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 September 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.
29,772,960 shares of Common Stock, $0.0001 par value, as of November 1, 1999.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998............................................ 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998..................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998............................ 5
Notes to Condensed Consolidated Financial Statements............. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.. 16
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds................... 17
ITEM 6. Exhibits and Reports on Form 8-K............................ 18
Signature.............................................................. 18
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
1999 December 31,
(Unaudited) 1998
------------------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,052,001 $ 2,026,932
Investments 1,474,949 8,068,310
Accounts receivable, less allowance for doubtful accounts
of $89,884 and $45,513 at September 30, 1999 and
December 31, 1998, respectively 1,124,248 727,999
Net investment in sales-type leases - current 387,554 534,302
Inventories 1,280,893 2,054,542
Other current assets 619,986 1,349,995
------------------------- --------------------------
Total current assets 7,939,631 14,762,080
Net investment in sales-type leases - non-current 325,512 574,437
Property and equipment, net 3,294,552 4,511,924
Software development costs, less accumulated
amortization of $278,275 and $111,211 at
September 30, 1999 and December 31, 1998, respectively 1,743,934 1,773,057
Other assets 2,353,015 2,575,377
========================= ==========================
Total assets $ 15,656,644 $24,196,875
========================= ==========================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 125,083 $ 184,619
Accrued expenses 724,258 748,136
Notes payable - 141,480
Current portion of deferred revenue 92,841 144,063
------------------------- --------------------------
Total current liabilities 942,182 1,218,298
Deferred revenue 274,800 422,376
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000
shares, issued 31,936,516 and 31,572,880 shares at
September 30, 1999 and December 31, 1998, respectively 3,193 3,157
Additional paid-in capital 69,553,539 69,392,545
Deferred compensation (375,862) (489,656)
Treasury stock, at cost (2,163,556 and 2,073,207 shares at
September 30, 1999 and December 31, 1998, respectively) (3,490,820) (3,371,297)
Accumulated deficit (51,250,388) (42,978,548)
------------------------- --------------------------
Total stockholders' equity 14,439,662 22,556,201
========================= ==========================
Total liabilities and stockholders' equity $ 15,656,644 $24,196,875
========================= ==========================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------------ ------------------- ----------------- ------------------
Revenues:
Transactions $ 128,587 $ 212,433 $ 346,522 $ 577,316
Mortgage processing services 71,128 104,326 338,378 260,183
Sales and rental 5,500 4,050 44,463 59,319
Professional services 59,445 1,536 849,897 798,597
Patent license fees 500,000 - 500,000 -
Other income 114,921 119,992 294,632 486,145
------------------ ------------------- ----------------- ------------------
Total revenue 879,581 442,337 2,373,892 2,181,560
Costs and expenses:
Cost of revenues 332,421 227,293 1,274,071 878,784
Research and development 482,439 460,886 1,300,917 2,263,209
Selling, general and 3,434,963 3,528,221 8,369,807 10,989,327
administrative expenses
------------------ ------------------- ----------------- ------------------
Total costs and expenses 4,249,823 4,216,400 10,944,795 14,131,320
------------------ ------------------- ----------------- ------------------
Operating loss (3,370,242) (3,774,063) (8,570,903) (11,949,760)
Interest income, net 64,245 209,111 299,063 856,257
------------------ ------------------- ----------------- ------------------
Net loss $ (3,305,997) $ (3,564,952) $ (8,271,840) $ (11,093,503)
================== =================== ================= ==================
Net loss per share - basic and $ (0.11) $ (0.12) $ (0.28) $ (0.37)
diluted
================== =================== ================= ==================
Shares used in computing net loss 29,772,018 29,499,673 29,722,919 29,841,090
per share
================== =================== ================= ==================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
1999 1998
------------------- ------------------
Operating activities
Net loss $ (8,271,840) $ (11,093,503)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 1,780,031 1,754,432
Amortization of deferred compensation 113,594 508,417
Provision for doubtful accounts 45,000 140,465
Inventory valuation allowance 664,940 720,000
Deferred revenue (198,799) (688,935)
Other 17,957 121,449
Changes in current assets and liabilities:
Accounts receivable (441,249) 1,242,900
Net investment in sales-type leases 395,673 1,155,950
Inventories 44,689 389,900
Other current assets 727,239 (554,432)
Accounts payable and accrued expenses (83,413) (427,613)
------------------- ------------------
Net cash used in operating activities (5,206,178) (6,730,970)
Investing activities
Purchases of property and equipment, net (124,399) (661,631)
Software development costs (137,941) (571,442)
Proceeds from sale of short term investments 6,593,360 10,706,659
------------------- ------------------
Net cash provided by investing activities 6,331,020 9,473,586
Financing activities
Payments on notes payable and capital leases (141,480) (47,258)
Exercise of options 41,707 4,029
Purchases of treasury stock - (2,404,263)
------------------- ------------------
Net cash used in financing activities (99,773) (2,447,492)
------------------- ------------------
Net increase in cash 1,025,069 295,124
Cash and cash equivalents at beginning of period 2,026,932 4,470,185
=================== ==================
Cash and cash equivalents at end of period $ 3,052,001 $ 4,765,309
=================== ==================
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, and 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 nine months ended
September 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 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 common share
because the Company has experienced operating losses in all periods presented
and, therefore, the effect would be antidilutive.
