SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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.
30,527,135 shares of Common Stock, $0.0001 par value, as of August 9, 2000.
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
========================= ==========================
June
2000 December 31,
(Unaudited) 1999
------------------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,728,462 $ 2,116,016
Investments - 1,474,949
Accounts receivable, less allowance for doubtful accounts of
$12,766 and $105,076 at June 30, 2000 and December 31, 1999,
respectively 1,509,859 713,644
Net investment in sales-type leases - current 207,182 324,485
Inventories 1,089,118 1,224,532
Other current assets 483,117 626,354
------------------------- --------------------------
Total current assets 5,017,738 6,479,980
Net investment in sales-type leases - non-current 56,130 249,830
Property and equipment, net 2,384,861 2,921,770
Software development costs, less accumulated amortization of $531,900
and $368,033 at June 30, 2000 and December 31, 1999, respectively
1,008,068 1,199,053
Other assets 2,130,654 2,278,895
------------------------- --------------------------
Total assets $ 10,597,451 $ 13,129,528
========================= ==========================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 124,614 $ 215,897
Accrued expenses 866,741 1,548,135
Notes payable 685,620 -
Current portion of deferred revenue 45,587 78,710
------------------------- --------------------------
Total current liabilities 1,722,562 1,842,742
Deferred revenue 786,032 615,806
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
32,676,159 and 31,961,956 shares at June 30, 2000 and
December 31, 1999, respectively 3,268 3,196
Additional paid-in capital 70,086,292 69,394,954
Deferred compensation (104,156) (163,167)
Treasury stock, at cost (2,168,418 and 2,163,556 shares at June 30,
2000 and December 31, 1999, respectively) (3,506,941) (3,490,819)
Accumulated deficit (58,389,606) (55,073,184)
------------------------- --------------------------
Total stockholders' equity 8,088,857 10,670,980
------------------------- --------------------------
Total liabilities and stockholders' equity $ 10,597,451 $13,129,528
========================= ==========================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------------- ------------------ ----------------- ------------------
Revenues:
Transactions $ 150,355 $ 94,389 $ 312,151 $ 217,935
Mortgage processing services 113,307 153,851 187,168 267,250
Sales and rental - 34,213 3,000 38,963
Professional services 309,503 790,452 319,503 790,452
Patent license fees 65,000 - 90,000 -
Other income 41,096 95,447 120,556 179,711
------------------- ------------------ --- ----------------- ------------------
Total revenue 679,261 1,168,352 1,032,378 1,494,311
Costs and expenses:
Cost of revenues 223,969 1,030,673 335,296 1,200,501
Research and development 153,063 519,353 482,996 818,478
Selling, general and administrative expenses 1,842,449 2,244,311 3,615,339 4,675,993
------------------- ------------------ ----------------- ------------------
Total costs and expenses 2,219,481 3,794,337 4,433,631 6,694,972
------------------- ------------------ ----------------- ------------------
Operating loss (1,540,220) (2,625,985) (3,401,253) (5,200,661)
Interest income, net 34,957 113,853 84,831 234,818
------------------- ------------------ ----------------- ------------------
Net loss $ (1,505,263) $ (2,512,132) $ (3,316,422) $ (4,965,843)
=================== ================== ================= ==================
Net loss per share - basic and diluted $ (0.05) $ (0.08) $ (0.11) $ (0.17)
=================== ================== ================= ==================
Shares used in computing net loss per share 30,021,808 29,755,930 29,949,436 29,697,963
=================== ================== ================= ==================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2000 1999
------------------- -------------------
Operating activities
Net loss $ (3,316,422) $ (4,965,843)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,054,449 1,195,230
Amortization of deferred compensation 59,011 71,300
Provision for doubtful accounts 30,000 30,000
Inventory valuation allowance 60,000 110,000
Deferred revenue 137,103 (17,372)
Other (1,794) 10,133
Changes in current assets and liabilities:
Accounts receivable (826,215) (660,017)
Net investment in sales-type leases 311,003 260,317
Inventories 75,414 8,816
Other current assets 144,050 319,949
Accounts payable and accrued expenses (772,677) (126,905)
------------------- -------------------
Net cash used in operating activities (3,046,078) (3,764,392)
Investing activities
Purchases of property and equipment, net (177,334) (74,386)
Software development costs - (137,940)
Proceeds from sale of short term investments 1,474,949 4,465,818
------------------- -------------------
Net cash provided by investing activities 1,297,615 4,253,492
Financing activities
Proceeds from notes payable 2,960,571 -
Payments on notes payable and capital leases (2,274,951) 25,920
Proceeds from sale of common stock 500,000 -
Exercise of options 175,289 38,464
------------------- -------------------
Net cash provided by financing activities 1,360,909 64,384
------------------- -------------------
Net (decrease) increase in cash (387,554) 553,484
Cash and cash equivalents at beginning of period 2,116,016 2,026,932
------------------- -------------------
Cash and cash equivalents at end of period $ 1,728,462 $ 2,580,416
=================== ===================
See accompanying notes.
