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, 2000 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
(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. 30,545,360 shares of Common Stock, $0.0001 par value, as of
November 2, 2000.
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
========================= ==========================
September
2000 December 31,
(Unaudited) 1999
------------------------- --------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 832,841 $ 2,116,016
Investments - 1,474,949
Accounts receivable, less allowance for doubtful accounts of
$27,766 and $105,076 at September 30, 2000, and December 31,
1999, respectively 2,153,673 713,644
Net investment in sales-type leases - current 205,567 324,485
Inventories 1,012,006 1,224,532
Other current assets 545,136 626,354
------------------------- --------------------------
Total current assets 4,749,223 6,479,980
Net investment in sales-type leases - non-current 1,108 249,830
Property and equipment, net 2,190,871 2,921,770
Software development costs, less accumulated amortization of $627,393
and $368,033 at September 30, 2000, and December 31, 1999,
respectively 912,575 1,199,053
Other assets 2,056,534 2,278,895
------------------------- --------------------------
Total assets $ 9,910,311 $13,129,528
========================= ==========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 281,975 $ 215,897
Accrued expenses 881,671 1,548,135
Notes payable 1,276,182 -
Current portion of deferred revenue 55,366 78,710
------------------------- --------------------------
Total current liabilities 2,495,194 1,842,742
Deferred revenue 811,381 615,806
Capital stock of subsidiary held by minority investor 25,000 -
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares,
issued 32,693,368 and 31,961,956 shares at September 30, 2000,
and December 31, 1999, respectively 3,269 3,196
Additional paid-in capital 70,104,636 69,394,954
Deferred compensation (81,965) (163,167)
Treasury stock, at cost (2,168,008 and 2,163,556 shares at
September 30, 2000, and December 31, 1999, respectively) (3,505,287) (3,490,819)
Accumulated deficit (59,941,917) (55,073,184)
------------------------- --------------------------
Total stockholders' equity 6,578,736 10,670,980
------------------------- --------------------------
Total liabilities and stockholders' equity $ 9,910,311 $13,129,528
========================= ==========================
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Transactions $ 129,676 $ 128,587 $ 441,827 $ 346,522
Mortgage processing services 132,584 71,128 319,753 338,378
Sales and rental - 5,500 3,000 44,463
Professional services - 59,445 319,503 849,897
Patent license fees 95,000 500,000 185,000 500,000
Other income 89,092 114,921 209,648 294,632
------------------- ------------------ --- ----------------- ------------------
Total revenue 446,352 879,581 1,478,731 2,373,892
Costs and expenses:
Cost of revenues 95,785 848,963 431,081 2,049,464
Research and development 110,556 482,439 593,552 1,300,917
Selling, general and administrative expenses 1,804,486 2,918,421 5,419,826 7,594,414
------------------- ------------------ ----------------- ------------------
Total costs and expenses 2,010,827 4,249,823 6,444,459 10,944,795
------------------- ------------------ ----------------- ------------------
Operating loss (1,564,475) (3,370,242) (4,965,728) (8,570,903)
Interest income, net 12,164 64,245 96,995 299,063
------------------- ------------------ ----------------- ------------------
Net loss $ (1,552,311) $ (3,305,997) $ (4,868,733) $ (8,271,840)
=================== ================== ================= ==================
Net loss per share - basic and diluted $ (0.05) $ (0.11) $ (0.16) $ (0.28)
=================== ================== ================= ==================
Shares used in computing net loss per share 30,523,492 29,772,018 30,142,184 29,722,919
=================== ================== ================= ==================
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Operating activities
Net loss $ (4,868,733) $ (8,271,840)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,486,808 1,780,031
Amortization of deferred compensation 81,202 113,594
Provision for doubtful accounts 45,000 45,000
Inventory valuation allowance 90,000 664,940
Deferred revenue 172,231 (198,799)
Other 17,955 17,957
Changes in current assets and liabilities:
Accounts receivable (1,485,029) (441,249)
Net investment in sales-type leases 367,640 395,673
Inventories 122,526 44,689
Other current assets 93,575 727,239
Accounts payable and accrued expenses (600,387) (83,413)
------------------- -------------------
Net cash used in operating activities (4,477,212) (5,206,178)
Investing activities
Purchases of property and equipment, net (257,383) (124,399)