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:
September 30, December 31,
1999 1998
------------------------- -------------------------
Electronic parts and other components $ 1,000,527 $ 1,062,180
Work in process 1,174,600 1,207,915
Finished goods 782,622 880,145
------------------------- -------------------------
2,957,749 3,150,240
Reserve for obsolescence (1,676,856) (1,095,698)
========================= =========================
$ 1,280,893 $ 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. There were no outstanding
borrowings under the credit facility as of September 30, 1999.
4. Stockholders' Equity
During 1997 and 1998, the Company had in place a share repurchase plan
under which the Company was authorized to use up to $4 million of general
corporate funds to acquire from time to time in the open market shares of the
outstanding Common Stock of the Company. As of December 31, 1998, the Company
had repurchased a total of 1,417,000 shares at an average price of $2.31 per
share for an aggregate cost of $3,271,700 under the share repurchase plan. No
shares were repurchased during the nine months ended September 30, 1999.
5. 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 in favor of the plaintiff 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 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 the indirect automobile finance
unit of The Dime Savings Bank of New York (formerly the Citibank Indirect Auto
Unit). The Company is currently continuing the development of a generic version
of this automobile loan processing and decisioning system to be sold, under the
brand name of iDEAL, to other financial institutions. Also, during 1998 and
continuing into 1999, the Company has been developing and testing a version of
its ALM to capture and begin the processing of mortgage loan applications. To
date, such ALMs have been primarily deployed and operated by Surety Mortgage,
Inc., a subsidiary of the Company. 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 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
for the remainder of 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 September 30, 1999 of $51,250,388. The Company expects to incur
substantial additional costs to develop its financial product origination
capabilities, to enhance and market iDEAL, e-xpertLender, the mortgage 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 nine months ended September
30, 1999 were $879,581 and $2,373,892, respectively, compared to $442,337 and
$2,181,560 for the corresponding periods of 1998.
Transaction fees. Revenues from transaction fees were $128,587 and
$346,522 for the three and nine months ended September 30, 1999, respectively,
compared to $212,433 and $577,316 for the corresponding periods in 1998. The
decrease in transaction fees during the three and nine months ended September
30, 1999, as compared to the same periods in 1998 is attributable to a decrease
in the number of financial service applications processed. Moreover, transaction
fees for the three and nine months ended September 30, 1998 includes fees
associated with the processing of credit and debit card transactions by the
Company's Transaction Processing Division ("TPS"). In December 1998, the Company
sold TPS to a third party.
Mortgage Processing Services. Revenues from mortgage processing
services earned by Surety were $71,128 and $338,378 for the three and nine
months ended September 30, 1999, respectively, compared to $104,326 and $260,183
for the corresponding periods in 1998. The decrease in mortgage processing
services for the three month period ended September 30, 1999, compared to the
corresponding period in 1998, is attributable to the origination and processing
of fewer loans. The increase in mortgage processing services revenue during the
nine months ended September 30, 1999, compared to the corresponding period in
1998, is attributable to the origination and processing of more loans in 1999
compared to the previous year. Surety commenced operations 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 nine
months of 1999, Surety devoted additional resources to marketing its products,
which has resulted in increased loan production for the year.
