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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
Commission file number 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
57-0991269
(I.R.S. Employer Identification No.)
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately 1,896,070 as of March 7,
2001. For purposes of such calculation, shares of Common Stock held by persons
who hold more than 10% of the outstanding shares of Common Stock and shares held
by directors and officers of the Registrant and certain of their immediate
family members have been included because such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
There were 35,551,233 shares of the Registrant's Common Stock
outstanding as of March 7, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's proxy statement with respect to
the 2001 Annual Meeting of Stockholders of the Registrant have been incorporated
by reference herein.
Item 1 of this Form 10-K entitled "Business" and Item 7 of this Form
10-K entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are inherently uncertain and
actual results could differ materially from those expressed or implied by the
forward-looking statements. These forward-looking statements should be
considered in the context of the business risks set forth below in Item 1 of
this report under the caption "Business Risks."
Part I
Item 1 Business
Affinity Technology Group, Inc. (the "Company") was formed to develop
and market technologies that enable financial institutions and other businesses
to provide consumer financial services electronically with reduced or no human
intervention. The Company's DeciSys/RT(R) processing system automates the
processing and consummation of consumer financial services transactions.
DeciSys/RT can simultaneously accept and capture consumer information through
remote input devices, such as touch-screen terminals or terminals used by loan
officers, and automatically interact with credit bureaus and other third parties
that supply information necessary to process a consumer financial transaction.
To date, 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 cash resources to fund its
operations. If the Company had continued to use cash at the rate used during
2000, the Company would have depleted its existing cash reserves in the first
quarter of 2001. The Company has taken certain measures to increase and preserve
its cash resources. These measures include the placement of a $1 million
convertible debenture in November 2000 and a 33% reduction in its work force in
March 2001. The Company believes that existing cash and internally generated
funds will be sufficient to fund its operations through the second quarter of
2001. However, the Company may encounter unexpected expenses, the loss of
anticipated revenues and other developments that may impact the Company's
ability to fund operations for the entire second quarter of 2001. Moreover, the
Company believes that existing cash resources will be insufficient to fund
operations after the second quarter of 2001. To remain viable, the Company must
substantially increase its revenues or raise additional capital. To maintain the
minimal resources necessary to support its current operations, the Company does
not believe that substantial additional reductions in its operating expenses is
feasible. No assurances can be given that the Company will be able to increase
revenues or raise additional capital in a manner that would allow it to continue
its operations.
The Company's products and services consist of:
o the Affinity Automated Loan Machine (the ALM (R)), which looks and
functions much like an automated teller machine and permits a consumer
to apply for and, if approved, receive a consumer loan without human
intervention in as little as 10 minutes;
o the e-xpertLender(R) system, which permits a financial institution to
use the DeciSys/RT(R) system to make automated lending decisions
through call centers, branches and automobile dealerships;
o iDEALSM (indirect electronic automobile lending system), which permits
a lender to make automated lending decisions for loan applications
originated at an automobile dealership; and
o rtDSSM (realtime decisioning services), which is based on the
e-xpertLender system and permits a lender to deliver credit decisions
to loan applicants over the Internet.
In addition, through a wholly owned subsidiary, Surety Mortgage, Inc.
("Surety"), the Company originates and processes mortgage loans.
The Company has been granted two patents covering its fully-automated
loan processing systems. In addition, in 1997 the Company acquired a patent that
covers the automated processing of an insurance binder through a kiosk. In
August 2000, the U.S. Patent and Trademark Office issued to the Company a patent
covering the fully-automated establishment of a financial account, including
credit accounts (U.S. Patent No. 6,105,007).
The Company has initiated a patent licensing program for its loan
processing patents and is developing a licensing program for its newly-issued
financial account patent. Both of the Company's patents covering fully automated
lending systems are being reexamined by the U.S. Patent and Trademark Office due
to challenges by third parties. In March 2000, August 2000 and January 2001, the
U.S. Patent and Trademark Office issued preliminary office actions rejecting all
previously issued claims under the Company's first patent covering
fully-automated lending systems. It is possible that third parties may bring
additional actions to contest some of or all of the Company's patents. The
Company can make no assurances that it will not lose some of or all the claims
covered by its existing patents.
Through the end of 1996, the Company's primary product was the ALM
which captures origination information for unsecured consumer loan applications
and then routes this information to the Company's proprietary DeciSys/RT for an
automated decision. The Company also developed additional financial products
which could be originated at an ALM and processed through DeciSys/RT. These
products included loans secured by cash collateral and the ability to open
checking accounts, renew existing loans, cross sell other products and make
counter offers to applicants who qualify for a loan amount higher or lower than
the loan amount originally requested. The ALM was not widely accepted by the
market and the Company has discontinued any sales and marketing efforts related
to this product. At December 31, 2000, the Company's installed base of ALMs
consisted of 15 units which were sold under a sales-type lease to one customer.
This lease expires in September 2001. All the contracts under which the Company
previously deployed ALMs have expired or been terminated by the Company's
customers.
During 1997, the Company developed e-xpertLender, which establishes
connectivity among a financial institution's delivery channels, Affinity's
automated decisioning system, and the institution's risk management group.
e-xpertLender also, upon approval, gives the consumer the choice of closing or
fulfillment methods that include branches, ALMs, mail, and third party closing
agents. The system enables call center agents and branch personnel to inquire as
to the status of applications at any time and electronically notifies loan
officers with respect to exceptions and the reason for referral. The Company
currently has one customer who uses its e-xpertLender product. The Company has
suspended the active marketing of e-xpertLender due to its latest
reduction-in-force and insufficient working capital necessary to support the
marketing, sales, deployment and operations of additional e-xpertLender systems.
During 1998, the Company's principal activities were directed toward
enhancing its e-xpertLender product delivery capabilities and designing and
developing a system to process automobile loans pursuant to a development
contract with Citibank. In 1999 Citibank sold its indirect automobile loan
business to Dime Savings Bank. Dime did not deploy the Company's indirect
automobile loan processing system and the Company initiated a lawsuit against
Dime in April 2000 to recover certain amounts the Company believed it was due
under the contract. The dispute was settled through mediation in January 2001.
During 1999, the Company completed the development of a general release version
of an automobile loan processing system, which was offered under the brand name
of iDEAL. During most of 2000, the Company processed automobile loan
transactions for one customer who had acquired iDEAL in 1999. This customer has
significantly curtailed its indirect automobile loan activities, and the Company
is not currently processing transactions for this customer. The Company has also
suspended the active marketing of its iDEAL system due to its latest
reduction-in-force and insufficient working capital necessary to support the
marketing, sales, deployment and operations of additional iDEAL systems.
In early 1998, the Company formed Surety for the purpose of marketing,
deploying and processing mortgage loan applications originating through its
Mortgage ALM product. Since 1998 Surety has deployed and operated a network of
Mortgage ALMs to gain an understanding of the market and consumer response to
this method of obtaining mortgage loan applications. Currently, Surety has 23
Mortgage ALMs deployed in various venues, including realtor's offices and
community bank branches, through which it obtains mortgage loan applications
which are then underwritten, processed, closed and sold to permanent investors.
In December 2000, Surety entered into a processing contract with
HomeGold Financial, Inc. ("HomeGold") whereby Surety will underwrite and process
certain mortgage loan applications generated by HomeGold through its
telemarketing and other channels. The agreement expires on December 31, 2001,
but may be terminated prior to that time by either party on 90 days' notice. In
addition, Surety entered into a processing contract with another mortgage banker
in March 2001 to provide similar services.
In June 2000, the Company entered into an agreement with Redmond Fund,
Inc. ("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
for $1.37 per share. The Company has registered these shares for resale by
Redmond under the Securities Act of 1933 pursuant to the Company's agreement
with Redmond.
On September 22, 2000, the Company entered into a convertible debenture
and warrants purchase agreement with AMRO International, S.A. ("AMRO"). Under
the agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture is convertible,
at the option of AMRO, into shares of the Company's common stock at a price
equal to the lesser of $1.00 per share or 65% of the average of the three lowest
closing prices of the Company's stock during the month prior to conversion. The
debenture matures 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 as much of the debenture as
it can at a price equal to 120% of the principal amount of the debenture plus
all accrued and unpaid interest. Under the agreement, on November 22, 2000 the
Company also issued to AMRO a three-year warrant to acquire 200,000 shares of
the Company's common stock. The warrant exercise price initially is $0.425. The
warrant exercise price is subject to reduction in certain instances. As of March
30, 2001, AMRO had exercised a portion of the debenture into an aggregate of
3,037,931 shares of the Company's stock. Additionally, the Company made a
principal payment of $50,000 in March 2001. The outstanding principal amount as
of March 30, 2001, was $765,000. If AMRO had converted the remainder of the
debenture in full on March 30, 2001, the Company would have been required to
issue to AMRO approximately 20,351,000 shares of its common stock.
On September 26, 2000, the Company entered into a common stock purchase
agreement with another 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 the Company's 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 it has
registered such shares for resale by the investor under the Securities Act of
1933. Under the agreement, the Company issued to the investor a three-year
warrant to acquire 720,000 shares of the Company's common stock at $0.8554 per
share. In addition, any time the Company sells any shares of stock under the
agreement, it 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. The amount of
capital the Company may raise under the common stock purchase agreement during
any month is not less than $100,000 or more than the lesser of $1,000,000, or
4.5% of the product of the daily volume-weighted average stock price during the
three-month period prior to a drawdown request and the total trading volume in
the Company's stock during the same three-month period. Based on these
limitations, the Company would not be able to sell any shares of its stock under
the equity line agreement as of March 30, 2001.
On February 12, 2001, the Company's stock was delisted from the Nasdaq
SmallCap Market. On February 13, 2001, shares of the Company's common stock
began trading on the OTC Bulletin Board under the symbol "AFFI."
Sales and Marketing
To date, the Company has offered its software products and services on
the basis of an Application Service Provider ("ASP") model. Under this model the
Company would install its software products for its customers and process its
customers' transactions at its operations center. The Company has suspended the
sales and marketing of its products under the ASP model due to working capital
and other resource constraints. The Company is considering alternative means to
sell and market its software products, including the sale of software licenses.
Currently, the Company does not maintain a dedicated software sales force.
Surety maintains a dedicated sales force of two employees.
Additionally, the senior executives of Surety actively participate in marketing
activities and negotiations with its customers to deploy and operate Mortgage
ALMs and to provide processing services to other mortgage bankers.
Competition
The market for products and services that enable electronic commerce is
highly competitive and is subject to rapid innovation and technological change,
shifting consumer preferences, frequent new product introductions 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 actually validates 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. There can be no assurance that the Company's products and
services will be competitive technologically or otherwise. The ability of the
Company to compete in the market will depend upon, among other things, broad
acceptance of the Company's products and services and on the Company's ability
to continually improve and expand such products and services to meet changing
customer requirements.
Electronic commerce technologies in general, including the ALM, the
Mortgage ALM, e-xpertLender, rtDS and iDEAL, compete with traditional consumer
lending methods, including in-person applications at branch offices of financial
institutions and cash advances on credit cards, home equity lines of credit and
other revolving credit facilities, some or all of which are employed by the
Company's existing and potential customers. The ability of the Company's
products and services to compete with traditional lending methods will be
dependent in part on consumer acceptance of electronic commerce in general and
industry acceptance of the Company's products and services in particular.
The Company also faces competition from companies engaged in the
business of producing automated lending and processing systems and other
alternatives to conventional consumer transactions, including software and data
processing companies and technology and service companies. The Company also is
aware that many banks have begun using on-line services and Internet service
providers to provide certain financial services electronically, and is aware of
several companies that have already made substantial investments in software
products that enable various other home banking services. Additionally, a number
of companies have developed certain on-line processing systems to automate the
mortgage application and underwriting processes. See "Business Risks -
Competition; Future Price Erosion".
The Company expects competition to increase in the future from existing
and new competitors that produce automated loan systems and other alternatives
to traditional consumer lending methods. Such competitors may include actual or
potential customers of the Company that may develop competitive technology
internally. All of the Company's current and potential competitors have
substantially greater financial, marketing and technical resources than the
Company. Accordingly, the Company may not be able to compete successfully
against new or existing competitors. Furthermore, competition may reduce the
prices the Company is able to charge for its products and services, thereby
potentially lowering revenues and margins, which would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business Risks - Rapid Technological Changes" and "- Competition; Future Price
Erosion".
Technology
The DeciSys/RT system employs a multi-tiered client/server architecture
that integrates the consumer interface, application analysis function and
multiple data sources together in a seamless operating environment. The
DeciSys/RT architecture enables true multi-tasking, which permits an expedited
loan decision. DeciSys/RT uses standard C++ code and object-oriented programming
which permits the decoupling of functional development from system deployment,
greatly reducing the time and cost of maintenance. The Company anticipates easy
platform portability by using standards such as the TCP/IP communications
protocol and C++ programming language, while maintaining compatibility with
widely accepted third-party database programs and operating systems.
The Company's Network Operating Center ("NOC"), located in Columbia,
South Carolina, connects through a private network to the ALMs and e-xpertLender
workstations in service. The NOC is connected to the network via dedicated 56.6
Kbps lines (upgradable to T-1), while the ALMs use dial-up connections and the
e-xpertLender System utilizes T-1 or dial-up connections. The Company also
maintains leased line connections to TRW Inc., Trans Union Corporation, Equifax
Inc., and other providers of information for validation of a consumer's identity
and loan underwriting. The combination of data-encryption techniques and the
closed loop nature of the system provide for a secure environment.
The Company's operations are dependent on its ability to protect its
NOC against damage from fire, earthquake, power loss, telecommunications failure
or similar events. All of the Company's computer equipment constituting its
central computer system, including its processing operations, is located at the
Company's NOC in Columbia, South Carolina.
Intellectual Property
The Company was issued two patents in 1999 covering systems and methods
for real-time loan processing over a computer network without human intervention
The Company is in a reexamination proceeding with the U.S. Patent and Trademark
Office ("PTO") on both of these loan processing patents ("System and Method for
Real-time Loan Approval", U.S. Patent No. 5,870,721, and "Closed-loop Financial
Transaction Method and Apparatus," U.S. Patent No. 5,940,811) due to a request
to invalidate or otherwise limit the patents. On three occasions the U.S. Patent
and Trademark Office has reached a preliminary decision to reject the claims
covered by one of these patents (U.S. Patent No. 5,870,721). The reexamination
could result in a loss or limitation of some or all of the previously issued
claims under both patents.