Software development costs - (137,941)
Proceeds from sale of short term investments 1,474,949 6,593,360
------------------- -------------------
Net cash provided by investing activities 1,217,566 6,331,020
Financing activities
Proceeds from notes payable 7,291,376 -
Payments on notes payable and capital leases (6,015,194) (141,480)
Proceeds from sale of common stock 500,000 -
Proceeds from sale of minority interest in subsidiary 25,000 -
Exercise of options 175,289 41,707
------------------- -------------------
Net cash provided by financing activities 1,976,471 (99,773)
------------------- -------------------
Net (decrease) increase in cash (1,283,175) 1,025,069
Cash and cash equivalents at beginning of period 2,116,016 2,026,932
------------------- -------------------
Cash and cash equivalents at end of period $ 832,841 $ 3,052,001
=================== ===================
See accompanying notes.
</TABLE>
Notes to Condensed Consolidated Financial Statements
1. Going Concern
To date, Affinity Technology Group, Inc. (the
"Company") has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products
and services and has been required to use a substantial amount
of existing cash resources to fund its operations. If the
Company continues to use cash at the rate used during the first
nine months of 2000, the Company would deplete its existing cash
resources in December 2000. Although the Company has taken
steps to reduce its operating expenses and believes that
existing cash, cash equivalents, internally generated funds and
expected funds from the issuance of the convertible debenture
described below will be sufficient to fund operations during
2000, such resources and funds will be insufficient to fund the
Company's operations in 2001 and beyond. To remain viable after
2000, the Company must substantially increase revenues, raise
additional capital, which may include selling shares under the
equity line agreement discussed below, and/or substantially
reduce its operations.
The Company plans to attempt to decrease its operating
loss through increased sales with new customer relationships
established during 1999 and in the first quarter of 2000,
deployment of existing product offerings to new customers,
deployment of a recently developed Internet product, and
continued cost curtailment. In addition, the Company believes
it is due certain amounts from a customer related to a
development contract and certain other matters and is pursuing
collection on these balances. Additionally, the Company intends
to continue discussions with third parties regarding additional
financing.
In the third quarter of 2000, the Company entered into
two financing agreements. Under the first agreement the Company
will issue a $1 million convertible debenture which is
convertible into shares of the Company's common stock. The
debenture will bear interest at 8% per annum and will mature 18
months after issuance, subject to earlier conversion and certain
provisions regarding acceleration upon default and prepayment.
The second agreement (the "Equity Line Agreement") permits the
Company to issue up to 6,000,000 shares of its common stock to
another investor in monthly installments over an 18-month
period. The issuance of such shares is subject to registration
of such shares under the Securities Act of 1933. The amount of
capital the Company may raise under the Equity Line Agreement
will depend on the market value of the Company's stock at time
of issuance and certain limitations based on the trading volume
and market value of the Company's common stock at such time.
2. Basis of Presentation
The accompanying unaudited financial statements of 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, 1999 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, 1999.
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 1999 have been reclassified to
conform to 2000 presentation for comparability. These
reclassifications have no effect on previously reported
stockholders' equity or net loss.
3. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
========================== ========================
September 30 December 31
2000 1999
------------------------- -------------------------
<S> <C> <C>
Electronic parts and other components $ 690,261 $ 976,345
Work in process 778,864 1,189,766
Finished goods 750,274 772,407
------------------------- -------------------------
2,219,399 2,938,518
Reserve for obsolescence (1,207,393) (1,713,986)
------------------------- -------------------------
$ 1,012,006 $ 1,224,532
========================= =========================
</TABLE>
4. 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, 2001. There were outstanding borrowings under the credit
facility as of September 30, 2000, of $1,276,182.
