both IT and Non-IT systems.
ALM Systems. ALMs are freestanding kiosks that consist of hardware,
software and communications systems. The Company's customers have deployed ALMs
to serve as a point of entry for consumer information as well as a delivery
vehicle to fulfill financial services transactions. ALM systems, including
software applications, hardware and component devices and communications
connection to the NOC, have been tested using certain date testing parameters as
follows: December 31, 1999; January 3, 2000; February 28, 2000; February 29,
2000; and March 1, 2000. The Company has requested that third party providers of
IT and Non-IT components and systems used in or in conjunction with the ALM
systems provide evidence of their system's compliance with Year 2000 issues. To
date, the Company has received no communication that any third party service
providers are non-compliant with Year 2000 issues. Evidence supporting
compliance has been received from most third parties that provide critical
systems or service used in the ALM system. During the course of its evaluation
of Year 2000 issues pertaining to the ALM system, the Company identified one
operating software system that required an upgrade to remediate Year 2000
issues. This upgrade has been completed.
Certain of the Company's services are accessed and utilized by external
systems of its customers. The Company has published an interface standard for
access to its services by these external systems, and the data elements of this
interface are Year 2000 compliant. This includes the interface to customer
created and maintained web pages for providing the Company's services using the
Internet.
Web Server-based Systems. The Company also provides services to its
customers using web server-based systems. These systems provide access to the
Company's services through customer maintained computer networks such as call
centers and indirect lending operations systems. The web server-based systems
access the Company's NOC through browser-based applications which are
independent of the operating systems and hardware environments utilized by the
Company's customers. As a result, customers must ensure that these operating
systems and hardware environments are Year 2000 compliant. Testing of these
systems is in process and is expected to be completed along with all necessary
remediation by September 1, 1999. Completion of the Company's Year 2000
initiatives with respect to its web server-based systems is dependent upon
completion of Year 2000 initiatives surrounding testing and implementation of
certain third party systems and services. Additionally, web server-based systems
are connected to the Company's NOC through dedicated third party communications
systems, and the Company has received statements from the provider of these
communications systems that such systems will operate in the Year 2000 and
beyond.
NOC Systems. The Company's NOC uses multiple servers to enable services
provided by its ALM and web server-based systems. These servers are
interconnected using standard Ethernet network facilities using TCP/IP
protocols. The Company is conducting tests on these servers and their operating
systems. All testing is expected to be completed along with all necessary
remediation by September 1, 1999. In addition, the Company is in the process of
soliciting and receiving statements from the various third party providers of
the IT and Non-IT components of these server systems regarding compliance with
Year 2000 issues.
The Company is dependent on services and systems provided by third
parties to maintain continuous and uninterrupted service to its customers.
Moreover, the Company's ability to fully certify its systems is dependent upon
successful implementation of Year 2000 compliant systems by third party service
providers. The Company anticipates that it will complete its assessment of Year
2000 issues related to third parties by September 1, 1999. The Company believes
that if certain third parties that provide essential services to the Company are
unable to demonstrate compliance with Year 2000 issues, the Company can switch
to alternative third party service providers and obtain substantially comparable
services at substantially the same cost.
Operations Systems
Operations Systems are those computer hardware and software systems
utilized by the Company for internal operating and administrative purposes.
Certain systems utilized by the Company for operating purposes are also
dependent on third party service providers, however, to a much lesser extent
than the systems utilized by the Company to provide services to its customers.
Operations systems include, but are not limited to, those systems used for
accounting, billing, human resources, payroll, internal communications and
management of software resources. Additionally, Operations Systems include other
devices used for ongoing operations such as telephone and PBX systems, personal
and network computers and fax machines. Third party services used in the
Company's internal operations include Internet and telephone services and other
communications services.
The Company is completing its remediation, testing and implementation
activities with respect to its Operations Systems. During the course of its
assessment, the Company identified one Operations System that was not year 2000
compliant. The Company anticipates that remediation will be completed by
September 1, 1999.
Operations Non-IT systems may contain imbedded chip technology, which
complicates the Company's Year 2000 identification, assessment, remediation and
testing efforts. Based upon its identification and assessment efforts to date,
the Company believes that no replacement of critical computer equipment or
software will be necessary. In addition, in the ordinary course of replacing
computer equipment and software, the Company attempts to obtain replacements
that are Year 2000 compliant.
The Company is completing its assessment regarding certain non-critical
Operations Systems and services provided by third parties. The assessment of
critical Operations Systems and services by third parties has been completed
which generally included obtaining representations that such systems were Year
2000 compliant. The Company is in the process of soliciting and obtaining
representations regarding all other systems and services provided by third
parties with respect to Year 2000 issues. The Company currently does not have
sufficient information to ascertain whether all third party system and service
providers will be Year 2000 compliant by September 1, 1999.
Costs of Addressing Year 2000 Issues
The automated systems developed by the Company and upon which it is
primarily dependent to deliver services to its customers were designed and
developed in consideration of Year 2000 issues. Accordingly, the incremental
cost associated with addressing Year 2000 issues in the initial design and
development of the Company's systems has been insignificant. Similarly, the
Company's internally developed operating systems have been developed since 1994,
and the incremental costs associated with Year 2000 issues have been
insignificant. The costs associated with Year 2000 issue assessment,
identification, remediation and testing have not been significant, and the
Company does not believe that significant future costs will be incurred to
complete its assessment and remediation of Year 2000 issues.