In addition, in August 2000, the Company was issued a patent covering
the automated establishment of a financial account without human intervention
("Automatic Financial Account Processing System", U.S. Patent No. 6,105,007).
The Company also holds a patent covering the issuance of insurance products
automatically through a kiosk ("Method and Apparatus for Issuing Insurance from
a Kiosk", U.S. Patent No. 5,537,315). The Company has also applied with the PTO
for additional patent protection for certain features of the Company's
technology, including additional aspects of its closed loop lending system, its
automated insurance product, and its Internet related products and services.
Certain of such applications and amendments thereto have been rejected by the
PTO and others are at a preliminary stage. There can be no assurance that any of
the Company's patent applications or amendments thereto will be allowed by the
PTO.
"Affinity", "ALM" "DeciSys/RT", and "e-xpertLender" are registered
trademarks of the Company; and "Affinity Technologies," "iDEAL," "rtDS," and
"Affinity enabled" are registered servicemarks of the Company.
The Company's success and ability to compete is heavily dependent upon
its proprietary technology. The Company also relies on trade secret and
copyright law and employee, customer and business partner confidentiality
agreements to protect its technology. However, the Company believes that factors
such as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
state-of-the-art technological system. There can be no assurance that the
Company will be able to protect its technology from disclosure or that others
will not develop technologies that are similar or superior to the Company's
technology. See "Business Risks - Limited Protection of Technology".
Research and Development
During 2000, 1999, and 1998, the Company spent approximately $684,000,
$1,871,000, and $2,560,000, respectively, on research and development activities
which represented approximately 31.7%, 65.1%, and 96.4% of 2000, 1999, and 1998
revenues, respectively. During 2000, the Company capitalized no software
development costs.
In January 2000, the Company substantially reduced the number of
employees on its research and development staff. While the Company believes that
its current research and development staff is sufficient to support ongoing
developmental projects, the Company does not currently have the capacity to
initiate new projects.
Employees
At December 31, 2000, the Company employed approximately 36 full-time
employees and 1 part-time employee, compared to 77 full-time and 1 part-time
employee at December 31, 1999. The Company reduced its workforce in March 2001
to 24 employees. The Company has no collective bargaining agreements.
Business Risks
In addition to the other information in this report, readers should
carefully consider the following important factors, among others, that in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.
Limited Capital Resources; Operating Losses
The Company has generated net losses of $64,276,280 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. At December 31, 2000, cash and liquid investments
were $646,198.
To date, 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 cash resources to fund its
operations. If the Company had continued to use cash at the rate used during
2000, the Company would have depleted its existing cash reserves in the first
quarter of 2001 The Company has taken certain measures to increase and preserve
its cash resources. These measures include the placement of a $1 million
convertible debenture in November 2000 and a 33% reduction in its work force in
March 2001. The Company believes that existing cash and internally generated
funds will be sufficient to fund its operations through the second quarter of
2001. However, the Company may encounter unexpected expenses, the loss of
anticipated revenues and other developments that may impact the Company's
ability to fund operations for the entire second quarter of 2001. Moreover, the
Company believes that existing cash resources will be insufficient to fund
operations after the second quarter of 2001. To remain viable, the Company must
substantially increase its revenues or raise additional capital. To maintain the
minimal resources necessary to support its current operations, the Company does
not believe that substantial additional reductions in its operating expenses is
feasible. No assurances can be given that the Company will be able to increase
revenues or raise additional capital in a manner that would allow it to continue
its operations.
In order to fund its operations, the Company may need to raise
additional funds through the issuance of additional equity securities, in which
case the percentage ownership of the stockholders of the Company will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to common stock.
There can be no assurance that additional financing will be available 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 could
have a material adverse effect on the Company's business, operating results and
financial condition.
Significant Losses; Accumulated Deficit; Future Losses
To date, the Company has incurred significant losses and has
experienced substantial negative cash flow from operations. The Company had an
accumulated deficit as of December 31, 2000 of approximately $64,276,000 with
net losses of approximately $706,000 for the period from inception (January 12,
1994) through December 31, 1994, and $2,308,000, $9,692,000, $15,399,000,
$14,873,000, $12,095,000 and $9,203,000 for the years ended December 31, 1995,
1996, 1997, 1998, 1999, and 2000, respectively. The Company expects to incur
substantial additional costs to finance its operations. There can be no
assurance that the Company will ever achieve profitability or, if achieved,
sustain such profitability.
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. To address these risks, the Company
must, among other things, respond to competitive developments, attract, motivate
and retain qualified personnel, establish effective distribution channels,
effectively manage any growth that may occur and continue to upgrade its
technologies and successfully commercialize products and services incorporating
such technologies.
Potential for Fluctuation in Quarterly Results
The Company's revenues are affected by many factors, including demand
for mortgage loan products and services, the Company's technology and demand for
any additional products or services developed or sold by the Company,
introduction and enhancement of products and services by the Company and its
competitors, market acceptance of such technology in existence or developed in
the future, types of distribution channels through which products are sold and
general economic conditions (particularly those conditions affecting financial
products and services supply and demand). Further, the Company's customer base
historically has been highly concentrated and such concentration has had a
significant effect on quarterly revenues. Shortfalls in revenues in relation to
the Company's expectations have had and may continue to have an adverse effect
on the Company's business, operating results and financial condition. The
uncertainty regarding the extent and timing of revenues coupled with the
Company's substantial operating expenses (many of which the Company is unable to
adjust in a timely manner) means that the Company may likely continue to
experience substantial quarterly fluctuations in its operating results.
As a result of all the foregoing factors and other factors discussed
under "Business Risks," the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance. Moreover, it is likely that
in some future quarter the Company's operating results will be below the
expectation of public market analysts and investors. In such event, the price of
the Company's Common Stock could be materially adversely affected.
Unproven Market; Unproven Acceptance of the Company's Products and Services
The market for products and services that enable electronic commerce is
new, developing and uncertain. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. The Company's future
growth and financial performance will depend upon consumer acceptance of
electronic commerce as an attractive means of conducting certain consumer
financial transactions and also upon institutional acceptance of the Company's
products as a preferred means for serving consumers. Such institutional
acceptance will in part depend on continued and growing use of relatively new
quantitative credit scoring methodologies that are amenable to automation. If
the electronic commerce market fails to grow or grows more slowly than
anticipated, or if lenders reduce their use of quantitative credit scoring
tools, the Company's business, operating results and financial condition would
be materially adversely affected. Furthermore, even if this market does
experience substantial growth, there can be no assurance that the Company's
products and services will be commercially successful or benefit from such
growth. Failure of either the providers of consumer financial services or the
consumers of such services to quickly accept electronic commerce distribution
channels in general, and the Company's electronic commerce enabling technologies
in particular, or the inability of the Company's products and services to
satisfy its customers' or consumers' expectations, have had and may continue to
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company's financial position may adversely
affect its ability to sell its products and services and develop strategic
relationships.
Because the market for the Company's products and services is new,
evolving and uncertain, it is difficult to determine the size and predict the
future growth rate, if any, of this market. The market for the Company's
products may never be developed, or may develop at a slower pace than expected,
or such products and services may not be adopted by participants in this market
or may be adopted by only a limited number of participants. If the market fails
to develop or develops more slowly than expected, or if the Company's products
and services do not achieve significant market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected. In addition, the Company may not have sufficient capital to
respond quickly and effectively to technological changes and competitive forces
in its markets.
Lengthy Sales Cycle
The Company has to date experienced a lengthy sales cycle for its
products and services. In most cases, the time between initial customer contact
and the execution of a final contract has exceeded six months. While the Company
believes that the length of the sales cycle may compress over time, if the
Company's technologies gain acceptance in the marketplace, there can be no
assurance such compression will take place in the future.
Early Stage Products and Services
The Company's products and services are in the early stages of
development and are subject to the risks inherent in the development and
marketing of new products, including the development of unforeseen design or
engineering problems with the Company's products and applications. There can be
no assurance that these or other risks associated with new product development
will not occur. The occurrence of one or more of these risks could have a
material adverse effect on the Company's business, operating results and
financial condition.
In addition, services based on software and computing systems often
encounter development delays, and the underlying software may contain undetected
errors or failures when introduced or when the volume of services provided
increases. The Company has experienced and may continue to experience delays in
the development of its products and the software and computing systems
underlying its services and the Company's software may contain errors. Any
material development delays or errors could damage the reputation of the service
or software affected, as well as the Company's customer relations, which could
have a material adverse effect on the Company's business.
Rapid Technological Changes
The market for products and services that enable electronic commerce is
highly competitive and subject to rapid innovation and technological change,
shifting consumer preferences, frequent new product introductions 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 validates 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. There can be no assurance that the Company's products and services
will be competitive technologically or otherwise. The ability of the Company to
compete in this market will depend upon, among other things, broad acceptance of
the Company's products and services and on the Company's ability to continually
improve its products and services to meet changing customer requirements. There
can be no assurance that the Company will successfully identify new product and
service opportunities and develop and bring to the market new and enhanced
services and products in a timely manner; that such products, services and
technologies will be commercially successful; that the Company will benefit from
such development; or that products, services and technologies developed by
others will not render the Company's products, services and technologies
noncompetitive or obsolete. If the Company is unable to penetrate new markets in
a timely manner in response to changing market conditions or customer
requirements or if new or enhanced products do not achieve a significant degree
of market acceptance, the Company's business, operating results and financial
condition would be materially and adversely affected. In addition, the Company
may not have sufficient capital to respond quickly and effectively to
technological changes and competitive forces in its markets.
Competition; Future Price Erosion
Electronic commerce technologies in general, including the Company's
products and services, compete with traditional consumer lending methods,
including in-person applications at branch offices of financial institutions or
at automobile dealerships and cash advances on credit cards and other revolving
credit facilities, some or all of which are employed by the Company's existing
and potential customers. The ability of the Company's products and services to
compete with traditional lending methods will be dependent in part on consumer
acceptance of electronic commerce in general and industry acceptance of the
Company's products and services in particular.
The Company also faces competition from companies engaged in the
business of producing automated lending systems and other alternatives to
conventional consumer lending, including software and data processing companies
and technology and service companies. The Company also is aware that many banks
have begun using on-line services and Internet service providers to provide
certain financial services electronically, and is aware of several companies
that have already made substantial investments in software products that enable
various other home banking services. Numerous companies have developed certain
on-line processing systems to automate the mortgage application and underwriting
processes.
The Company expects competition to increase in the future from existing
and new competitors that produce automated loan systems and other alternatives
to traditional consumer lending methods. Such competitors may include actual or
potential customers of the Company that may develop competitive technology
internally. Most of the Company's current and potential competitors have
substantially greater financial, marketing and technical resources than the
Company. Accordingly, the Company may not be able to compete successfully
against new or existing competitors. Furthermore, competition may reduce the
prices that the Company is able to charge for its products and services, thereby
potentially lowering revenues and margins, which would have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence on Consumer Retail Lending Industry; Cyclical Nature of Consumer
Lending
The Company's business is currently concentrated in the consumer
lending industry and is expected to be so concentrated for the foreseeable
future, thereby making the Company susceptible to a downturn in that industry.
For example, a decrease in consumer lending could result in a smaller overall
market for the Company's products and services. Furthermore, U.S. banks are
continuing to consolidate, decreasing the overall potential number of buyers for
the Company's products and services. Moreover, one customer accounted for
approximately 35.8% of the Company's revenue in 2000. The Company expects that
its operating revenues will continue to be attributable to a relatively small
number of customers. These factors as well as others affecting the consumer
lending industry could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's business currently depends upon the volume of consumer
loans made through its products and services. Historically, demand for consumer
loans has been cyclical, in large part based on general economic conditions and
cycles in overall consumer indebtedness levels. Changes in general economic
conditions that adversely affect the demand for consumer loans or the
willingness of financial institutions to provide such loans, such as changes in
interest rates and the overall consumer indebtedness level, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Limited Protection of Technology
The Company regards certain of its technology as critical to its
business and attempts to protect such technology under patent, copyright and
trade secret laws and through the use of employee, customer and business partner
confidentiality agreements. Such measures, however, afford only limited
protection, and the Company may not be able to maintain the confidentiality of
its technology. As a result, existing and potential competitors may be able to
develop products and services that are competitive with, or superior to, the
Company's products and services, and such competition could have a material
adverse effect on the Company's business, operating results and financial
condition.
In addition, the Company's success and ability to compete is dependent
in part upon its proprietary technology. The Company relies primarily on patent,
copyright, trade secret and trademark law to protect its technology. The
Company's patents are subject to challenge by third parties. The Company
currently holds four United States patents, and has applied for others in the
United States and abroad to protect certain features of its technology. However,
as a result of challenges by third parties, the U.S. Patent and Trademark Office
is reexamining both of the Company's patents covering fully-automated lending
systems ("System and Method for Real-time Loan Approval," U.S. Patent No.
5,870,721, and "Closed-loop Financial Transaction Method and Apparatus," U.S.
Patent No. 5,940,811). On three occasions, the U.S. Patent and Trademark Office
has reached a preliminary decision to reject the claims covered by one of the
Company's patents (U.S. Patent No. 5,870,721). The reexamination process could
result in a loss or limitation of some of or all the claims under these patents.
Further, it is likely that third parties may bring additional actions to contest
some of or all of the Company's patents. Such actions could result in a
limitation or the complete loss of some of or all the patents the Company has or
may obtain in the future. Moreover, while the Company intends to continue to
file patent applications to further protect its technology, the Company cannot
assure you that any of these patents will be granted, that if granted these
patents would survive a legal challenge to their validity or provide meaningful
levels of protection or that the Company will have sufficient capital to
prosecute and protect any of these patents.