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 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 six months of 2000, the Company would deplete its
existing cash resources in the fourth quarter of 2000. Although the Company has
taken steps to reduce its operating expenses and believes that existing cash,
cash equivalents and internally generated funds will be sufficient to fund
operations during 2000, such resources, together with projected revenues that
may be received under existing contracts, 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 and/or
substantially reduce its operations.
Management's plan includes increased sales with new customer
relationships established during 1999 and in the first quarter of 2000, sales
growth through 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. The Company also has several patents
which it could sell, if necessary. Additionally, management intends to continue
discussions with third parties regarding additional financing.
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
Inventories consist of the following:
-------------------------- ------------------------
June 30, December 31,
2000 1999
------------------------- -------------------------
Electronic parts and other components $ 728,780 $ 976,345
Work in process 1,175,506 1,189,766
Finished goods 763,309 772,407
------------------------- -------------------------
2,667,595 2,938,518
Reserve for obsolescence (1,578,477) (1,713,986)
------------------------- -------------------------
$ 1,089,118 $ 1,224,532
========================= =========================
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 Loan Warehousing Agreement as of June 30, 2000 of $685,620.
5. 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.
6. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. In addition, a claim was filed by a
plaintiff who claimed certain rights, damages 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 a 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 lawsuit was filed, 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 reinstitute 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 actions
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 cash requirements, 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 Dime from the
Citibank Indirect Auto Unit). The Company has been informed by Dime that they
will not deploy the system, and the Company has filed a lawsuit against Dime as
a result of their decision not to deploy the system. The Company has developed 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 1999, the Company developed a version of its ALM to capture 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, to be
marketed under the name rtDS ("real time Decision Service"), which 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 and other
products in a fully automated manner. 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 2000, such resources, together with projected revenues that
may be received under existing contracts, 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 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.
To date, the Company has generated minimal operating revenues, has
incurred significant losses and has experienced substantial negative cash flow
from operations. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly technology-based companies operating in
unproven markets with unproven products. The Company had an accumulated deficit
as of June 30, 2000 of $58,389,606. 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 six months ended June 30, 2000
were $679,261 and $1,032,378, respectively, compared to $1,168,352 and
$1,494,311 for the corresponding periods of 1999.
Transaction fees. Revenues from transaction fees were $150,355 and
$312,151 for the three and six months ended June 30, 2000, respectively,
compared to $94,389 and $217,935 for the corresponding periods in 1999. The
increase in transaction fees during the three and six months ended June 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. Accordingly, there were no transaction fees associated with this
customer in the first six months of 1999.
Mortgage Processing Services. Revenues from mortgage processing
services earned by Surety were $113,307 and $187,168 for the three and six
months ended June 30, 2000, respectively, compared to $153,851 and $267,250 for
the corresponding periods in 1999. The decrease in mortgage processing services
revenue during the three and six month periods ended June 30, 2000, compared to
the corresponding periods in 1999 is attributable to the origination and
processing of fewer loans in both periods in 2000 compared to the corresponding
periods in the previous year.