5. Minority Interest
In September 2000, Surety, in conjunction with an unrelated real estate
broker/developer ("Minority Investor"), formed Palmetto Mortgage Loans, LLC
("Palmetto"). Concurrent with the formation of Palmetto, Surety and the Minority
Investor executed an Operating Agreement whereby the Minority Investor
contributed $25,000 and Surety contributed technology of comparable value as an
initial capital contribution. Under the terms of the Operating Agreement and
Articles of Organization, Surety will receive 51% of the net operating profits
of Palmetto, and the Minority Investor will receive 49%.
6. Net Loss Per Share of Common Stock
The Company has adopted Financial Accounting Standards Board 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 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.
7. 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 and 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. The
Company intends to vigorously contest 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.
On April 18, 2000, the Company filed a lawsuit against The Dime Savings Bank of
New York, FSB and Hudson United Bancorp in The United States District Court for
the District of South Carolina, Columbia Division. The lawsuit arises out of the
Company's contract with The Dime Savings Bank relating to the development of a
system to process and automate decisioning of automobile loans. This contract
was acquired by The Dime Savings Bank in connection with its acquisition of the
indirect automobile loan business formerly operated by Citibank, N.A. In the
complaint, the Company alleges a breach of contract by The Dime Savings Bank and
intentional interference with the contract by Hudson United Bancorp, which
attempted to merge with The Dime Savings Bank earlier this year. The lawsuit
also contains a civil conspiracy claim against both The Dime Savings Bank and
Hudson United Bancorp and seeks actual and punitive damages against both
defendants. Since the Company filed this lawsuit, Hudson United Bancorp has been
granted a request to dismiss the lawsuit against it due to lack of jurisdiction
in South Carolina. The Company is evaluating whether to re-institute a similar
lawsuit against Hudson United Bancorp in another jurisdiction. In addition, The
Dime Savings Bank has asserted counterclaims against the Company for an
unspecified amount of damages for breach of contract, breach of warranty,
constructive fraud and negligent misrepresentation. The Company intends to
contest these allegations vigorously.
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, such as statements about the Company's future prospects and
short and long-term liquidity, are forward-looking statements and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Actual results may vary due to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, unanticipated
costs and expenses affecting the Company's cash position and other 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,
1999. 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 decisioning system 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 1999, the Company
developed 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 (which contract was acquired by The Dime
Savings Bank from the Citibank Indirect Auto Unit). The Company has been
informed by The Dime Savings Bank that it will not deploy the system, and the
Company has filed a lawsuit against The Dime Savings Bank as a result of its
decision not to deploy the system. The Company has developed a generic version
of this automobile loan processing and decisioning system to be licensed under
the brand name of iDEAL to other financial institutions. Also, during 1998 and
1999, the Company developed a version of its ALM to initiate and begin the
processing of mortgage loan applications. To date, such ALMs have been deployed
and operated by Surety Mortgage, Inc., a subsidiary of the Company. In addition,
during 1999 and 2000, the Company developed an Internet product, which is
marketed under the name rtDS ("real time Decision Service"). rtDS is an
outsourced service enabling lenders to deliver automated decisions to web loan
applicants in real-time.
To date, the Company has generated substantial operating losses and experienced
an extremely lengthy sales cycle for its products and services. Average consumer
use of ALMs and average rates of ALM loan approvals have been lower than
customer expectations. The Company believes that the ALM has not proven to be a
viable channel for the delivery of consumer loans or other financial services.
Although the Company has developed 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.
In the third quarter of 2000, the Company entered into two financing agreements.