Despite the Company's efforts to protect its proprietary rights, third
parties may attempt to copy aspects of the Company's products and services or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products and services is difficult,
particularly in the environment in which the Company operates, and the laws of
other countries may afford the Company little or no effective protection of its
intellectual property. Additionally, policing the unauthorized use of the
Company's intellectual property rights may be very expensive, and the Company
may not have the resources to do so. The Company cannot be assured that the
steps it has taken will prevent others from misappropriating its technology. The
Company believes that certain companies have developed or will develop systems
and technologies that are covered by one or more of the claims covered by either
the Company's existing patents or pending patent applications. The Company's
capital resources are very limited, and it may not be able to take the actions
necessary to enforce the Company's proprietary rights. Moreover, if the Company
were to initiate litigation to enforce its proprietary rights, whether
successful or unsuccessful, it would result in substantial costs and a diversion
of resources, which could have a material adverse effect on the Company's
business, financial condition or operating results.
Risk of Fraud in Electronic Consumer Transactions
Electronic consumer transactions involve the risk of consumer fraud.
The customer using the Company's products is responsible for the selection and
use of the origination and underwriting parameters incorporated in the software
supporting the Company's products and services. The Company is unaware of any
significant instances of fraud in connection with the funding of loans through
the use of the Company's products and services. However, the rate of fraudulent
activity could increase, especially if the number of transactions processed by
the Company's products and services increased. Moreover, in light of the limited
operating experience of the Company, there can be no assurance that the
Company's experience with respect to fraud to date is indicative of future
performance for the Company's products and services. While the Company believes
the risk of collection in any given transaction belongs to its customers, the
Company may nevertheless be held responsible for losses associated with
fraudulent transactions if such transactions are attributable to the Company's
malfeasance. Furthermore, even if the Company is not directly liable or
contractually liable for fraudulent transactions processed by the Company's
products and services, an increase in fraud to levels greater than those
experienced in traditional and other emerging consumer credit processing systems
would likely have a material and adverse impact on the ability of the Company to
attract and retain financial institution customers and thus on the Company's
business, operating results and financial condition. In addition, the Company
may not be able to control adequately the occurrence of fraud in the future or
may only be able to do so at considerable cost, either of which would materially
and adversely affect the Company's business, operating results and financial
condition.
Risk of Third-Party Network Failure
The Company relies on third parties for certain fraud detection systems
and for obtaining credit information about loan applicants. Additionally, the
Company uses a dedicated private data network provided by a third party to gain
access to the networks maintained by such third parties and to customers.
Prolonged or repeated failure of (i) a network that provides access to
information necessary to complete a transaction through the Company's system or
(ii) the Company's network access provider to provide access to such networks or
customers would materially and adversely affect the Company's business,
operating results and financial condition.
Dependence on Third Parties
The success of the Company and its business is dependent on, among
other things, its ability to identify and reach agreements and work successfully
with third parties. In particular, the Company relies or may rely on third
parties in connection with its customer relationships, strategic alliance
arrangements, and other areas. There can be no assurance that the Company will
be successful in identifying such third parties, that it will be able to reach
suitable agreements with such third parties or that it will be able to
successfully implement any such agreements that are or have been reached.
Failure by the Company to accomplish any of the above could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company's success depends particularly on the ability of customers
and third parties to successfully market the Company's products and services.
For example, the ability of the Company to realize recurring revenues from
transactions is dependent on the success of its customers in generating consumer
demand for transactions using the Company's products and services. Failure of
customers to generate and sustain consumer demand for the Company's products and
services has had and may continue to have an adverse effect on the Company's
business, operating results and financial condition. Although the Company views
its strategic and other alliances with third parties as an important factor in
the development and commercialization of its products and services, there can be
no assurance that such third parties view their alliances with the Company as
significant for their own businesses or that they will not reassess their
commitment to the Company in the future. Currently, the Company's agreements
with customers generally do not require them to meet minimum performance
requirements. Instead, the Company relies on the voluntary efforts of such
customers to promote consumer acceptance and use of the Company's products and
services. The Company's ability to maintain relationships with its customers and
third parties will depend, in part, on its ability to successfully enhance
products and services and develop new products and services. The Company's
inability to meet such requirements could result in its customers and third
parties seeking alternative providers of the Company's products and services,
which would have a material adverse effect on the Company's business, operating
results and financial condition.
Undeveloped Distribution Channels
The Company currently does not have a dedicated sales staff that
focuses exclusively on the marketing and sales of its products and services.
Moreover, the Company has been unable to enter into strategic relationships with
any third parties that have resulted in meaningful sales of its software
products and services. Due to measures taken to reduce the Company's employee
base and preserve cash resources, the Company does not expect to hire any sales
and marketing personnel unless it is able to raise sufficient additional
capital. The Company currently relies on the efforts of its senior officers to
pursue opportunities to market and sell its products and services, and these
officers have limited resources to dedicate to sales and marketing efforts. For
the Company to ever achieve broad distribution of its products or services, it
will have to implement effective marketing and distribution programs. The
inability of the Company to develop and implement effective marketing programs
could have a material adverse effect on the Company's business, operating
results and financial condition. To the extent broad distribution of the
Company's products and services is not achieved, there would be a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Employees
The Company is highly dependent on certain key executive officers and
technical employees. The Company is also dependent on its ability to recruit,
retain and motivate high quality personnel. Competition for such personnel is
intense, and the inability to attract and retain qualified employees or the loss
of current key employees could materially and adversely affect the Company's
business, operating results and financial condition. Additionally, the Company
does not maintain "key man" insurance policies on any of its key employees nor
does the Company intend to secure such insurance. The Company's financial
situation could adversely affect the Company's ability to retain current
employees and executives. The loss of the services of any of the Company's
executive officers could have a material adverse effect upon the Company's
business, operating results and financial condition.
Risk of Substantial Dilution
In November, 2000, the Company issued to AMRO International, S.A.
("AMRO") a debenture which is convertible into shares of the Company's stock at
a price equal to the lesser of $1.00 or 65% of the average of the three lowest
closing prices of the Company's stock during the month prior to conversion. As
of March 30, 2001, AMRO exercised a portion of the debenture representing a
principal amount of $185,000 and accrued interest of $3,406 into 3,037,931
shares of common stock. If AMRO had converted the remainder of the debenture in
full on March 30, 2001, the Company would have been required to issue to AMRO
approximately 20,351,000 shares of its common stock.
The convertible debenture the Company issued under the convertible
debenture and warrants purchase agreement with AMRO is convertible into shares
of common stock at a price that will be substantially less than the market price
of the Company's stock at the time of conversion. In addition, the lower the
price of the Company's stock at the time of conversion of the convertible
debenture, the greater the number of shares that the Company will be required to
issue, and the greater the dilution that the Company's existing shareholders
will incur. Also, the perceived risk of dilution may cause the Company's
existing shareholders and other holders to sell their shares of the Company's
stock, which would contribute to a decrease in the Company's stock price. In
this regard, significant downward pressure on the trading price of the Company's
stock may also cause investors to engage in short sales, which would further
contribute to significant downward pressure on the trading price of its stock.
In addition, the Company has entered into other agreements under which
it may sell stock at a price that may be substantially less than the market
price of the Company's stock at the time of sale. The sale of stock at a price
that is less than market value could have an immediate adverse effect on the
market price of the Company's common stock. In addition, the Company has issued
options and warrants to acquire shares of its common stock, and the Company may
issue additional warrants in connection with its financing arrangements and may
grant additional stock options under its stock option plan that may further
dilute the Company's common stock. The exercise of such warrants and options
would have a dilutive effect on the Company's common stock. Also, to the extent
that persons who acquire shares under all the foregoing agreements sell those
shares in the market, the price of the Company's shares may decrease due to
additional shares in the market.
Volatility of Stock Price and Risk of Litigation
The Company's common stock price has been extremely volatile and has
experienced substantial and sudden fluctuations in response to a number of
events and factors. In addition, the stock market has experienced significant
price and volume fluctuations that have especially affected the market prices of
equity securities of many high technology companies, and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations have adversely affected and may continue to adversely affect the
market price of the Company's common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business, operating results and financial condition.
Government Regulation and Uncertainties of Future Regulation
The financial services industry is subject to extensive and complex
federal and state regulation. The Company's current and prospective customers,
which consist of state and federally chartered banks, savings and loans, credit
unions, consumer finance companies and other consumer lenders, as well as
customers in the real estate development, real estate sales and insurance
industries that the Company may target in the future, operate in markets that
are subject to extensive and complex federal and state banking and insurance
regulation. The Company's products and services must be designed to work within
the extensive and evolving regulatory constraints in which its customers
operate. These constraints include federal and state truth-in-lending disclosure
rules, state usury laws, the Equal Credit Opportunity Act, the Electronic Funds
Transfer Act, the Fair Credit Reporting Act, the Community Reinvestment Act, and
restrictions on the establishment, number and location of branch offices and
remote electronic banking facilities such as automated teller machines. Because
many of these regulations were promulgated before the development of products
that enable electronic commerce, the application of such regulations to any
products and services developed by the Company must be determined on a
case-by-case basis. The Company has not attempted to review the laws of each
state that might be applicable to the deployment of its products and services.
It is possible that other states may have or will in the future adopt specific
regulations applicable to the deployment and operation of the Company's products
and services. Regulations currently existing or promulgated in the future that
significantly restrict the ability of a financial institution to install ALMs at
multiple locations outside branch offices or otherwise adversely affect the use
of ALMs or any other products or services the Company has or may develop could
have a material adverse effect on the Company's business, operating results and
financial condition.
Anti-Takeover Provisions
Certain provisions of Delaware law and the Company's Certificate of
Incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's common stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and bylaws may also have the effect of discouraging
or preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. Certain of
these provisions allow the Company to issue preferred stock with rights senior
to those of the common stock and other rights that could adversely affect the
interest of holders of common stock without any further vote or action by the
stockholders. The issuance of preferred stock, for example, could decrease the
amount of earnings or assets available for distribution to the holders of common
stock or could adversely affect the rights and powers, including voting rights,
of the holders of the common stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the common stock, as
well as having the anti-takeover effects discussed above.
Risk of System Failure or Interruption
The Company would be unable to deliver its services if its system
infrastructure broke down or was otherwise interrupted. Events that could cause
such system interruption include, but are not limited to, fire, earthquake,
power loss, telecommunications failure, and unauthorized entry or other events.
The Company cannot assure uninterrupted service of its processing capabilities
in the event of a regional natural disaster, power outage, communications
interruption, or other catastrophic event. Also, the Company has never
experienced substantial transaction volumes that may stress the capacity of its
systems. There is a possibility that the Company's existing systems may be
inadequate to handle substantially increased transaction volumes, which may
cause serious failures of its services. Finally, although the Company regularly
backs up data from its operations and takes other measures to protect against
loss of data, there is still some risk of some losses. A system outage or data
loss could materially and adversely affect the Company's business.
The Company's infrastructure may be vulnerable to computer viruses,
hackers, rogue employees or similar sources of disruption. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business. Any problem of this nature could
result in significant liability to customers and also may deter potential
customers from using the Company's services.
Item 2. Properties
The Company's principal executive offices are located at 1201 Main
Street in Columbia, South Carolina. Such office space encompasses approximately
33,000 square feet and is currently under lease which expires in 2001. The
Company also leases approximately 2,800 square feet of office space at 1500
Hampton Street, Suite 130, in Columbia, South Carolina, under a lease that is
due to expire in August 2001. The Company's primary assembly and quality
assurance facilities are located at 2500 Leaphart Road in West Columbia, South
Carolina, which encompasses approximately 7,500 square feet and is currently
under a sublease arrangement which expires in August 2001.
Item 3. Legal Proceedings
The Company settled its lawsuit against The Dime Savings Bank of New
York on January 22, 2001. The lawsuit arose 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Name Age Position with the Company
Joseph A. Boyle 47 Chairman, President, Chief
Executive Officer, and Chief
Financial Officer
Terrence J. Sabol, Sr. 54 Senior Vice President of Technology
Gina Champion 37 Senior Vice President and General
Counsel and Secretary
Joseph A. Boyle became President and Chief Executive Officer of the Company in
January 2000 and Chairman in March 2001. Mr. Boyle has also served as Chief
Financial Officer of the Company since September 1996. Mr. Boyle also held the
title of Senior Vice President from September 1996 to January 2000 and Treasurer
from May 1997. From May 1997 to July 1998, Mr. Boyle also served as Secretary of
the Company. Prior to joining the Company, Mr. Boyle served as Price Waterhouse,
LLP's engagement partner for most of its Kansas City, Missouri, financial
services clients and was a member of the firm's Mortgage Banking Group. Mr.
Boyle was employed by Price Waterhouse, LLP from June 1982 to August 1996.
Terrence J. Sabol, Sr., Senior Vice President of Technology, joined the Company
in October 1995. From July 1990 to October 1995, he served as Products Manager
for Policy Management Systems Corporation, a Columbia, South Carolina company
that provides and supports computer systems for insurance companies.
Gina Champion became Senior Vice President and Chief Administrative Officer of
the Company in March 2000. Ms. Champion has also served as General Counsel of
the Company since 1997 and as Secretary of the Company since July 1998. Prior to
joining the Company in 1996, Ms. Champion engaged in the private practice of
law.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Effective February 12, 2001, the Company's common stock was
delisted from the Nasdaq Smallcap Market and began trading on the
OTC Bulletin Board. The Company's common stock traded on the
Nasdaq SmallCap Market from March 27, 2000, to February 12, 2001.
Prior to March 27, 2000, the Company's common stock was traded on
the Nasdaq National Market under the symbol "AFFI." The following
table presents the high and low sales prices of the Company's
Common Stock for the periods indicated during 1999 and 2000, as
reported by the Nasdaq Stock Market. As of March 7, 2001, there
were 283 stockholders of record of the Common Stock.
Sales Price Per Share
High Low
1999
First Quarter 2.50 0.63
Second Quarter 3.81 1.19
Third Quarter 1.78 0.69
Fourth Quarter 1.31 0.41
2000
First Quarter 4.38 0.47
Second Quarter 2.16 0.75
Third Quarter 1.31 0.63
Fourth Quarter 0.66 0.09
The Company has never paid dividends on its capital stock. The
Company intends to retain earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the
foreseeable future.