Sales and Rental. Sales and rental fees were $5,500 and $44,463 for the
three and nine months ended September 30, 1999, respectively, compared to $4,050
and $59,319 for the corresponding periods in 1998. The increase in sales and
rental for the three months ended September 30, 1999, compared to the
corresponding period in 1998, is attributable to the recognition of rental fees
associated with a pilot deployment of the Company's insurance kiosk product with
an insurance agency. The pilot deployment was discontinued during the quarter.
The decrease in sales and rental revenue during the first nine months of 1999 is
attributable to a decrease in the number of ALMs deployed and in service during
the nine months ended September 30, 1999 as compared to the same period in 1998.
In 1998 and 1999 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
nine months ended September 30, 1999 were $59,445 and $849,897, as compared to
$1,536 and $798,597 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 nine month period ended September 30, 1999, the Company recognized
revenues 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.
Patent License Fees. During the third quarter of 1999, the Company
granted a non-exclusive license under a patent which the Company owns. Under the
patent licensing agreement the Company was paid and recognized a patent license
fee of $500,000. The Company was granted its patent and initiated its patent
licensing program in 1999.
Other Income. Other income for the three and nine months ended
September 30, 1999 was $114,921 and $294,632, respectively, compared to $119,992
and $486,145 for the corresponding periods in 1998. Other income for the three
and nine months ended September 30, 1999, compared to corresponding periods in
1998, decreased primarily due to a decrease in the number of ALMs deployed and
in service and a decrease in the number of employees employed by the Company
thereby reducing the amount received under a revitalization program with the
State of South Carolina.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended
September 30, 1999 were $332,421 and $1,274,071, respectively, compared to
$227,293 and $878,784 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, amortization of capitalized software development costs and the direct
and indirect costs associated with performing professional services. The
increase in the cost of revenues for the three month period ended September 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, higher levels of amortization associated with
capitalized software development costs and the recognition of certain costs
associated with patent license fee revenue. This increase is partially offset by
a decrease in the quantity, and therefore the costs, of transactions processed
by the Company, including the elimination of costs associated with processing
certain other transactions through the Company's TPS division, which was sold in
December 1998, and a slight decrease in the costs associated with the processing
of mortgage loans by Surety due to lower loan production levels.
The increase in the cost of revenues for the nine month period ended
September 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, higher
levels of amortization associated with capitalized software development costs
and the recognition of certain costs associated with patent license fee revenue.
The overall increase in the cost of revenues in the nine month period ended
September 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 by the Company, including the
elimination of costs associated with processing certain transactions through
TPS.
Research and Development. Costs incurred for research and development
totaled $482,439 and $1,300,917 for the three and nine months ended September
30, 1999, respectively, compared to $460,886 and $2,263,209 for the
corresponding periods in 1998. The slight increase in research and development
costs for the three months ended September 30, 1999, compared to the
corresponding period in 1998, is attributable to an increase in the commitment
of certain resources to initiatives associated with the technological
enhancement of certain deliverable products. The decrease in research and
development costs for the nine months ended September 30, 1999, primarily
reflects a decrease in the number of employees involved in development
activities and the classification of certain costs associated with the delivery
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 nine
months ended September 30, 1999, selling, general and administrative expenses
totaled $3,434,963 and $8,369,807, respectively, as compared to $3,528,221 and
$10,989,327 for the corresponding periods in 1998. The decrease for the three
and nine months ended September 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. The overall decrease
in selling, general and administrative expenses for the three months ended
September 30, 1999 compared to the corresponding period in 1998 was offset by an
increase in the provision for obsolete inventory. During the third quarter of
1999 the Company recognized a provision for obsolete inventory of $554,940
compared to $390,000 in the corresponding period in 1998.
Interest Income/Expense. Interest income for the three and nine months
ended September 30, 1999, totaled $65,142 and $302,827, respectively, compared
to $210,156 and $866,963 for the corresponding periods in 1998. The decrease in
interest income for the three and nine months ended September 30, 1999, is due
to a decrease in cash and cash equivalents and investments 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 nine months ended September 30, 1999, was
$897 and $3,764, respectively, as compared to $1,045 and $10,706 for the
corresponding periods in 1998.