Under the first agreement the Company will issue a $1 million debenture which is
convertible into shares of the Company's common stock. The debenture will bear
interest at 8% per annum and will mature 18 months after issuance, subject to
earlier conversion and certain provisions regarding acceleration upon default
and pre-payment. The second agreement (The "Equity Line Agreement") permits the
Company to issue up to 6,000,000 shares of its common stock to another investor
in monthly installments over an 18-month period. The issuance of such shares is
subject to the registration of such shares under the Securities Act of 1933. The
amount of capital the Company may raise under the Equity Line Agreement will
depend on the market value of the Company's stock at the time of issuance and
certain limitations based on the trading volume and market value of the
Company's common stock.
Although the Company believes that existing cash, cash equivalents, internally
generated funds and expected funds from the issuance of the convertible
debenture described above will be sufficient to fund operations for the
remainder of 2000, such resources and funds will be insufficient to fund the
Company's operations in 2001 and beyond. To remain viable after 2000, the
Company must substantially increase revenues, raise additional capital, which
may include the sale of shares pursuant to the Equity Line Agreement described
above, 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
2001 and beyond. In this regard, the Company's ability to sell shares under the
Equity Line Agreement is subject to certain limitations and conditions,
including, among others, the absence of a material adverse event or development
affecting the Company.
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, 2000, of $59,941,917. The Company expects to incur
substantial additional costs to develop its financial product origination
capabilities, to enhance and market iDEAL, e-xpertLender, the ALM, rtDS and
DeciSys/RT 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, 2000
were $446,352 and $1,478,731, respectively, compared to $879,581 and $2,373,892
for the corresponding periods of 1999.
Transaction fees. Revenues from transaction fees were $129,676 and $441,827 for
the three and nine months ended September 30, 2000, respectively, compared to
$128,587 and $346,522 for the corresponding periods in 1999. The increase in
transaction fees during the three and nine months ended September 30, 2000, as
compared to the same periods in 1999 is attributable to an increase in the
number of financial service applications processed using DeciSys/RT. Such
increase is primarily attributable to the addition of one customer in the latter
half of 1999. There were no transaction fees attributable to this customer in
the first nine months of 1999.
Mortgage Processing Services. Revenues from mortgage processing services earned
by Surety were $132,584 and $319,753 for the three and nine months ended
September 30, 2000, respectively, compared to $71,128 and $338,378 for the
corresponding periods in 1999. The increase in mortgage processing services
revenue during the three months ended September 30, 2000, compared to the
corresponding period in 1999 is attributable to the origination and processing
of more loans in the third quarter of 2000 compared to the corresponding period
in the previous year. The increase resulted primarily from the marketing efforts
of Surety to deploy its mortgage origination system and establish new customer
relationships during the second and third quarters of 2000. The decrease in
mortgage processing services revenue for the nine-month period ending September
30, 2000, compared with the corresponding period in 1999 is attributable to
fewer loans processed during the first and second quarters of 2000, compared to
the corresponding periods in 1999. The decrease was primarily the result of
Surety's dedication of resources to its marketing efforts and general market
conditions.
Sales and Rental fees. Sales and rental fees for the nine months ended September
30, 2000, were $3,000, all of which were recognized in the first quarter of
2000, compared to $5,500 and $44,463 for the three and nine months ended
September 30, 1999. The decrease in sales and rental revenue is attributable to
a decrease in the number of non-mortgage ALMs deployed and in service during
2000 as compared to the same periods in 1999. The Company's relationship with
most of its non-mortgage ALM customers has been terminated.
Professional Services. The Company recognized no professional services revenue
during the three months ended September 30, 2000. Professional services revenue
for the nine months ended September 30, 2000, was $319,503. Professional
services revenues were $59,445 for the three months ended September 30, 1999,
and $849,897 for the nine months ended September 30, 1999. 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.
During the second quarter of 2000, the Company recognized $309,503 of
professional services revenue which was associated with one customer. The
Company performed most of the services related to such revenue during 1999 and
deferred such revenue until collection was assured. For the three and nine month
periods ended September 30, 1999, the Company recognized revenues associated
with two contracts.