On October 27, 2000, the Company issued 20,000 shares of its
common stock to an outside consultant retained by the Company to
pursue opportunities to exploit the Company's financial account
patent. The Company issued such shares in reliance on the
exemption from registration in Section 4(2) of the Securities Act
of 1933, as amended.
(b) 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 $.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 December 31, 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; and to Direct or indirect
affiliates of the issuer. payments to others
-------------------------------- ----------------------
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 5,994,000
Purchase of real estate -
Acquisition of other business(es) 300,000
Repayment of indebtedness $ 771,000 1 1,000,000
Working capital 34,072,400
Temporary investments:
US Treasury obligations -
Commercial paper -
Money market /cash -
Other purposes:
Marketing 4,564,000
Research & development 11,129,600
Purchase of software 2,257,000
1 Reflects the repayment of debt owed to Carolina First Corporation, as
described under the caption "Use of Proceeds" in the Company's Prospectus, dated
April 25, 1996.
Item 6. Selected Financial Data
The following table presents selected financial data of the Company for
the periods indicated. The following financial data should be read in
conjunction with the information set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements and Notes thereto and other information
included elsewhere in this report.
Year ended
December 31,
2000 1999 1998 1997 1996
------------------ ---------------- --------------- --------------- ---------------
Statements of Operations Data:
Revenues $ 2,155,513 $ 2,874,901 $2,656,259 $ 4,146,899 $ 5,081,818
Costs and expenses:
Cost of revenues 557,328 2,262,468 1,644,653 2,125,646 3,088,321
Research and development 683,600 1,870,509 2,559,600 3,526,257 2,905,232
Impairment loss 2,608,773 - - - -
Selling, general and
administrative expenses 7,604,478 11,208,310 14,358,335 15,892,560 10,819,381
------------------ ---------------- --------------- --------------- ---------------
Total costs and expenses 11,454,179 15,341,287 18,562,588 21,544,463 16,812,934
------------------ ---------------- --------------- --------------- ---------------
Operating loss (9,298,666) (12,466,386) (15,906,329) (17,397,564) (11,731,116)
Interest income 168,033 375,514 1,044,251 2,033,571 2,099,004
Interest expense (72,463) (3,764) (10,923) (35,359) (60,083)
------------------ ---------------- --------------- --------------- ---------------
Net loss (9,203,096) (12,094,636) (14,873,001) (15,399,352) (9,692,195)
================== ================ =============== =============== ===============
Net loss per share -
basic and diluted $ (0.30) $ (0.41) $ (0.50) $ (0.54) $ (0.40)
================== ================ =============== =============== ===============
Shares used in computing
net loss per share 30,242,054 29,738,459 29,755,034 28,477,880 24,136,480
================== ================ =============== =============== ===============
December 31,
2000 1999 1998 1997 1996
---------------- ---------------- --------------- ---------------- ---------------
Balance Sheet Data:
Cash and cash equivalents $ 646,198 $ 2,116,016 $ 2,026,932 $4,470,185 $31,563,950
Short-term investments - 1,474,949 8,068,310 19,135,415 10,583,997
Working capital 2,216,854 4,637,238 13,543,782 28,599,560 43,672,679
Net investment in sales-type
leases, less current portion - 249,830 574,347 1,328,741 2,386,010
Total assets 5,638,453 13,129,528 24,196,875 42,209,570 56,098,857
Notes payable, less
current portion 951,456 - - - -
Capital lease obligations to related -
party, less current portion - - - 66,245
Capital stock of subsidiary held -
by minority investor 22,668 - - - 200,000
Stockholders' equity 2,326,314 10,670,980 22,556,201 39,230,570 52,134,639
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company was formed in 1994 to develop and market technologies that
enable financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. From the period
of inception (January 12, 1994) through December 31, 1994, the Company was a
development stage company, and its activities principally related to developing
its DeciSys/RT technology (formerly known as the "DSS System") and the Affinity
ALM, raising capital and recruiting personnel.
To date, 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 cash resources to fund its
operations. If the Company had continued to use cash at the rate used during
2000, the Company would have depleted its existing cash reserves in the first
quarter of 2001. The Company has taken certain measures to increase and preserve
its cash resources. These measures include the placement of a $1 million
convertible debenture in November 2000 and a 33% reduction in its work force in
March 2001. The Company believes that existing cash and internally generated
funds will be sufficient to fund its operations through the second quarter of
2001. However, the Company may encounter unexpected expenses, the loss of
anticipated revenues and other developments that may impact the Company's
ability to fund operations for the entire second quarter of 2001. Moreover, the
Company believes that existing cash resources will be insufficient to fund
operations after the second quarter of 2001. To remain viable, the Company must
substantially increase its revenues or raise additional capital. To maintain the
minimal resources necessary to support its current operations, the Company does
not believe that substantial additional reductions in its operating expenses is
feasible. No assurances can be given that the Company will be able to increase
revenues or raise additional capital in a manner that would allow it to continue
its operations.
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 were $2,155,513, $2,874,901, and
$2,656,259 for the years ended December 31, 2000, 1999 and 1998, respectively.
The types of revenue recognized by the Company in the years ended December 31,
2000, 1999 and 1998 are as follows:
Years ended December 31,
2000 1999 1998
----- ------------------ --- --- ------------------- --- -- ------------------- ---
% of % of % of
Amount Total Amount Total Amount Total
--------------- -------- -------------- -------- -------------- --------
Transaction fees $ 544,168 25.2 $ 538,073 18.7 $ 750,936 28.3
Mortgage processing fees 432,438 20.1 397,024 13.8 453,657 17.1
Initial set-up fees - - - - 91,000 3.4
Sales and rental fees 3,000 0.1 48,962 1.7 66,369 2.5
Professional services fees 319,503 14.8 850,497 29.6 797,301 30.0
Patent license revenue 510,000 23.7 645,000 22.4 - -
Other income 346,404 16.1 395,345 13.8 496,996 18.7
--------------- -------- -------------- -------- -------------- --------
$ 2,155,513 100.0 $ 2,874,901 100.0 $2,656,259 100.0
=============== ======== ============== ======== ============== ========
Transaction fees. The slight increase in transaction fees in 2000
compared to 1999 is attributable to an increase in the volume of automobile
loans processed through the Company's iDEAL system in 2000 compared to 1999. The
Company's only iDEAL customer significantly curtailed its auto lending
activities in late 2000. The decrease in transaction fees in 1999 compared to
1998 is attributable primarily to the sale of the Company's Transaction
Processing Division ("TPS") in December 1998. Transaction fees associated with
processing credit and debit card transactions through the Company's TPS division
were approximately $218,000 in 1998.
Mortgage processing fees. Surety Mortgage, Inc. ("Surety"), a wholly
owned subsidiary of the Company, was formed to deploy and test the Company's
automated mortgage loan application system, and engages in mortgage brokerage
activities which involve originating, processing and selling mortgage loans to
outside investors. Surety originates and processes mortgage loans directly with
consumers or on behalf of correspondents, and immediately sells such loans to
institutions that sponsor the loan programs offered by Surety. Surety only
offers loans that will be acquired by such institutions under such programs.
Upon making the loan commitment to the borrower, Surety immediately receives a
commitment from an institution to acquire the loan upon closing. Mortgage
processing fees include gains on sales of mortgage loans to institutions and
loan fees received for originating and processing the loan. Loan origination
fees and all other direct costs associated with originating loans are recognized
at the time the loans are sold. The increase in mortgage loan processing fees in
2000 compared to 1999 is attributable to the increased deployment of the
Company's technology in 2000, which resulted in the processing of more mortgage
loans. In 2000 Surety processed and closed an aggregate principal balance of
loans of approximately $17,860,000. The decrease in mortgage processing fees in
1999 compared to 1998 is attributable to the processing of fewer loans in 1999
compared to 1998. In 1999 Surety processed and closed an aggregate principal
balance of loans of approximately $17,408,000 compared with approximately
$21,745,000 in 1998.
Initial set-up fees. The Company did not deploy any ALMs in 2000 or
1999 and, accordingly, recognized no set-up fees. Set-up fees recognized in 1998
relate to the deployment of one ALM and the recognition of previously deferred
set-up fees associated with a customer's decision not to deploy ALMs.
Sales and rental fees. During 2000, all ALM operating leases expired,
and the Company recognized $3,000 of rental payments associated with its final
lease. The decrease in sales and rental revenue in 1999 compared to 1998 is due
to a decrease in the number of ALMs deployed under operating leases in 1999
compared to 1998 for which there were scheduled rental payments.
Professional services fees. When the Company agrees to provide
professional services to customize its core technology to conform to a specific
customer request, the Company generally enters into a contract with the customer
for the performance of these services which typically defines deliverables,
specific delivery and acceptance dates and specified fees for such services.
Upon completion and acceptance of the specific deliverables by the customer, the
Company recognizes the corresponding revenue as professional services revenue.
In 2000 the Company recognized $309,503 of professional services revenue
associated with final enhancements to its e-xpertLender system for one customer.
The level of professional services revenue remained relatively consistent for
the years 1999 and 1998. In 1999, 64% and 36% of professional services fees were
associated with the customization of the Company's e-xpertLender and iDEAL
systems, respectively. This customization was performed during the year to meet
the specific requirements of two of the Company's customers. These two customers
represent 100% of the amounts recognized in 1999 for customization of the
e-xpertLender and iDEAL systems. In 1998, professional services revenue related
primarily to the customization of the Company's e-xpertLender system to meet a
specific customer's requirements. Such customer represented 99% of professional
services revenue in 1998.
Patent license revenue. The Company was granted two patents in 1999
covering automated loan processing and one patent in 2000 covering the automated
establishment of a financial account. Patent license revenue in 2000 related to
the granting of five patent license agreements, of which three licenses were
granted under a sub-licensing agreement with one customer. The sub-licensing
agreement was terminated in January 2001. In addition, 91% of the Company's 2000
patent license revenue was associated with the sub-licensing arrangement. Patent
license revenue in 1999 related to the granting of three patent license
agreements, of which two, representing 93% of the Company's 1999 patent license
revenue, were associated with one customer.
Costs and Expenses
Costs of Revenues. Costs of revenues for the years ended December 31,
2000, 1999 and 1998 were $557,328, $2,262,468, and $1,644,653, respectively.
Cost of revenues includes the direct costs associated with the generation of
specific types of revenue and the allocation of certain indirect costs when such
costs are specifically identifiable and allocable to revenue producing
activities. During the three years ended December 31, 2000, the nature and
amounts of costs, as well as gross profit margins, associated with certain
revenue producing activities varied significantly due to changes in the nature
of the services offered by the Company and due to different pricing structures
offered to certain customers.
Costs of revenues and the percentage of the costs of revenues to total
costs of revenues for the years ended December 31, 2000, 1999, and 1998 are as
follows:
Year ended December 31,
2000 1999 1998
--- ------------------- --- -- -------------------- -- --- ------------------- --------
% of % of % of
Amount Total Amount Total Amount Total
--------------- -------- -------------- ------- -------------- -------------
Transaction fees $ 108,193 19.4 $ 209,424 9.2 $ 388,734 23.6
Mortgage processing fees 212,397 38.0 194,239 8.6 192,726 11.7
Sales and rental fees 52,240 9.4 445,581 19.7 379,775 23.1
Professional services fees 133,498 24.0 573,381 25.3 204,058 12.4
Patent license revenue 51,000 9.2 64,500 3.0 - -
Contract loss provision - - 775,343 34.2 479,360 29.2
--------------- -------- -------------- ------- -------------- -------------
--------------- -------- -------------- ------- -------------- -------------
$ 557,328 100.0 $2,262,468 100.0 $ 1,644,653 100.0
=============== ======== ============== ======= ============== =============
Costs of transaction fees. The cost of transaction fees consists
primarily of the direct costs incurred by the Company to process loan
applications through its systems. Such direct costs are associated with services
provided by third parties and includes the cost of credit reports, fraud reports
and communications networks used by the Company. The decrease in the costs of
transaction fees in 2000 compared to 1999 is due to the implementation of
contractual provisions whereby certain of the Company's customers assumed the
responsibility for paying the direct costs associated with loan transactions
processed on their behalf by the Company. The cost of transaction fees decreased
in 1999 compared to 1998 in direct correlation to a decrease in 1999 from 1998
of the volume of transactions the Company processed through its systems.
Costs of mortgage processing fees. The costs of mortgage processing
fees consist of the direct cost incurred by Surety associated with the
underwriting, processing and closing of mortgage loans. Such costs include
credit reports, appraisal reports, flood certifications, administration fees
charged by the purchasers of loans and fees paid to other lenders that provide
certain processing services associated with loans originated by Surety. The
costs of mortgage processing fees increased in 2000 compared to 1999 as a result
of an increase in the number of mortgage loans processed by Surety in 2000
compared to the previous year. The costs of mortgage processing fees remained
consistent in 1999 compared to 1998 even though Surety originated fewer loans.
Accordingly, costs of mortgage processing fees increased on a loan-for-loan
basis in 1999 compared to 1998. This increase was due to Surety's increased use
of other lenders to provide certain processing services in 1999 compared to
1998.
Costs of sales and rental fees. Costs of sales and rental fees are
related to the cost of ALM hardware components associated with ALMs deployed
under sales-type leases, maintenance of installed ALMs, amortization associated
with capitalized ALMs and related systems development costs, and depreciation
associated with ALMs deployed under operating leases. Costs of sales and rental
fees decreased in 2000 compared to 1999 as a result of the expiration of the
Company's last ALM operating lease. In 2000 costs of sales and rental fees
consisted of depreciation and other costs incidental to the removal of remaining
ALMs under operating leases and maintenance associated with remaining ALMs
originally deployed under sales-type lease arrangements. Costs associated with
sales and rental fees remained consistent in 1999 compared to 1998 and reflected
an increase in amortization and depreciation related to ALMs deployed under
operating leases and related systems. Such increase was offset by lower ALM
maintenance costs in 1999 compared to 1998. In 1998 the costs of sales and
rental fees consisted primarily of depreciation related to ALMs deployed under
operating leases and the costs associated with maintaining the Company's
installed base of ALMs.