Sales and Rental. Sales and rental fees for the six months ended June
30, 2000, were $3,000, all of which were recognized in the first quarter of
2000, compared to $34,213 and $38,963 for the three and six months ended June
30, 1999. The decrease in sales and rental revenue is attributable to a decrease
in the number of ALMs deployed and in service during 2000 as compared to the
same periods in 1999. The Company's relationship with most of its ALM customers
has been terminated.
Professional Services. Professional services revenue for the three and
six months ended June 30, 2000 were $309,503 and $319,503, respectively. For the
corresponding periods in 1999, professional services revenues were $790,452. 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 during 1999 and deferred the associated
revenue until collection was assured. For the six month period ended June 30,
1999, the Company recognized revenues, all of which were recognized in the
second quarter of 1999, associated with two contracts.
Other Income. Other income for the three and six months ended June 30,
2000 was $41,096 and $120,556, respectively, compared to $95,447 and $179,711
for the corresponding periods in 1999. Other income consists primarily of
miscellaneous non-recurring income items. The decrease in the three and six
months periods ending June 30, 2000, compared to the corresponding periods in
1999 is due to ancillary, non-recurring revenues recognized in 1999 associated
with ALMs. 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 six months ended
June 30, 2000 were $223,969 and $335,296, respectively, compared to $1,030,673
and $1,200,501 for the corresponding periods in 1999. Cost of revenues decreased
in the three and six months ended June 30, 2000 compared to the comparable
periods due to: a renegotiation of a processing contract subsequent to June 30,
1999, whereby the customer assumed the responsibility of paying directly to
third party vendors certain direct costs associated with transactions processed
for that customer; fewer mortgage loan originations by Surety; 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, a reduction in depreciation and amortization associated with a
reduction in the number of ALMs deployed under operating lease arrangements.
Research and Development. Costs incurred for research and development
totaled $153,063 and $482,996 for the three and six months ended June 30, 2000,
respectively, compared to $519,353 and $818,478 for the corresponding periods in
1999. The decrease in research and development costs for the three and six
months ended June 30, 2000, primarily reflects a decrease in the number of
employees and contractors involved in development activities in the first six
months of 2000 compared to the same period in 1999. The Company continues to
commit resources to initiatives associated with the technological enhancement of
the Company's DeciSys/RT technology and its financial product origination
capabilities.
Selling, General and Administrative Expenses. For the three and six
months ended June 30, 2000, selling, general and administrative expenses totaled
$1,842,449 and $3,615,339, respectively, as compared to $2,244,311 and
$4,675,993 for the corresponding periods in 1999. The decrease for the three and
six months ended June 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 six months ended
June 30, 2000, totaled $34,957 and $84,831, compared to $113,853 and $234,818
for the corresponding periods in 1999. The decrease in interest income for the
three and six months ended June 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 $58,389,606 since its inception
and has financed its operations primarily through 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 is
in the process of registering 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 of 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.
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 six months of 2000, the Company would deplete its
existing cash resources in the fourth quarter of 2000; however, the Company has
taken certain measures to reduce its operating expenses, including decreasing
its employee base. The Company believes existing cash, cash equivalents and
internally generated funds will be sufficient to meet the Company's currently
anticipated cash requirements through 2000. However no assurances can be given
that the Company's existing cash resources will be sufficient to fund the
Company's cash requirements for 2000. Moreover, existing cash resources and
projected revenues that may be received under existing contracts 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 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 need to raise additional funds through the issuance
of equity securities, in which case the percentage ownership of the stockholders
of the Company will be reduced, stockholders may experience additional dilution,
and 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 acceptable 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 six months ended June 30, 2000, to fund
operations was approximately $3,046,078 compared to approximately $3,764,392 for
the same period in 1999. Proceeds from the offering and other sources of cash
were used to fund current period operations, purchase of property, plant and
equipment of $177,000, and research and development of approximately $483,000.