Risks Associated with Year 2000 Issues
The Company is still evaluating Year 2000 issues and there can be no
assurance that the Company will be completely successful in its efforts to
assess, identify, remediate and test all Year 2000 issues including the Year
2000 issues which may affect critical services supplied by third parties. If the
Company is unable to complete its assessment or otherwise improperly assesses or
fails to adequately remediate Year 2000 issues, the Company may be unable to
provide continuous and uninterrupted services to its customers. Accordingly, the
Company could suffer the loss of revenue, customers and future sales as well as
expose itself to litigation. Similarly, the Company may be exposed to the
disruption of its business activities and diversion of resources that could
materially and adversely affect the operations and activities of the Company.
Any amount of potential lost revenue or liability related to year 2000 issues
cannot be reasonably estimated at this time.
Ongoing Testing
While the Company believes that modifications to its systems will be
limited, the Company has established procedures for Year 2000 testing of any
modifications after September 30, 1999. This testing includes both specific
change testing and full regressed testing of all critical Year 2000 dates.
To address the uncertainty and risks associated with Year 2000 issues,
the Company is developing contingency and recovery plans. Such plans are being
developed based on an assessment of possible scenarios that may result from Year
2000 issues and include the possible failure of the Company's systems and third
party systems and services. The Company anticipates that its planning efforts
and development of contingency plans will be complete by September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investments and the Company's
mortgage brokerage business. The Company does not believe such risk is material.
The Company's cash and cash equivalents consist of highly liquid investments
with maturities of three months or less. At June 30, 1999, short term
investments consist of approximately $3,600,000 in U.S. Government securities
with maturities greater than three months when purchased, which are currently
held as available for sale. Further, when the Company receives a commitment to
originate a mortgage loan from a consumer or correspondent, the Company
immediately receives a commitment from an investor to buy such mortgage loan.
The Company does not believe that its mortgage brokerage business exposes it to
significant market risk for changes in interest rates.
Part II. Other Information
Items 1, 3 and 5 are not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company's registration statement on Form S-1 (File No.
333-1170) with regard to an initial public offering of 5,060,000
shares of common stock, par value $0.0001 per share, of the
Company was declared effective by the Securities and Exchange
Commission on April 24, 1996. As set forth in the Company's Form
SR, Report of Sales of Securities and Use of Proceeds Therefrom,
Montgomery Securities and Donaldson, Lufkin & Jenrette Securities
Corporation acted as the managing underwriters for the offering,
which commenced April 25, 1996. As of June 30, 1999, the Company
has used net proceeds of $60,088,000 from the offering as follows:
Direct or indirect
payments to directors,
officers, general
partners of the issuer
or their associates; to
persons owning ten
percent or more of any
class of equity
securities of the
issuer; Direct or
indirect and to
affiliates of the
issuer payments to
others
------------------------------------- --------------------------
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 5,600,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 29,955,000
Temporary investments:
US Treasury obligations 5,113,000
Commercial paper -
Money market / cash 1,070,000
Other purposes
Marketing 4,648,000
Research & development 9,394,000
Purchase of software 2,237,000
<FN>
1 Reflects the repayment of debt owned to Carolina First Corporation, as
described under the caption "Use of Proceeds" in the Company's Prospectus, dated
April 25, 1996.
</FN>
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Affinity Technology Group, Inc.
was held on May 28, 1999 (the "Annual Meeting"). At the Annual Meeting, Alan H.
Fishman, Robert M. Price, Edward J. Sebastian, R. Murray Smith and Peter R.
Wilson were duly elected to the Board of Directors of the Company. Prior to the
Annual Meeting, Jeff A. Norris, who was nominated for re-election to the Board
of Directors at the Annual Meeting, resigned from the Board of Directors and
requested the Company withdraw his nomination for re-election. In addition, the
proposal to amend the 1996 Stock Option Plan of Affinity Technology Group, Inc.
(the "1996 Option Plan") to increase the number of shares issuable thereunder
from 1,900,000 shares to 2,900,000 and the proposal to amend the 1996 Option
Plan to permit participation by non-employee directors in the 1996 Option Plan
were approved and the selection of Ernst & Young, LLP as independent auditors
for the year ending December 31, 1999 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 18,937,705 10,279,729 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Robert M. Price 18,939,755 10,277,679 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Edward J. Sebastian 18,937,280 10,280,154 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
R. Murray Smith 18,942,435 10,274,999 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Peter R. Wilson 18,939,955 10,277,479 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Proposal to amend the 1996 Option Plan to increase the number of shares issuable
thereunder from 1,900,000 shares to 2,900,000.
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
15,894,074 3,140,001 10,183,359 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Proposal to amend the 1996 Option Plan to permit participation by non-employee
directors.
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
15,094,888 3,924,272 10,198,274 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Ratification of the selection of Ernst & Young, LLP.
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
18,971,676 63,300 10,182,458 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
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, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
Joseph A. Boyle
Senior Vice President, Chief Financial Officer and Treasurer
Date: August 12, 1999
Exhibit 27 - Financial Data Schedule
This schedule contains summary financial information extracted from the
consolidated financial statements for the three and six months ended June 30,
1999 and is qualified in its entirety by reference to such statements.