Patent license fees. Patent license fees for the three and nine month periods
ended September 30, 2000, were $95,000 and $185,000, respectively. Such patent
licensing fees were associated with a patent licensing agreement the Company
entered during the third quarter of 1999. Under the patent licensing agreement
the Company was paid and recognized a patent license fee of $500,000 in the
third quarter of 1999. The Company initiated its patent licensing program in
1999. Both of the Company's patents covering fully automated lending systems are
being re-examined by the U. S. Patent and Trademark Office (the "PTO"). In March
2000 and again in August 2000, the PTO issued a preliminary office action
rejecting all previously issued claims under the Company's first patent covering
fully automated lending systems.
Other Income. Other income for the three and nine months ended September 30,
2000, was $89,092 and $209,648, respectively, compared to $114,921 and $294,632
for the corresponding periods in 1999. Other income consists primarily of
miscellaneous non-recurring income items. The decrease in the three and nine
month periods ending September 30, 2000, compared to the corresponding periods
in 1999 is due primarily to ancillary, non-recurring revenues recognized in 1999
associated with ALMs and other miscellaneous items. Additionally, the Company
performed certain outsourced services for the purchasers of its Transaction
Processing Division in the first six months of 1999 which were not performed in
2000.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended September
30, 2000, were $95,785 and $431,081, respectively, compared to $848,963 and
$2,049,464 for the corresponding periods in 1999. Cost of revenues decreased in
the three and nine months ended September 30, 2000, compared to the comparable
periods due to: (i) a renegotiation of a processing contract in the third
quarter of 1999 whereby the customer assumed the responsibility of paying
directly to third party vendors certain direct costs associated with
transactions processed for that customer; (ii) a higher level of costs
associated with certain professional development services performed by the
Company in 1999, which includes certain contract loss provisions not incurred in
2000; and (iii) a reduction in depreciation and amortization associated with a
reduction in the number of non-mortgage ALMs deployed under operating lease
arrangements.
Research and Development. Costs incurred for research and development totaled
$110,556 and $593,552 for the three and nine months ended September 30, 2000,
respectively, compared to $482,439 and $1,300,917 for the corresponding periods
in 1999. The decrease in research and development costs for the three and nine
months ended September 30, 2000, primarily reflects a decrease in the number of
employees and contractors involved in development activities in 2000 compared to
the same period in 1999. The Company has substantially reduced the resources
committed 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, 2000, selling, general and administrative expenses totaled
$1,804,486 and $5,419,826, respectively, as compared to $2,918,421 and
$7,594,414 for the corresponding periods in 1999. The decrease for the three and
nine months ended September 30, 2000, compared to the corresponding periods of
1999, is primarily attributable to cost reduction measures taken in January
2000, which included a 47% reduction in the Company's workforce.
Interest Income. Interest income for the three and nine months ended September
30, 2000, totaled $12,164 and $96,995, compared to $64,245 and $299,063 for the
corresponding periods in 1999. The decrease in interest income for the three and
nine months ended September 30, 2000, is due to a decrease in cash and cash
equivalents and investments balances as compared to the same periods of 1999,
coupled with a decrease in the amount of amortization of deferred interest
income associated with ALMs under sales-type lease agreements.
Liquidity and Capital Resources
The Company has generated net losses of $59,941,917 from inception through
September 30, 2000, and has financed its operations primarily through the net
proceeds from its initial public offering in May 1996. Net proceeds from the
Company's initial public offering were $60,088,516.