Under the terms of an agreement with one customer covering 30 ALMs, the
customer's payment obligation to the Company was based on ALM performance, which
resulted in revenues insufficient to cover the depreciation expense recognized
by the Company. Accordingly, the cost of sales and rental revenues exceeded the
sales and rental revenues recognized by the Company for such contract. This
contract expired in early 2000, at which time the related ALMs were fully
depreciated.
Costs of professional services fees. The costs of professional services
fees consist of the costs of the direct labor and the allocation of certain
indirect costs associated with performing software and system customization
services for customers. The costs of providing professional services will vary
depending upon the nature of professional services rendered, the level of
developers assigned to specific projects and the duration of the project.
Accordingly, the margins recognized by the Company may vary significantly
depending upon the nature of the project. The costs of providing professional
services decreased in 2000 compared to 1999 as a result of the decrease in the
level of projects requiring professional services in 2000 compared to 1999. The
costs of providing professional services increased in 1999 compared to 1998
primarily as a result of the greater amount of time to conclude certain projects
in 1999 compared to 1998.
Costs of patent license revenue. Costs of patent license revenue
recognized in 2000 and 1999 consists of commissions paid to the Company's patent
licensing agent and is associated with such agent's commissions for patent
licenses granted by the Company. The Company commenced its patent licensing
program in 1999.
Contract loss provision. The Company periodically enters into long-term
development contracts to design, develop and install loan processing systems for
its customers. In conjunction with such contracts the Company periodically
evaluates whether costs incurred and estimated future costs exceed estimated
revenues under the contract. To the extent such costs exceed contracted
revenues, the Company records a charge to costs of revenues. In 1999 and 1998,
the Company recorded contract loss provisions of $775,343 and $479,360,
respectively.
Research and Development. The Company accounts for research and
development costs as operating costs and expenses such costs in the period
incurred. In accordance with Statement of Financial Accounting Standards No. 86
("SFAS 86"), "Computer Software to be Sold, Leased or Otherwise Marketed," the
Company capitalizes software costs incurred in the development of a software
application after the technological feasibility of the application has been
established. Technological feasibility is established when an application design
and a working model of the application have been completed and the completeness
of the working model and its consistency with the application design have been
confirmed by testing. From the time technological feasibility is established
until the time the relevant application is available for general release to
customers, software development costs incurred are capitalized at the lower of
cost or net realizable value. Thereafter, costs related to the application are
again expensed as incurred. Capitalized software development costs are amortized
using the greater of the revenue curve or straight-line method over the
estimated economic life of the application. Software costs capitalized include
direct labor, other costs directly associated with the development of the
related application and an allocation of indirect costs, primarily facility
costs and other costs associated with the Company's software development staff.
The Company bases such allocation on the percentage of the Company's total labor
costs represented by the software development labor costs.
Research and development expenses for the year ended December 31, 2000,
were approximately $684,000, compared to $1,871,000 and $2,560,000 for 1999 and
1998, respectively. The decrease in research and development expense in 2000
compared to 1999 and in 1999 compared to 1998 is due to an overall decrease in
the number of employees involved in development activities in 2000 compared to
1999 and in 1999 compared to 1998.
The Company capitalized no costs associated with software development
in 2000. During 1999 and 1998, the Company capitalized approximately $138,000
and $1,041,000, respectively, of software development costs related primarily to
the development of certain financial service applications processed using
DeciSys/RT. When a product is available for general release to customers,
capitalization of such costs is discontinued and amounts capitalized are
generally amortized over a 48 month period.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses for the year ended December 31, 2000, were
approximately $7,604,000, compared to $11,208,000 and $14,358,000 for the years
ended December 31, 1999 and 1998, respectively.
SG&A expenses during 2000 consisted primarily of personnel expense of
approximately $2,099,000; professional fees of approximately $791,000;
depreciation and amortization expense of approximately $1,690,000; rent expense
of approximately $519,000; and writedown of deferred software development costs
of approximately $518,000. SG&A expenses during 1999 consisted primarily of
personnel expense of approximately $4,283,000; professional fees of
approximately $969,000; depreciation and amortization expense of approximately
$1,695,000; rent expense of approximately $903,000; provision for excess rental
capacity of approximately $449,000; writedown of deferred software development
costs of approximately $370,000; and travel costs of approximately $270,000.
SG&A expenses during 1998 consisted primarily of personnel costs of
approximately $6,283,000; professional fees of approximately $1,722,000;
depreciation and amortization of approximately $1,693,000; rent expense of
approximately $915,000; advertising and marketing costs of approximately
$193,000; deferred compensation expense amortization of approximately $599,000;
and travel costs of approximately $437,000.
The decrease in SG&A in 2000 compared to 1999 is due to a substantial
reduction in the Company's workforce in January 2000. Similarly, the decrease in
SG&A expense in 1999 compared to 1998 is due to a substantial reduction in the
Company's workforce in the fourth quarter of 1998. SG&A expenses were lower in
all material categories in 2000 compared to 1999. Other than certain increases
associated with contract services, the provision for excess rental capacity, and
certain amounts the Company wrote off related to capitalized software
development costs, SG&A expenses were lower in all material categories in 1999
compared with 1998.
Impairment Loss. The Company periodically evaluates the carrying value
of long-lived assets to be held and used, including property and equipment and
goodwill. In accordance with its evaluation, the Company recorded an impairment
loss of approximately $2,609,000 in 2000. The impairment loss was primarily
attributable to certain assets used or associated with its software and consumer
loan processing business, which the Company has significantly curtailed.
Impairment losses included charges taken by the Company to reduce the carrying
value of property and equipment and goodwill. The Company did not record any
impairment losses in 1999 or 1998.
Interest Income
Interest income of $168,033, $375,514, and $1,044,251, during 2000,
1999, and 1998, respectively, primarily reflects interest income attributable to
short-term investments and interest earned on mortgage loans during the period
they are held by Surety pending sales to permanent investors under mandatory
sales commitments. Interest income also reflects the amortization of deferred
interest income attributable to ALM sales-type leases. The decrease in interest
income in 2000 compared to 1999 is attributable to a decrease in the average
cash and cash equivalents and investment balances. Similarly, the decrease in
interest income in 1999 compared to 1998 was attributable to a decrease in the
average cash and cash equivalents and investments balances in 1999 compared to
1998.
Interest Expense
Interest expense for the year ended December 31, 2000 was $72,463,
compared to $3,764 and $10,923 for 1999 and 1998, respectively. Interest expense
recognized by the Company is primarily attributable to a line of credit used by
the Company to fund mortgage loans made by its wholly owned subsidiary Surety
Mortgage, Inc. The increase in 2000 compared to 1999 is attributable to higher
utilization of the line of credit in 2000 compared with the previous year.
Income Taxes
The Company has recorded a valuation allowance for the full amount of
its net deferred income tax assets as of December 31, 2000, 1999, and 1998,
based on management's evaluation of the recognition criteria as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Liquidity and Capital Resources
The Company has generated net losses of $64,276,280 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. Additionally, in 2000 the Company sold 484,848 shares
of its common stock for $500,000 and sold a $1 million convertible debenture.
The Company continues to use a substantial amount of existing cash
resources to fund its operations. If the Company had continued to use cash at
the rate used during 2000, the Company would have depleted its existing cash
reserves in the first quarter of 2001. The Company has taken certain measures to
increase and preserve its cash resources. These measures include the placement
of a $1 million convertible debenture in November 2000 and a 33% reduction in
its work force in March 2001. The Company believes that existing cash and
internally generated funds will be sufficient to fund its operations through the
second quarter of 2001. However, the Company may encounter unexpected expenses,
the loss of anticipated revenues and other developments that may impact the
Company's ability to fund operations for the entire second quarter of 2001.
Moreover, the Company believes that existing cash resources will be insufficient
to fund operations after the second quarter of 2001. To remain viable, the
Company must substantially increase its revenues or raise additional capital. To
maintain the minimal resources necessary to support its current operations, the
Company does not believe that substantial additional reductions in its operating
expenses is feasible. No assurances can be given that the Company will be able
to increase revenues or raise additional capital in a manner that would allow it
to continue its operations.
In June 2000, the Company entered into an agreement with Redmond Fund,
Inc. ("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
for $1.37 per share. The Company has registered these shares for resale by
Redmond under the Securities Act of 1933 pursuant to the Company's agreement
with Redmond.
On September 22, 2000, the Company entered into a convertible debenture
and warrants purchase agreement with AMRO International, S.A. ("AMRO") Under the
agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture is convertible,
at the option of AMRO, into shares of the Company's common stock at a price
equal to the lesser of $1.00 per share or 65% of the average of the three lowest
closing prices of the Company's stock during the month prior to conversion. The
debenture matures 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 as much of the debenture as
it can at a price equal to 120% of the principal amount of the debenture plus
all accrued and unpaid interest. Under the agreement, on November 22, 2000 the
Company also issued to AMRO a three-year warrant to acquire 200,000 shares of
the Company's common stock. The warrant exercise price initially is $0.425. The
warrant exercise price is subject to reduction in certain instances. As of March
30, 2001, AMRO had exercised a portion of the debenture into an aggregate of
3,037,931 shares of the Company's stock. The outstanding principal amount as of
March 30, 2001, was $765,000.
On September 26, 2000, the Company entered into a common stock purchase
agreement with another 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 the Company's 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 it has
registered such shares for resale by the investor under the Securities Act of
1933. Under the agreement, the Company issued to the investor a three-year
warrant to acquire 720,000 shares of the Company's common stock at $0.8554 per
share. In addition, any time the Company sells any shares of stock under the
agreement, it 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. The amount of
capital the Company may raise under the common stock purchase agreement during
any month is not less than $100,000 or more than the lesser of $1,000,000, or
4.5% of the product of the daily volume-weighted average stock price during the
three-month period prior to a drawdown request and the total trading volume in
the Company's stock during the same three-month period. Based on these
limitations, the Company would not be able to sell any shares of its stock under
the equity line agreement as of March 30, 2001.
Net cash used during the year ended December 31, 2000, to fund
operations was approximately $5,291,000 compared to approximately $6,101,000 and
$9,498,000 for 1999 and 1998, respectively. Proceeds from the offering and other
sources of cash were used to fund current period operations, research and
development of approximately $684,000, and capital expenditures of approximately
$342,000. During 1999, proceeds from the offering and other sources of cash were
used to fund current period operations, research and development of
approximately $1,871,000, software development of approximately $138,000 and
capital expenditures of approximately $195,000. During 1998, proceeds from the
offering and other sources of cash were used to fund current period operations,
research and development of approximately $2,560,000, software development of
approximately $1,041,000, capital expenditures of approximately $696,000 and the
repurchase of outstanding shares of the Company's common stock of approximately
$2,404,000. At December 31, 2000, 1999, and 1998, cash and liquid investments
were $646,198, $3,590,965, and $10,095,242, respectively, and working capital
was $2,216,854, $4,637,238, and $13,543,782, respectively.
During June 2000, Surety renewed its agreement with a lender to
maintain a credit facility with a maximum borrowing amount of $2,000,000.
Pursuant to the terms of the agreement, 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. Surety had approximately $923,000 in
outstanding borrowings under the Loan Warehousing Agreement as of December 31,
2000.
Item 7(a). 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 the Company's mortgage brokerage
business. The extent of market rate risk to the Company due to changes in
interest rates is not quantifiable or predictable, but the Company does not
believe such risk is material. When the Company receives a commitment to
originate a mortgage loan from a consumer or correspondent, the Company
immediately receives a commitment from an investor to buy such mortgage loan.
The Company does not believe that its mortgage brokerage business exposes it to
significant market risk for changes in interest rates.