During the six months ended June 30, 1999, net proceeds from the offering and
other sources of cash were used to fund operations, research and development of
approximately $818,000 and software development of approximately $138,000. At
June 30, 2000, cash and liquid investments were $1,728,462, as compared to
$3,590,965 at December 31, 1999. At June 30, 2000 working capital was
$3,295,176, 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 Loan Warehousing Agreement as of June 30, 2000 were $685,620.
Implications of Year 2000 Issues
The Company's operational transition into the year 2000 was uneventful
and the Company is unaware of any material problems or issues associated with
the operation of its systems as a result of Year 2000 issues. In addition, the
Company is unaware of any material problems or issues associated with critical
third party systems and services utilized by the Company. The Company's
incremental costs associated with Year 2000 issues have been insignificant and
the Company does not believe that significant costs will be incurred in
remediation of Year 2000 issues.
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
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 shortly after it is made. Accordingly, the Company does
not incur a material amount of interest experience relating to its variable rate
lending arrangements. The Company does not believe that it is exposed to
significant market risk for changes in interest rates.
Part II. Other Information
Items 3 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 a 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 lawsuit was filed, 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 reinstitute 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 actions
vigorously.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) On June 2, 2000, the Company entered into an agreement with
Redmond Fund, Inc., under which on June 5, 2000, Redmond acquired,
for $500,000, 484,848 shares of the Company's common stock, par
value $.0001 per share, and a warrant to acquire an additional
484,848 shares of common stock for $1.37 per share. The warrant
permits Redmond to pay the exercise price in cash or by "cashless
exercise" by having the Company withhold shares that would
otherwise be issued having a fair market value at the time of
exercise equal to the exercise price. In connection with such
transaction, the Company issued 19,394 shares of its common stock
to an individual in payment of a finder's fee associated with the
transaction. All such shares were issued pursuant to an exemption
from registration under Section 4(2) of the Securities Act of
1933.
(d) The Company's registration statement on Form S-1 (File No.
333-1170) with regard to an initial public offering of 5,060,000
shares of common stock, par value $0.0001 per share, of the
Company was declared effective by the Securities and Exchange
Commission on April 24, 1996. As set forth in the Company's Form
SR, Report of Sales of Securities and Use of Proceeds Therefrom,
Montgomery Securities and Donaldson, Lufkin & Jenrette Securities
Corporation acted as the managing underwriters for the offering,
which commenced April 25, 1996. As of June 30, 2000, the Company
has used net proceeds of $60,088,000 from the offering as follows:
Direct or indirect
payments to
directors, officers,
general partners of
the issuer or their
associates; to
persons owning ten
percent or more of
any class of equity
securities of the
issuer; Direct or
indirect and to
affiliates of the
issuer payments to
others
------------------------------------ ---------------------------
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 5,840,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 32,723,000
Temporary investments:
US Treasury obligations -
Commercial paper -
Money market / cash 1,728,000
Other purposes
Marketing 4,551,000
Research & development 10,929,000
Purchase of software 2,246,000
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 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Stockholders of Affinity Technology Group,
Inc. was held on May 26, 2000 (the "Annual Meeting"). At the Annual Meeting,
Alan H. Fishman, Robert M. Price, Edward J. Sebastian, Joseph A. Boyle and
Peter R. Wilson were duly elected to the Board of Directors of the Company.
Prior to the Annual Meeting, R. Murray Smith, who was nominated for re-
election to the Board of Directors at the Annual Meeting, resigned from
the Board of Directors and requested the Company to withdraw his nomination
for re-election. The selection of Ernst & Young, LLP as independent auditors
for the year ending December 31, 2000 was also ratified. Votes cast
by the stockholders of the Company at the Annual Meeting are as follows:
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Alan H. Fishman 29,755,423 93,181 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Robert M. Price 29,753,563 95,041 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Edward J. Sebastian 29,723,623 124,981 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Joseph A. Boyle 29,763,923 84,681 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Peter R. Wilson 29,754,623 93,981 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ----------------------------------------------------------------------------------------------------------------------
Ratification of the selection of Ernst & Young, LLP.
- ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
- ---------------------------------------- -------------------------- ------------------------- ------------------------
29,778,398 36,705 33,501 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
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)).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June
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: August 14, 2000