In June 2000, the Company entered into an agreement with Redmond Fund, Inc., a
Nevada corporation ("Redmond"), under which Redmond acquired, for $500,000,
484,848 shares of the Company's common stock and a warrant to acquire an
additional 484,848 shares of common stock for $1.37 per share. The Company has
registered these shares under the Securities Act of 1933 pursuant to its
agreement with Redmond. Under certain circumstances that include Redmond's
satisfactory completion of its due diligence investigation of the Company, the
Company may issue to Redmond additional shares of common stock at a price equal
to the lesser of $1.50 per share or the trading price of such stock at the time
of issuance, subject to a maximum aggregate purchase price of $3,750,000. If the
Company issued such shares, it would also be required to issue to Redmond one or
more warrants to acquire the same number of shares at a purchase price equal to
133% of the price that Redmond paid for such shares. The Company would also be
required to register all such shares, including the shares that may be issued
under the warrants, under the Securities Act of 1933. Redmond is currently under
no obligation to purchase any additional shares.
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with an accredited investor. Under the agreement,
the Company has agreed to issue an 8% convertible debenture in the principal
amount of $1,000,000. The debenture will be convertible, at the option of the
investor, into shares of the Company's common stock at a price initially equal
to the lesser of $1.00 per share or a percentage, which will be either 65% or
75% depending on the primary trading market for the Company's stock at the time
of conversion, of the three lowest closing prices of the Company's stock during
the month prior to conversion. The debenture will mature 18 months after its
issuance, subject to earlier conversion and certain provisions regarding
acceleration upon default and prepayment. In this regard, the debenture requires
the Company to use no less than 25% of the proceeds from any future equity
financing to repay all or part of the debenture at a price equal to 120% of the
principal amount of the debenture, plus all accrued and unpaid interest. Under
the agreement, the Company also is required to issue to the investor a
three-year warrant to acquire 200,000 shares of common stock. The warrant
exercise price initially will be 120% of the average of the three lowest closing
prices of the Company's stock during the month prior to issuance. The warrant
exercise price is subject to reduction in certain instances. In accordance with
the Company's agreement with the investor, the Company is registering the shares
of stock that may be issued under the 8% convertible debenture and the warrant
for resale by the investor under the Securities Act of 1933. The agreement is
scheduled to close in November 2000. Consummation of the agreement is subject to
certain conditions, including the continuing accuracy of the representations and
warranties made by the Company in the agreement. A material adverse event or
development affecting the Company prior to the consummation of the agreement may
result in the termination of the agreement.
On September 26, 2000, the Company entered into The Equity Line Agreement with
an unrelated accredited investor. Under the agreement, the Company may sell
periodically in monthly installments during a period of 18 months, up to
6,000,000 shares of common stock at a price equal to 85% of the volume adjusted
average market price of the Company's stock at the time of issuance. The Company
would not be permitted to sell any shares until the Company has registered such
shares for resale by the investor under the Securities Act of 1933. The amount
of capital the Company can raise under this arrangement during any month may not
be less than $250,000 or more than the lesser of (i) $1,000,000 or (ii) 4.5% of
the product of the daily volume-weighted average stock price during the
three-month period prior to the request and the total trading volume in such
stock during the same three-month period. Under the agreement the Company has
issued to the investor a three-year warrant to acquire 720,000 shares of common
stock at a price equal to 115% of the average closing price of stock at the time
of issuance. In addition, any time the Company sells any shares of stock under
the agreement, the Company would be required to issue to the investor a 35-day
warrant to acquire 25% of the number of shares sold. The warrant would be
exercisable at the average purchase price paid by the investor for such shares.
Depending on the number of shares the Company ultimately issues under the
agreement, the Company may be required to obtain prior stockholder approval of
the transaction under the regulation of the Nasdaq Stock Market relating to
transactions involving the issuance of a number of shares equal to or in excess
of 20% of the number of shares outstanding prior to the transaction. The
Company's ability to sell any shares under the agreement is subject to certain
conditions. In particular, a material adverse event or development affecting the
Company may result in the termination of the agreement.