Item 8. Financial Statements and Supplemental Data
The report of independent auditors and consolidated financial
statements are set forth below (see item 14(a) for list of financial statements
and financial statement schedules):
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Affinity Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of
Affinity Technology Group, Inc. and subsidiaries as of December 31, 2000 and
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. The Company's audits also included the financial statement schedule listed
in the Index at Item 14(a) (2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Affinity Technology Group, Inc. and subsidiaries at December 31, 2000 and 1999
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Affinity Technology Group, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
an accumulated deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
reflect any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
March 30, 2001
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2000 1999
---------------------- ---------------------
Assets
Current assets:
Cash and cash equivalents $ 646,198 $ 2,116,016
Investments - 1,474,949
Receivables, less allowance for doubtful accounts of $9,467
and $105,076 at December 31, 2000 and 1999, respectively 1,830,491 713,644
Net investment in sales-type leases - current 157,139 324,485
Inventories 977,274 1,224,532
Other current assets 388,961 626,354
---------------------- ---------------------
Total current assets 4,000,063 6,479,980
Net investment in sales-type leases - non-current - 249,830
Property and equipment, net 862,813 2,921,770
Software development costs, less accumulated
amortization of $411,793 and $368,033 at December
31, 2000 and 1999, respectively 299,179 1,199,053
Other assets 476,398 2,278,895
---------------------- ---------------------
Total assets $ 5,638,453 $ 13,129,528
====================== =====================
December 31,
2000 1999
---------------------- ---------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 252,040 $ 215,897
Accrued expenses 414,717 788,763
Accrued compensation and related benefits 151,800 759,372
Notes payable 922,545 -
Current portion of deferred revenue - third parties 42,107 78,710
---------------------- ---------------------
Total current liabilities 1,783,209 1,842,742
Convertible Debenture 951,456 -
Deferred revenue 554,806 615,806
Capital stock of subsidiary held by minority investor 22,668 -
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000
shares, issued 32,713,368 shares in 2000 and
31,961,956 shares in 1999 3,271 3,196
Additional paid-in capital 70,084,414 69,394,954
Common stock warrants 52,000 -
Deferred compensation (31,804) (163,167)
Treasury stock, at cost (2,168,008 and 2,163,556 shares at
December 31, 2000 and 1999, respectively) (3,505,287) (3,490,819)
Accumulated deficit (64,276,280) (55,073,184)
---------------------- ---------------------
Total stockholders' equity 2,326,314 10,670,980
---------------------- ---------------------
Total liabilities and stockholders' equity $ 5,638,453 $ 13,129,528
====================== =====================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended December 31,
2000 1999 1998
---------------------- ---------------------- ---------------------
Revenues:
Transactions $ 544,168 $ 538,073 $ 750,936
Mortgage processing services 432,438 397,024 453,657
Initial set-up - - 91,000
Sales and rental 3,000 48,962 66,369
Professional services 319,503 850,497 797,301
Patent license revenue 510,000 645,000 -
Other income 346,404 395,345 496,996
---------------------- ---------------------- ---------------------
2,155,513 2,874,901 2,656,259
Costs and expenses:
Cost of revenues 557,328 2,262,468 1,644,653
Research and development 683,600 1,870,509 2,559,600
Selling, general and administrative expenses 7,604,478 11,208,310 14,358,335
Impairment loss 2,608,773 - -
---------------------- ---------------------- ---------------------
Total costs and expenses 11,454,179 15,341,287 18,562,588
---------------------- ---------------------- ---------------------
Operating loss (9,298,666) (12,466,386) (15,906,329)
Interest income 168,033 375,514 1,044,251
Interest expense (72,463) (3,764) (10,923)
---------------------- ---------------------- ---------------------
Net loss $ (9,203,096) $ (12,094,636) $ (14,873,001)
====================== ====================== =====================
Net loss per share - basic and diluted $ (0.30) $ (0.41) $ (0.50)
====================== ====================== =====================
Shares used in computing net loss per share 30,242,054 29,738,459 29,755,034
====================== ====================== =====================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Common Total
Common Paid-in Stock Deferred Treasury Accumulated Stockholders'
Stock Capital Warrants Compensation Stock Deficit Equity
--------- -------------- ------------ ---------------- -------------- ---------------- --------------
--------- -------------- ------------ ---------------- -------------- ---------------- --------------
Balance at December 31, 1997 $ 3,155 $ 69,858,571 - $ (1,558,574) $ (967,035) $(28,105,547) $ 39,230,570
Exercise of stock options 2 4,228 - - - - 4,230
Forfeiture of stock options - (470,254) - 470,254 - - -
Amortization of deferred
compensation - - - 598,664 - - 598,664
Purchase of treasury stock - - - - (2,404,262) - (2,404,262)
Net loss - - - - - (14,873,001) (14,873,001)
--------- -------------- ------------ ---------------- -------------- ---------------- --------------
Balance at December 31, 1998 3,157 69,392,545 (489,656) (3,371,297) (42,978,548) 22,556,201
-
Exercise of stock options 39 173,209 - - (119,522) - 53,726
Forfeiture of stock options - (170,800) - 170,800 - - -
Amortization of deferred
compensation - - - 155,689 - - 155,689
Net loss - - - - - (12,094,636) (12,094,636)
--------- -------------- ------------ ---------------- -------------- ---------------- --------------
Balance at December 31, 1999 3,196 69,394,954 - (163,167) (3,490,819) (55,073,184) 10,670,980
Exercise of stock options 23 189,733 - (14,468) - 175,288
Forfeiture of stock options - (28,980) - 28,980 - - -
Amortization of deferred
compensation - - - 102,383 - - 102,383
Issuance of common stock in
private placement 48 499,952 - - - - 500,000
Issuance of common stock as
finder's fee 4 28,755 - - - - 28,759
Issuance of common stock
warrants - - 52,000 - - - 52,000
Net loss - - - - (9,203,096) (9,203,096)
--------- -------------- ------------ ---------------- -------------- ---------------- --------------
Balance at December 31, 2000 $ 3,271 $ 70,084,414 52,000 $ (31,804) $ (3,505,287) $ (64,276,280) $ 2,326,314
========= ============== ============ ================ ============== ================ ==============
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31,
2000 1999 1998
---------------------- ---------------------- ---------------------
Operating activities
Net loss $(9,203,096) $(12,094,636) $(14,873,001)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,921,528 2,449,521 2,369,220
Amortization of deferred compensation 102,383 155,689 598,664
Impairment Loss 2,608,773 - -
Writedown of software development costs 517,903 369,787 -
Provision for doubtful accounts 60,000 60,000 370,000
Inventory valuation allowance 120,000 694,940 1,060,000
Contract loss provision - 775,343 479,360
Deferred revenue (97,603) 128,077 187,175
Other 21,926 24,837 94,808
Changes in current assets and liabilities:
Accounts receivable (1,176,847) (45,645) 543,906
Net investment in sales-type leases 417,176 534,425 937,388
Inventories 127,258 71,051 450,258
Other assets 234,981 (55,395) (1,029,727)
Accounts payable 36,143 31,278 (482,205)
Accrued expenses (338,050) 400,297 (2,118)
Accrued compensation and related benefits (643,568) 399,702 (201,721)
---------------------- ---------------------- ---------------------
Net cash used in operating activities (5,291,093) (6,100,729) (9,497,993)
Investing activities
Purchases of property and equipment (342,403) (194,726) (696,122)
Proceeds from sale of property and equipment 65,895 16,872 47,622
Software development costs - (137,940) (1,041,091)
Purchases of short-term investments - (2,474,949) (9,436,211)
Sales of short-term investments 1,474,949 9,068,310 20,503,316
---------------------- ---------------------- ---------------------
Net cash provided by investing activities 1,198,441 6,277,567 9,377,514
Financing activities
Proceeds from convertible debenture 1,000,000 - -
Proceeds from notes payable to third parties 11,531,712 - 141,480
Principal payments on capital leases - - (64,222)
Payments on notes payable to third parties (10,609,166) (141,480) -
Purchase of treasury stock - - (2,404,262)
Proceeds from sale of common stock 500,000 - -
Proceeds from sale of minority interest in subsidiary 25,000 - -
Exercise of options 175,288 53,726 4,230
---------------------- ---------------------- ---------------------
Net cash provided by (used in) financing activities 2,622,834 (87,754) (2,322,774)
---------------------- ---------------------- ---------------------
Net (decrease) increase in cash (1,469,818) 89,084 (2,443,253)
Cash and cash equivalents at beginning of year 2,116,016 2,026,932 4,470,185
---------------------- ---------------------- ---------------------
Cash and cash equivalents at end of year $ 646,198 $ 2,116,016 $ 2,026,932
====================== ====================== =====================
See accompanying notes.
Affinity Technology Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
1. Going Concern
To date, Affinity Technology Group, Inc. ("the Company"), has generated
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. The Company has taken certain measures to
increase and preserve its cash resources. These measures include the placement
of a $1 million convertible debenture in November 2000 and a 33% reduction in
its work force in March 2001. The Company believes that existing cash and
internally generated funds will be sufficient to fund its operations through the
second quarter of 2001. However, the Company may encounter unexpected expenses,
the loss of anticipated revenues and other developments that may impact the
Company's ability to fund operations for the entire second quarter of 2001.
Moreover, the Company believes that existing cash resources will be insufficient
to fund operations after the second quarter of 2001. To remain viable, the
Company must substantially increase its revenues or raise additional capital. To
maintain the minimal resources necessary to support its current operations, the
Company does not believe that substantial additional reductions in its operating
expenses is feasible. No assurances can be given that the Company will be able
to increase revenues or raise additional capital in a manner that would allow it
to continue its operations.
Management has developed a plan, which if successful, will generate
sufficient working capital to sustain the Company's operations in 2001 and
beyond. Management's plan included further reductions in the Company's
workforce, which resulted in a 33% decrease in employees in March 2001. In
conjunction with the reduction in workforce, management has elected to suspend
the marketing of most of its products as an Application Service Provider
("ASP"). The Company will offer for sale its proprietary software previously
utilized by the Company to offer its ASP services.
Management's plan also includes the continued deployment of its
Mortgage ALM through its wholly owned subsidiary, Surety Mortgage, Inc.
("Surety"), and continuing to provide outsourced loan processing services for
third parties through Surety. Surety entered into its first out-sourced loan
processing contract in December 2000 and another similar contract in March 2001.
The Company has been issued three patents covering fully automated loan
processing and establishment of financial accounts. Integral to management's
plan is the continued development of a patent licensing program to generate
patent licensing revenue.
Additionally, in November 2000 the Company entered into an equity line
agreement. Under the terms of the agreement, the Company may issue up to 6
million shares of its common stock. The agreement expires in May 2002. The rate
at which the Company may issue its common shares pursuant to the equity line
agreement is subject to certain price and trading volume requirements of the
Company's common stock. Management's ability to utilize the equity line
agreement for purposes of raising additional working capital is therefore
subject to general stock market conditions, as well as the specific perception
of the market concerning the value of the Company's common stock. Moreover, to
sell additional shares of its common stock, the Company must first register the
shares by filing the prescribed registration statement with the Securities and
Exchange Commission and receive timely approval of such registration statement.
The successful execution of management's plan is subject to numerous
risks and uncertainties, many of which are beyond the control of management.
Management's plan is highly dependent upon the rapid expansion of its mortgage
operations through Surety. Demand for mortgage loan products is cyclical and is
generally proportionate to long-term interest rates and general economic
conditions. Management's plan regarding the exploitation of its patents has been
limited due to the lengthy reexamination of its loan processing patents.
Further, the Company's patents are subject to additional challenges by third
parties and may require enforcement through lengthy litigation.
Management's plan also includes the continued evaluation of entering
into new agreements under which the Company may sell additional debt or equity
securities. Additionally, management may consider selling certain assets,
including some or all of the Company's patents or its mortgage banking
operations.
As a result of the above, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result from this uncertainty.
2. The Company
The Company was incorporated on January 12, 1994. Since its formation
the Company has concentrated its product development efforts primarily on a
"closed loop" electronic commerce system that utilizes its proprietary
Decisys/RT technology and enables 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 for their products and services, thereby
increasing assets and revenues and broadening customer relationships while
reducing their operating and infrastructure costs.
The Company has developed several products which utilize its DeciSys/RT
technology to process certain types of loans with little or no human
intervention. The Company's iDEAL System allows the automated decisioning and
processing of automobile loans originating at an automobile dealership. Similar
to iDEAL, the Company's e-xpertLender System allows the automated decisioning
and processing of loans originating at bank or other financial institution
branches. The Company's Automated Loan Machine ("ALM") which is similar in
appearance to an automated teller machine allows consumers to apply for, and if
approved, receive a loan, including the loan proceeds and underlying
documentation in as little as 10 minutes.
Through its wholly owned subsidiary, Surety Mortgage, Inc., the Company
deploys its Mortgage ALM product in locations where consumers are likely to
apply for a mortgage loan. Surety deploys Mortgage ALMs, accepts and processes
mortgage loan applications obtained through its Mortgage ALM network and sells
the mortgage loans to permanent investors.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Affinity
Technology Group, Inc. (the "Company" or "ATG") and its subsidiaries, Affinity
Bank Technology Corporation, Affinity Clearinghouse Corporation, Affinity Credit
Corporation, Affinity Processing Corporation ("APC"), Affinity Mortgage
Technology, Inc., decisioning.com and Multi Financial Services, Inc. and its
wholly owned subsidiary Surety Mortgage, Inc., ("Surety"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Investments
The Company classifies its investments as held to maturity or available
for sale. At December 31, 2000 the Company had no investments. Investments at
December 31, 1999, consisted of investments in certificates of deposit, or other
similar money market investments with maturities of less than three months. The
Company had no unrealized holding gains or losses associated with investments
classified as available for sale during the years ended December 31, 2000, 1999,
and 1998.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, investments, accounts receivable, net investment in sales-type
leases, accounts payable and notes payable approximate their fair values. Fair
values of investments are based on quoted market prices.
Inventories
Inventories at December 31, 2000 and 1999 are stated at the lower of
cost or market. Cost is determined using the first-in, first-out ("FIFO") cost
flow assumption.
Other Current Assets
Other current assets at December 31, 2000 consisted of deferred
contract costs of $176,083 and prepaid expenses of $212,878. At December 31,
1999, other current assets consisted of deferred contract costs of $329,266,
prepaid expenses of $275,954 and interest receivable of $21,134.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives range from five to ten years
for office furniture and fixtures and three to five years for all other
depreciable assets. Depreciation expense (including amortization of equipment
leased under capital leases) was approximately $1,620,000, $1,807,000, and
$1,893,000 during 2000, 1999, and 1998, respectively.
Software Development Costs
Costs incurred in the development of software, which is incorporated as
part of the Company's products or sold separately, are capitalized after a
product's technological feasibility has been established. Capitalization of such
costs is discontinued when a product is available for general release to
customers. Software development costs are capitalized at the lower of cost or
net realizable value and amortized using the greater of the revenue curve method
or the straight-line method over the estimated economic life of the related
product. Amortization begins when a product is ready for general release to
customers. The net realizable value of unamortized capitalized costs is
periodically evaluated and, to the extent such costs exceed the net realizable
value, unamortized amounts are reduced to net realizable value. In 2000 and
1999, the Company recorded charges of approximately $518,000 and $370,000,
respectively, to reduce recorded balances of unamortized capitalized software
costs to their net realizable value.
Amortization of capitalized software development was approximately
$382,000, $342,000 and $82,000 during 2000, 1999, and 1998, respectively.
Valuation of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), the Company periodically evaluates the carrying
value of long-lived assets to be held and used, including property and equipment
and goodwill, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In the event of such, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
In 2000 the Company recorded certain impairment charges related to certain of
its long-lived assets. Impairment charges recorded by the Company were
approximately: property and equipment, $1,103,000; goodwill, $1,453,000 (see
"Intangible Assets" below); and other non-current assets of $53,000.
Intangible Assets
Intangible assets arising from the excess of cost over acquired assets
are amortized by the straight-line method over their estimated useful life of
ten years. Intangible assets, primarily goodwill, consisted of approximately
$1,470,000 which was recorded in conjunction with the acquisition of Buy
American, Inc. and Project Freedom, Inc. (see Note 10), and approximately
$1,400,000 which was recorded in conjunction with the exchange of APC common
stock for ATG common stock. See "Minority Investor" below. Accumulated
amortization associated with these intangible assets approximated $528,000 and
$661,000 at December 31, 2000 and 1999, respectively. In accordance with its
evaluation of its long-lived assets, the Company recorded an impairment charge
related to goodwill in the amount of $1,453,000. Such charges eliminated the
recorded balance of goodwill associated with the exchange of APC common stock
for ATG common stock and reduced the unamortized balance of goodwill associated
with the acquisition of Buy American and Project Freedom to approximately
$473,000.