Liquidity and Capital Resources
The Company has generated operating losses of $51,250,388 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 the first three quarters of 1999, the Company would deplete
its existing cash resources in the second quarter of 2000. The Company believes
existing cash, cash equivalents and internally generated funds will be
sufficient to meet the Company's currently anticipated cash requirements for the
remainder of 1999. However, 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 or one or more of
its subsidiaries may need to raise additional funds through the issuance of
equity securities, in which case the direct and indirect percentage ownership of
the stockholders in the Company and it businesses may 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 would
have a material adverse effect on the Company's business, operating results and
financial condition.
Net cash used during the nine months ended September 30, 1999, to fund
operations was $5,206,178 compared to $6,730,970 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 $1,300,917, capital expenditures
of $124,399, and software development of $137,941. During the nine months ended
September 30, 1998, net proceeds from the offering and other sources of cash
were used to fund operations, research and development of $2,263,209, capital
expenditures of $661,631, software development of $571,442 and the repurchase of
outstanding shares of the Company's common stock of $2,404,263. At September 30,
1999, cash and liquid investments were $4,526,950 and working capital was
$6,997,449. 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. As of September 30, 1999,
there were no outstanding borrowings under the credit facility.
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 the
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.
Possible Delisting of Securities from the Nasdaq Stock Market
The Company has been notified by the Nasdaq Stock Market, Inc.
("Nasdaq") that the Company is not in compliance with Nasdaq listing standards
that require the Company's stock to maintain a minimum bid price of $1.00 or
more. As a result, the Company has been provided a period which expires January
18, 2000, to regain compliance with such standards. If the Company's common
stock does not regain compliance within the specified period (which would
require the common stock to have a closing bid price of $1.00 or more for at
least ten consecutive business days), the Company's stock would be delisted at
the opening of business on January 20, 2000. The Company may request a review
prior to January 18, 2000, which will generally stay delisting for an
indeterminable period of time after January 20, 2000. In the event of delisting
by Nasdaq, trading in the Company's common stock would thereafter be conducted,
if at all, in the over-the-counter markets. Consequently, the liquidity of the
Company's common stock would be impaired, not only in the number of securities
that could be bought and sold, but also through delays in the timing of
transactions and lower or higher prices for the Company's common stock than
might otherwise be attained. Further, the delisting of the Company's common
stock would have a material adverse effect on the ability of the Company to
raise capital through the sale of equity securities.
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 completed its Year 2000
assessment, remediation, testing and implementation efforts for current
production systems on November 10, 1999. The Company was not required to make
material modification or refinement to its IT or Non-IT systems 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 the
Company's web server-based systems was completed on November 10, 1999.
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 has conducted tests on these servers and their operating
systems. All testing was completed on November 10, 1999.
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 completed its assessment of Year 2000 issues related to
third parties on November 10, 1999. The Company believes that if certain third
parties that provide essential services to the Company are ultimately unable to
fully comply 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
December 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 provided 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 continues to assess
information provided by third parties to ascertain whether all third party
system and service providers will be Year 2000 compliant.
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 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 November 10, 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 has developed contingency and recovery plans. Such plans were
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 completed its planning efforts and
development of contingency plans on November 10, 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 September 30, 1999, short-term
investments consist of approximately $1,475,000 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, 4 and 5 are not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company's registration statement on Form S-1 (File No.
333-1170) with regard to an initial public offering of 5,060,000
shares of common stock, par value $0.0001 per share, of the
Company was declared effective by the Securities and Exchange
Commission on April 24, 1996. As set forth in the Company's Form
SR, Report of Sales of Securities and Use of Proceeds Therefrom,
Montgomery Securities and Donaldson, Lufkin & Jenrette Securities
Corporation acted as the managing underwriters for the offering,
which commenced April 25, 1996. As of September 30, 1999, the
Company has used net proceeds of $60,089,000 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 5,654,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 30,834,000
Temporary investments:
US Treasury obligations 2,961,000
Commercial paper -
Money market / cash 1,566,000
Other purposes
Marketing 4,888,000
Research & development 9,876,000
Purchase of software 2,239,000
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.
Item 6. Exhibits and Reports on Form
8-K.
(a) Exhibits
Exhibit 10 - 1996 Stock Option Plan of Affinity Technology Group, Inc.
(as amended and restated effective May 28, 1999)
Exhibit 27 - Financial Data Schedule. This schedule contains summary
financial information extracted from Affinity Technology Group, Inc. condensed
consolidated financial statements for the three and nine months ended September
30, 1999 and is qualified in its entirety by reference to such financial
statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 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: November 15, 1999