The Company continues to use a substantial amount of existing cash resources to
fund its operations. If the Company continued to use cash resources at the rate
used in the first nine months of 2000, the Company would deplete its existing
cash resources in December 2000. The Company has taken certain measures to
reduce its operating expenses, including decreasing its employee base, and has
entered into two agreements to raise additional capital as discussed above. The
Company believes existing cash, cash equivalents, internally generated funds,
and expected funds from the proceeds from the issuance of the convertible
debenture discussed above will be sufficient to meet the Company's currently
anticipated cash requirements through 2000. However, no assurances can be given
such resources and funds will be sufficient to fund the Company's cash
requirements for 2000. Moreover, such resources and funds will be insufficient
to fund the Company's operations in 2001 and thereafter. Accordingly, to remain
viable after 2000, the Company must substantially increase revenues, raise
additional capital, which may include the sale of shares pursuant to its Equity
Line Agreement, 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 2001 and beyond. In order to fund operations, the Company may
issue equity securities (which may include the sale of stock under the Equity
Line Agreement), in which case the percentage ownership of the stockholders of
the Company will be reduced, stockholders likely will experience additional
dilution, and such equity securities may have rights, preferences or privileges
senior to common stock.
As discussed above, the Company's ability to sell shares under its Equity Line
Agreement is subject to certain conditions, including the absence of an event or
development that has a material adverse effect on the Company or its business,
operations, properties, prospects or financial condition. Further, the amount of
money the Company may raise in any given month under the Equity Line Agreement
may not be less than $250,000 or greater than a formula based on the volume of
trading and stock price during the three-month period price to any requested
drawdown. Based on these limitations, as of November 10, 2000, the Company would
not be able to request a drawdown under the Equity Line Agreement. There can be
no assurance that the Company will be in a position to sell shares under the
Equity Line Agreement. Further, there can be no assurance that other financing
will be available when needed on terms acceptable to the Company or at all. If
adequate funds are not available, the Company may be required to substantially
reduce its operations or declare bankruptcy.
Net cash used during the nine months ended September 30, 2000, to fund
operations was approximately $4,477,212, compared to approximately $5,206,178
for the same period in 1999. Proceeds from the offering and other sources of
cash were used to fund current period operations, the purchase of property,
plant and equipment of $257,000, and research and development of approximately
$594,000. During the nine months ended September 30, 1999, net proceeds from the
offering and other sources of cash were used to fund operations, research and
development of approximately $1,301,000 and software development of
approximately $138,000. At September 30, 2000, cash and liquid investments were
$832,841, as compared to $3,590,965 at December 31, 1999. At September 30, 2000,
working capital was $2,254,029, as compared to $4,637,238 at December 31, 1999.
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, 2001. Outstanding borrowings under
the credit facility as of September 30, 2000, were $1,276,182.
Possible Delisting of Securities from 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 December 28, 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 will be delisted at the opening of business
on December 29, 2000. The company may request a review prior to December 28,
2000, which will generally stay delisting for an indeterminable period of time
after December 29, 2000. In the event of delisting by Nasdaq, trading in the
Company's common stock may thereafter be conducted in 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.
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, lending arrangements and the
demand for consumer loans. 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. Further, when the Company agrees to
make a mortgage loan, the Company immediately receives a commitment from an
investor to buy such mortgage loan shortly after it is made. Accordingly, the
Company does not incur a material amount of interest expense relating to
Surety's credit facility. The Company does not believe that it is exposed to
significant market risk for changes in interest rates.
Part II. Other Information
Items 3, 4, and 5 are not applicable.
Item 1. Legal Proceedings.