Minority Investor
An unrelated third party exchanged 240,570 shares of APC common stock
for 666,667 shares of the Company's common stock on May 21, 1997. The exchange
was accounted for as a purchase of minority interest in a majority owned
subsidiary. The fair market value of the Company's common stock at the time of
the exchange was approximately $1,600,000. The unrelated third party had
previously acquired the shares of APC common stock for aggregate consideration
of $125,000, and 90,988 shares of APC convertible preferred stock, which was
acquired for aggregate consideration of $75,000. These holdings represented a
24.9% minority interest in APC at the date of exchange.
Software Revenue Recognition
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended, effective for transactions entered into in fiscal
years beginning after December 15, 1997. SOP 97-2 provides guidance on software
revenue recognition associated with the licensing and selling of computer
software. The Company did not recognize any revenue during 2000 or 1999
associated with contracts subject to SOP 97-2 guidance.
Revenue Recognition
Transaction fees - Transaction fee revenue is recognized as the related
transactions are processed. Transaction processing fees revenue represented
approximately 25%, 19%, and 28% of total revenue during 2000, 1999, and 1998,
respectively.
Mortgage processing services - Surety engages in mortgage brokerage activities
which generally involve originating, processing, and selling mortgage loan
products to outside investors. Surety originates and/or processes mortgage loans
directly with consumers or on behalf of correspondents and immediately sells
such loans to investors that sponsor the loan programs offered by Surety. Surety
only offers loans that will be acquired by the investors under such programs.
Upon making the loan commitment to the borrower, Surety immediately receives a
commitment from an investor to acquire the loan upon closing. Loan origination
fees include gains on sales of mortgage loans to investors and loan origination
fees received for originating and processing the loan. Loan origination fees and
all direct costs associated with originating loans are recognized at the time
the loans are sold.
Initial set-up - The Company leases ALMs to customers utilizing both sales-type
and operating lease arrangements and concurrently enters into a service and
processing agreement (the "ALS Agreement") with the customer. Pursuant to the
ALS Agreement, the customer pays an initial set-up fee which is initially
recognized as deferred revenue. Generally upon installation of an ALM, the
Company recognizes as revenue the portion of the initial set-up fee attributable
to the related costs of set-up and installation. The remainder of the initial
fee is deferred and amortized ratably over the term of the ALS Agreement.
Sales and rental - Revenue and costs related to leases of ALM equipment are
recognized in accordance with Statement of Financial Accounting Standards No.
13, "Accounting for Leases" (see Note 4). Revenue from sales-type leases is
generally recognized when the equipment is installed and accepted by the
customer. Operating lease revenue is recognized ratably over the lease term.
Professional services - In conjunction with the installation of the Company's
technology, periodically additional customer specific technology development is
performed by the Company in the form of professional services. The Company
generally enters into a contract with the customer for the performance of these
services. Upon completion and acceptance of professional services by the
customer, the Company recognizes the corresponding revenue.
Patent licensing - The Company recognizes revenue from patent licensing
activities pursuant to the provisions of each license agreement which specify
the periods to which the related license and corresponding revenue applies.
Software licensing - The Company recognizes revenue from sales of software
licenses upon delivery of the software product to a customer, unless the Company
has significant related obligations remaining. When significant obligations
remain after the software product has been delivered, revenue is not recognized
until such obligations have been completed or are no longer significant. The
costs of any remaining insignificant obligations are accrued when the related
revenue is recognized.
Deferred revenues - Deferred revenues relate to unearned revenue on ALM leases
and certain other amounts billed to customers for which acceptance of the
underlying product or service is not fully complete.
Cost of Revenues
Cost of revenues consists of costs associated with initial set-up,
transaction fees, sales and rental revenues, professional services and mortgage
processing services. Additionally, contract loss provisions are charged to cost
of revenues. Costs associated with initial set-up fees include labor, other
direct costs and an allocation of related indirect costs. The Company did not
deploy any ALMs during 2000 and 1999 and deployments were insignificant in 1998.
No costs were incurred in 2000, 1999 and 1998 in association with initial set-up
revenue recognized. Costs associated with transaction fees include the direct
costs incurred by the Company related to transactions it processes for its
customers. Costs of transaction fees approximated $108,000, $209,000, and
$389,000 in 2000, 1999, and 1998, respectively. Costs associated with sales and
rental revenues include the cost of the leased ALM hardware, other direct costs
and an allocation of related indirect costs. Costs of ALM hardware sold under
sales-type leases, depreciation expense for hardware leased to customers under
operating leases and other direct costs associated with sales and rental
revenues totaled approximately $52,000, $446,000, and $380,000 for the years
ended December 31, 2000, 1999, and 1998, respectively. Costs associated with
professional services include labor, other direct costs and an allocation of
related indirect costs. Labor and other direct and allocation of indirect costs
associated with professional services totaled approximately $133,000, $573,000,
and $204,000 for the years ended December 31, 2000, 1999, and 1998,
respectively. Costs associated with mortgage processing services include direct
costs associated with originating and processing mortgage loans and totaled
approximately $212,000, $194,000 and $193,000 for the years ended December 31,
2000, 1999 and 1998, respectively. Costs of patent license revenues consist of
commissions paid by the Company to its patent licensing agent and totaled
$51,000 and $64,500 for the years ended December 31, 2000 and 1999,
respectively. In 1999 and 1998, the Company recorded contract loss provisions of
approximately $775,000 and $480,000, respectively.
Stock Based Compensation
The Company accounts for stock options in accordance with APB Opinion
No.25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the Company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the Company records
compensation expense related to these options over the performance period.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"), provides an alternative to APB 25 in
accounting for stock based compensation issued to employees. SFAS 123 provides
for a fair value based method of accounting for employee stock options and
similar equity instruments. However, for companies that continue to account for
stock based compensation arrangements under APB 25, SFAS 123 requires disclosure
of the pro forma effect on net income and earnings per share as if the fair
value based method prescribed by SFAS 123 had been applied. The pro forma effect
on net income and earnings per share were not material for the years-ended
December 31, 2000, 1999, and 1998. The Company intends to continue to account
for stock based compensation arrangements under APB No. 25 and has adopted the
pro forma disclosure requirements of SFAS 123.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising and
marketing expense was approximately $33,000, $77,000, and $193,000 during 2000,
1999, and 1998, respectively.
Net Loss Per Share of Common Stock
All net loss per share of Common Stock amounts presented 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 are
not included in the calculation of dilutive loss per common share because the
Company has experienced operating losses in all periods presented and,
therefore, the effect would be antidilutive.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which is effective for fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 contains disclosure requirements based
on the type of hedge and the type of market risk that is being hedged. The
Company has elected to defer adoption of SFAS 133 until 2001. The Company does
not believe adoption will have a material impact on the Company's financial
position or results of operations.
Income Taxes
Deferred income taxes are calculated using the liability method
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
Concentrations of Credit Risk
The Company markets its products and services to financial institutions
throughout the United States. The Company performs ongoing credit evaluations of
customers and retains a security interest in leased equipment related to
sales-type leases.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain amounts in 1999 and 1998 have been reclassified to conform to
2000 presentations for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
4. Sales-Type and Operating Leases
The components of the net investment in sales-type leases are as
follows:
December 31,
2000 1999
-------------------- -------------------
Total minimum lease payments receivable $ 162,972 $ 628,081
Less unearned interest income (5,833) (53,766)
Net investment in sales-type leases $ 157,139 $ 574,315
==================== ===================
==================== ===================
Net investment in sales-type leases is classified as:
Current $ 157,139 $ 324,485
Non-current - 249,830
-------------------- -------------------
$ 157,139 $ 574,315
==================== ===================
Future minimum lease payments to be received on sales-type leases at
December 31, 2000 are $162,972. All remaining lease payments are to be received
in the year 2001.
5. Inventories
Inventories consist of the following:
December 31,
2000 1999
-------------------- -------------------
Electronic parts and other components $ 676,546 $ 976,345
Work in process 774,331 1,189,766
Finished goods 754,325 772,407
-------------------- -------------------
2,205,202 2,938,518
Reserve for obsolescence (1,227,928) (1,713,986)
-------------------- -------------------
$ 977,274 $ 1,224,532
==================== ===================
6. Property and Equipment
Property and equipment consists of the following:
December 31,
2000 1999
-------------------- --------------------
ALM equipment leased to others under operating leases $ - $ 424,518
Data processing equipment 2,618,284 2,594,052
Demonstration equipment 727,267 1,080,259
Office furniture and fixtures 1,426,348 2,337,307
Automobiles 72,003 72,003
Purchased software 2,017,891 2,173,584
-------------------- --------------------
6,861,793 8,681,723
Less accumulated depreciation and amortization (5,998,980) (5,759,953)
-------------------- --------------------
$ 862,813 $ 2,921,770
==================== ====================
Accumulated depreciation of ALM equipment leased to others was approximately
$394,000 at December 31, 1999.
7. Notes Payable
During June 1998, Surety entered into an agreement with a lender to
establish a credit facility with a maximum borrowing amount of $2,000,000.
Pursuant to the terms of the agreement, 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 at December 31, 2000 were $922,545 bearing an interest
rate of 10%. There were no outstanding borrowings under the Loan Warehousing
Agreement as of December 31, 1999.
8. Convertible Debenture
In November 2000, the Company issued a convertible debenture in the
amount of $1 million at an interest rate of 8%. The debenture is fully payable
in May 2002 and includes detachable warrants to purchase 200,000 shares of the
Company's common stock. Additionally, in conjunction with the sale of the
debenture, warrants to purchase 35,000 shares of the Company's common stock were
issued to a broker. A discount on the debenture of $52,000 was recorded
representing the estimated original value of the common stock purchase warrants.
Under the terms of the debenture agreement, the investor may convert
principal and interest of the debenture at any time during the debenture's term
into the Company's common stock at the election of the investor. The conversion
rate is the lower of $1 per share or 65% of the average lowest closing price of
the Company's common stock for three days in the twenty-two (22) day period
preceding the investor's conversion notification to the Company. The investor
converted $130,000 of principal into 1,534,533 shares of the Company's common
stock in January 2001, and 1,503,398 in March 2001. Additionally, in March 2001
the Company made a $50,000 principal reduction payment.
9. Stockholders' Equity
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations, or restrictions.
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. At December 31, 2000 there are no shares of
preferred stock issued or outstanding.
Stock Option Plans
During 1995, the Company adopted the 1995 Option Plan under which
incentive stock options and nonqualified stock options may be granted to
employees, directors, consultants or independent contractors. At December 31,
2000, approximately 153,000 options were exercisable. At December 31, 2000, the
weighted average exercise price was $0.44 and the weighted average remaining
contractual life was 5.0 years. This plan closed during April 1996.
In April 1996, the Company adopted the 1996 Incentive Stock Option
Plan. Under the terms of both plans, incentive options may be issued at an
exercise price not less than the estimated fair market value on the date of
grant. Generally, options granted vest ratably over a 60 month term.
In addition, the 1996 Stock Option Plan was amended and restated
effective May 28, 1999, to increase the number of shares of common stock
available for issuance from 1,900,000 to 2,900,000 and to permit non-employee
directors to participate in the 1996 Stock Option Plan. As a result of the
amendment, non-employee directors will receive options to purchase 5,000 shares
of Common Stock of the company on the 5th business day after each annual
shareholder meeting.
A summary of activity under the 1996 and 1995 Option Plans is as follows:
Options Outstanding
---------------------------------------
Shares Weighted Average
Available Number Price
for Grant of Shares Per Share
1995 Stock Option Plan
Balance at December 31, 1997 - 887,396 $0.44
Options canceled/forfeited - (175,642) $0.44
Options exercised - (9,540) $0.44
------------------- -------------------- ------------------
Balance at December 31, 1998 - 702,214 $0.44
Options canceled/forfeited - (69,324) $0.44
Options exercised - (387,076) $0.44
------------------- -------------------- ------------------
Balance at December 31, 1999 - 245,814 $0.44
Options canceled/forfeited - (9,434) $0.44
Options exercised - (53,000) $0.44
------------------- -------------------- ------------------
Balance at December 31, 2000 - 183,380 $0.44
=================== ==================== ==================
1996 Stock Option Plan
Balance at December 31, 1997 1,183,800 716,200 $6.66
Options granted (1,544,255) 1,544,255 $1.03
Options canceled/forfeited 636,805 (636,805) $5.63
------------------- -------------------- ------------------
Balance at December 31, 1998 276,350 1,623,650 $1.55
Shares reserved 1,000,000 - -
Options granted (235,200) 235,200 $1.52
Options canceled/forfeited 316,310 (316,310) $1.20
Options exercised - (2,000) $0.91
------------------- -------------------- ------------------
Balance at December 31, 1999 1,357,460 1,540,540 $1.63
Options granted (1,067,500) 1,067,500 $1.15
Options canceled/forfeited 693,970 (693,970) $1.16
Options exercised - (169,930) $0.98
------------------- -------------------- ------------------
------------------- -------------------- ------------------
Balance at December 31, 2000 983,930 1,744,140 $1.59
=================== ==================== ==================
A summary of stock options exercisable and stock options outstanding
under the 1996 Option Plan is as follows:
1996 Stock Option Plan
-------------------------------------------------------------------------------------------------------------------------
------------------- ----------------------------------------- -----------------------------------------------------------
Options Exercisable Options Outstanding
at December 31, 2000 At December 31, 2000
========================================= ===========================================================
----------------------------------------- ----------------------------------------------------------
-------------------- -------------------- -------------------- -------------------- -----------------
Weighted
Weighted Weighted Average
Range of Average Average Remaining
Exercise Number Price Number Price Contractual
Prices Exercisable Per Share Outstanding Per Share Life (years)
------------------- -------------------- -------------------- -------------------- -------------------- -----------------
------------------- -------------------- -------------------- -------------------- -------------------- -----------------
$0.50 - $0.94 236,960 $0.82 665,270 $0.79 8.1
$1.06 - $3.75 67,203 $3.11 972,695 $1.50 8.9
$6.75 - $7.38 63,705 $7.34 106,175 $7.34 6.0
-------------------- --------------------
$0.50 - $7.38 367,868 $2.36 1,744,140 $1.59 8.4
==================== ====================
9. Stockholder's Equity (continued)
The Company has recorded in 1996 and 1995 deferred compensation expense
totaling approximately $5,492,000 for the difference between the grant price and
the deemed fair value of certain of the Company's common stock options granted
under the 1995 Plan. During 1997, the Company adjusted the deferred compensation
expense to reflect actual compensation expense earned by terminated employees.