On April 18, 2000, the Company filed a lawsuit against The Dime Savings Bank of
New York, FSB and Hudson United Bancorp in The United States District Court for
the District of South Carolina, Columbia Division. The lawsuit arises out of the
Company's contract with The Dime Savings Bank relating to the development of a
system to process and automate decisioning of automobile loans. This contract
was acquired by The Dime Savings Bank in connection with its acquisition of the
indirect automobile loan business formerly operated by Citibank, N.A. In the
complaint, the Company alleges a breach of contract by The Dime Savings Bank and
intentional interference with the contract by Hudson United Bancorp, which
attempted to merge with The Dime Savings Bank earlier this year. The lawsuit
also contains a civil conspiracy claim against both The Dime Savings Bank and
Hudson United Bancorp and seeks actual and punitive damages against both
defendants. Since the Company filed this lawsuit, Hudson United Bancorp has been
granted a request to dismiss the lawsuit against it due to lack of jurisdiction
in South Carolina. The Company is evaluating whether to re-institute a similar
lawsuit against Hudson United Bancorp in another jurisdiction. In addition, The
Dime Savings Bank has asserted counterclaims against the Company for an
unspecified amount of damages for breach of contract, breach of warranty,
constructive fraud and negligent misrepresentation. The Company intends to
contest these allegations vigorously.
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, 2000, the Company has used net proceeds of $60,088,000 from the
offering as follows:
<TABLE>
<CAPTION>
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
------------------------------------ ---------------------------
<S> <C> <C>
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 5,912,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 33,919,000
Temporary investments:
US Treasury obligations -
Commercial paper -
Money market / cash 333,000
Other purposes
Marketing 4,559,000
Research & development 11,040,000
Purchase of software 2,254,000
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.
</TABLE>
Item 6. Exhibits and Reports on Form
8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Common Stock Purchase Agreement, dated as of June 2, 2000,
between Affinity Technology Group, Inc. and Redmond Fund, Inc.(incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on Form
S-3 (file no. 333-41898)).
Exhibit 99.2 - Form of Common Stock Purchase Warrant issued by Affinity
Technology Group, Inc. to Redmond Fund, Inc. (incorporated by reference to
Exhibit 4.5 to the Company's Registration Statement on Form S-3
(file no. 333-41898)).
Exhibit 99.3 - First Amendment to Common Stock Purchase Agreement,dated as
of September 1, 2000, between Affinity Technology Group, Inc. and Redmond
Fund, Inc.(incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3(file no. 333-41898)).
Exhibit 99.4 - Second Amendment to Common Stock Purchase Agreement, dated
as of October 2, 2000, between Affinity Technology Group, Inc. and Redmond
Fund, Inc.(incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-3 (file no. 333-41898)).
Exhibit 99.5 - Convertible Debenture and Warrants Purchase Agreement, dated
as of September 22, 2000, between Affinity Technology Group, Inc. and AMRO
International, S. A. (incorporated by reference to Exhibit 4.8 to the
Company's Registration Statement on Form S-3 (file no. 333-48176)).
Exhibit 99.6 - Form of 8% Convertible Debenture to be issued by Affinity
Technology Group, Inc. to AMRO International, S. A.(incorporated by
reference to Exhibit 4.9 to the Company's Registration Statement
on Form S-3(file no. 333-48176)).
Exhibit 99.7 - Form of Stock Purchase Warrant to be issued by Affinity
Technology Group, Inc., to AMRO International, S. A.,(incorporated by
reference to Exhibit 4.10 to the Company's Registration Statement on
Form S-3(file no. 333-48176)).
Exhibit 99.8 - Registration Rights Agreement, dated as of September 22,
2000, between Affinity Technology Group, Inc. and AMRO International, S. A.
(incorporated by reference to Exhibit 4.11 to the Company's Registration
Statement on Form S-3 (file no.
333-48176)).
Exhibit 99.9 - Form of Stock Purchase Warrant to be issued by Affinity
Technology Group, Inc. to Cardinal Securities, LLC (incorporated by
reference to Exhibit 4.12 to the Company's Registration Statement on Form
S-3 (file no. 333-48176)).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 2000.
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
President, Chief Executive
Officer, Chief Financial Officer and Treasurer
Date: November 14, 2000