The Company continues to amortize the deferred compensation of the remaining
individuals still employed by the Company over the vesting period of the
individual's options. The vesting period for other options is generally 60
months. Amortization of deferred compensation in 2000, 1999, and 1998 totaled
approximately $102,000, $156,000, and $599,000, respectively.
During July 1998, independent of the 1995 and 1996 Incentive Stock
Option Plans and in connection with the employment of the President and Chief
Executive Officer of the Company, the Company issued an option to purchase
250,000 shares of Common Stock of the Company at an exercise price of $0.94 per
share. The exercise price equaled the estimated fair market value on the date of
grant and the vesting of this option was ratable over a 60 month term. The
President and Chief Executive Officer resigned on January 10, 2000 and the
option was terminated. Also in conjunction with the President and Chief
Executive Officer's resignation and the termination of his option to purchase
250,000 shares of Common Stock of the Company, the Company's Board of Directors
voted to accelerate the vesting of options granted under the 1996 Stock Option
Plan to purchase 50,000 shares of the Common Stock of the Company. All options
granted to the previous President and Chief Executive Officer were exercised in
2000.
Stock Warrants
In 1995, the Company formalized an agreement with a related party,
resulting from certain financing arrangements preceding the Initial Public
Offering, for the issuance of a stock warrant under which the party had the
right to purchase up to an aggregate of 6,666,340 shares of common stock at a
purchase price of approximately $.0001 per share. The agreement also specified
that the warrant could be exercised in whole or in part at any time prior to
December 31, 2015 only if, absent prior written regulatory approval, after
giving effect of such exercise, the party beneficially owns less than five
percent of the outstanding shares of the Company's common stock. During 1997 the
party obtained written regulatory approval to exercise the warrant in its
entirety. The warrant is not transferable without regulatory approval. On
December 31, 1997 and December 28, 1995, the party exercised portions of the
warrant and acquired 2,400,000 and 795,000 shares of Common Stock, respectively.
In March 2001, the party exercised the remainder of the warrant and acquired
3,471,340 shares of the Company's common stock.
Common Stock Purchase Agreement
On September 26, 2000, the Company entered into a common stock purchase
agreement. Under the agreement, the company may sell, periodically in monthly
installments during a period of 18 months, up to 6,000,000 shares of the
Company's 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 is not
permitted to sell any shares until it has registered such shares for resale by
the investor under the Securities Act of 1933. Under the agreement, the Company
issued to the investor a three-year warrant to acquire 720,000 shares of the
Company's common stock at a price equal to 115% of the average closing price of
the stock at the time of issuance. The Company ascribed no value to the
warrants. In addition, any time the Company sells any shares of stock under the
agreement, it would be required to issue to the investor a 35-day warrant to
acquire 25% of the number of shares sold. The warrants would be exercisable at
the average purchase price paid by the investor for such shares. Initially the
amount of capital the Company could raise under the common stock purchase
agreement during any month was not less than $250,000 or more than the lesser of
$1,000,000, or 4.5% of the product of the daily volume-weighted average stock
price during the three-month period prior to a drawdown request and the total
trading volume in the Company's stock during the same three-month period. In
March 2001, the minimum drawdown request was reduced to $100,000. At December
31, 2000, the Company would not have been able to sell any shares of its
stock under the equity line agreement.
10. Acquisition
On May 7, 1997 the Company acquired the assets of Buy American, Inc. and
Project Freedom, Inc., two related companies, for aggregate consideration
consisting of $300,000 in cash and issuance of 259,460 shares of restricted
common stock. The acquisition was accounted for as a purchase. The results of
operations of Buy American, Inc. and Project Freedom, Inc. are included in the
consolidated financial statements from the date of acquisition.
The restricted common stock issued in association with the acquisition was
subject to a call option by the Company and put option by the sellers. The
Company had a single option to repurchase any or all shares of restricted common
stock at a price of $5.78 per share. The sellers of Buy American, Inc. and
Project Freedom, Inc. had a single option to sell any or all the shares of
restricted common stock to the Company at a price of $3.47 per share. In April
1999, the Company and sellers of Buy American, Inc. and Project Freedom, Inc.
cancelled the call and put options.
11. Leases
The Company has noncancelable operating leases for the rental of its
offices and ALM assembly operations. Future minimum lease payments under these
leases at December 31, 2000 are $422,214 payable in 2001.
In 2000, 1999, and 1998 the Company incurred rent expense, including
rent associated with cancelable rental agreements, of approximately $519,000,
$903,000, and $915,000, respectively. Additionally, in 1999 the Company recorded
approximately $449,000 for excess rent capacity as other operating expense.
12. Income Taxes
As of December 31, 2000, the Company had federal and state net
operating loss carryforwards of approximately $58,606,000. The net operating
loss carryforwards will begin to expire in 2009, if not utilized.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities consisted of the
following:
December 31,
2000 1999
--------------------- --------------------
Deferred tax assets:
Net operating loss carryforwards $ 21,859,900 $ 19,493,400
Intangible Assets 668,400 81,800
Inventory valuation reserve 458,000 639,300
Writedown of property and equipment 411,300 -
Other 9,400 292,300
--------------------- --------------------
Total deferred tax assets 23,407,000 20,506,800
--------------------- --------------------
Deferred tax liabilities:
Capitalized software costs (111,600) (447,200)
Depreciation (47,200) (154,900)
Other (30,900) (113,300)
--------------------- --------------------
--------------------- --------------------
Total deferred tax liabilities (189,700) (715,400)
--------------------- --------------------
Less: Valuation allowance (23,217,300) (19,791,400)
--------------------- --------------------
Total net deferred taxes $ - $ -
===================== ====================
The Company has recorded a valuation allowance for the full amount of
its net deferred tax assets as of December 31, 2000 and 1999, based on
management's evaluation of the evidential recognition requirements under the
criteria of SFAS 109. The main component of the evidential recognition
requirements was the Company's cumulative pretax losses since inception. The
provision for income taxes at the Company's effective rate did not differ from
the provision for income taxes at the statutory rate for 2000, 1999, and 1998.
13. Segment Information
The Company conducts its business within one industry segment -
financial services technology. To date, all revenues generated have been from
transactions with North American customers. One customer accounted for 36%, 35%
and 49% of revenues in 2000, 1999, and 1998, respectively. All other segment
disclosures required by SFAS 131 are included in the consolidated financial
statements or in the notes to the consolidated financial statements.
14. Other Related Party Transactions
The Company had leased ALMs to a bank which held warrants to acquire
shares of common stock of the Company. See Note 9. The Company had installed and
otherwise delivered a number of ALMs on behalf of the bank during 1996 and 1995.
In 1998, pursuant to a termination agreement executed between the bank and the
Company, amounts due the Company totaling approximately $505,000 were settled in
consideration of a $50,000 payment and the return of the ALMs to the Company.
The amount due the Company was charged to the allowance for doubtful accounts of
as of December 31, 1998. The bank also provided financing for the Company in the
form of an unsecured loan preceding the Initial Public Offering and provided
lease financing for a small portion of ALM hardware.
During February 1998, Surety entered into an agreement with Resource
Bancshares Mortgage Group, Inc. ("RBMG"), pursuant to which the Company will
underwrite and process mortgage loans in accordance with guidelines specified by
RBMG. The Company receives a fee from RBMG for the underwriting and processing
services performed. A member of the Company's Board of Directors served as the
Chairman and Chief Executive Officer of RBMG until December 1999. During 1999
and 1998, the Company processed and sold to RBMG approximately $12,369,000 and
$18,300,000, respectively, in mortgage loans resulting in approximately $286,000
and $330,000, respectively, in revenue for the Company.
15. Commitments and Contingent Liabilities
As of December 31, 2000 Surety had approximately $10,279,000 in
commitments outstanding to originate and sell mortgage loans. Commitments to
originate mortgage loans represent mortgage loan applications where the borrower
has locked in the interest rate. Commitments to sell mortgage loans to investors
represent optional commitments to sell mortgage loans at a future date and at a
specified price.
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 arose
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.
The 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 January 2001, the Company settled its lawsuit with Dime
through mediation, a provision of which was the release of Hudson from further
legal action by the Company.
16. Quarterly Results of Operations (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------ -------------------- -------------------- ------------------
------------------ -------------------- -------------------- ------------------
Year ended December
31, 2000
Net sales $ 353,117 $ 679,261 $ 446,352 $ 676,783
Gross Profit 241,790 455,292 350,567 550,536
Net loss (1,811,159) (1,505,263) (1,552,311) (4,334,363)
Net loss per share -
basic and diluted (0.06) (0.05) (0.05) (0.14)
Year ended December
31, 1999
Net sales $ 325,959 $ 1,168,352 $ 879,581 $ 501,009
Gross Profit 156,131 137,676 30,618 288,008
Net loss (2,453,711) (2,512,132) (3,305,997) (3,822,796)
Net loss per share -
basic and diluted (0.08) (0.08) (0.11) (0.13)
The sum of net loss per share for the first through fourth quarters of
1999 differs from the annual results due to the effect of rounding quarterly
results.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Officers of the Registrant
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held on May 23, 2001 under the captions "Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance," which are incorporated by reference
herein.
Item 11. Executive Compensation
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held on May 23, 2001 under the caption "Executive Compensation", which is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held on May 23, 2001 under the caption "Security Ownership of Management and
Certain Beneficial Owners," which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held on May 23, 2001 under the caption "Certain Transactions" which is
incorporated by reference herein.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following consolidated financial statements of Affinity
Technology Group, Inc. and subsidiaries included in this Annual Report on
Form 10-K are included in Item 8.
i. Consolidated Balance Sheets as of December 31, 2000 and
1999.
ii. Consolidated Statement of Operations for the years ended
December 31, 2000, 1999, and 1998.
iii. Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999, and 1998.
iv. Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998.
v. Notes to the Consolidated Financial Statements for the
years ended December 31, 2000, 1999, and 1998.
(2) Schedule II - Valuation and Qualifying Accounts
No other financial statement schedules are to be filed with
this Annual Report on Form 10-K due to the absence of the conditions
under which they are required or because the required information is
included within the consolidated financial statements or the notes
thereto included herein.
(3) Exhibits:
Exhibit Number Description
- --------------------- ------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Affinity Technology Group, Inc., which is hereby incorporated
by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
3.2 Bylaws of Affinity Technology Group, Inc., which is hereby incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc.
(File No. 333-1170).
4.1 Specimen Certificate of Common Stock which is hereby incorporated by reference to Exhibit 4.1
to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No.
333-1170).
4.2 Warrant to Purchase Common Stock of Affinity Technology Group, Inc. dated November 8, 1995,
for the purchase, subject to certain conditions, of up to 6,666,340 shares of Common Stock,
which is hereby incorporated by reference to Exhibit 4.7 to the Registration Statement on
Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170).
4.3 Sections 4, 7 and 8 of the Certificate of Incorporation of Affinity Technology Group, Inc., as
amended, and Article II, Sections 3, 9, and 10 of the By-laws of Affinity Technology Group,
Inc., as amended, which are incorporated by reference to Exhibits 3.1 and 3.2, respectively.
4.4 Common Stock Purchase Agreement, dated as of June 2, 2000, between Affinity Technology Group,
Inc., and Redmond Fund, Inc., which is hereby incorporated by reference to Exhibit 4.4 to
the Registration Statement on Form S-3 of Affinity technology Group, Inc. (File No.
333-41898).
4.5 Form of Common Stock Purchase Warrant issued by Affinity Technology Group, Inc., to Redmond
Fund, Inc., which is hereby incorporated by reference to Exhibit 4.5 to the Registration
Statement of From S-3 of Affinity Technology Group, Inc. (File No. 333-41898)
4.6 Convertible Debenture and Warrants Purchase Agreement, dated as of September 22, 2000, between
Affinity Technology Group, Inc., to AMRO International, S. A., which is hereby incorporated
by reference to Exhibit 4.8 to the Registration Statement Form S-2 of Affinity Technology
Group, Inc. (File No. 333-48176)
4.7 Form of 8% Convertible Debenture issued by Affinity Technology Group, Inc., to AMRO
International, S. A., which is hereby incorporated by reference to Exhibit 4.9 to the
Registration Statement on Form S-2 of Affinity Technology Group, Inc. (File No. 333-48176).
4.8 Form of Stock Purchase Warrant issued by Affinity Technology Group, Inc., to AMRO
International, S. A., which is hereby incorporated by reference to Exhibit 4.10 to the
Registration Statement on Form S-2 of Affinity Technology Group, Inc. (File No. 333-48176).
4.9 Registration Rights Agreement, dated as of September 22, 2000, between Affinity Technology
Group, Inc., and AMRO International, S.A., which is hereby incorporated by reference to
Exhibit 4.11 to the Registration Statement Form S-2 of Affinity Technology Group, Inc. (File
No. 333-48176).
4.10 Form of Stock Purchase Warrant issued by Affinity Technology Group, Inc., to Cardinal
Securities, LLC, which is hereby incorporated by reference to Exhibit 4.12 to the
Registration Statement Form S-2 of Affinity Technology Group, Inc. (File No. 333-48176).
10.1* Form of Stock Option Agreement (1995 Stock Option Plan), which is hereby incorporated by
reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.2* Form of Stock Option Agreement (1996 Stock Option Plan), which is hereby incorporated by
reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.3* Form of Stock Option Agreement (Directors' Stock Option Plan), which is hereby incorporated by
reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.4* 1995 Stock Option Plan of Affinity Technology Group, Inc., which is hereby incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Affinity Technology
Group, Inc. (File No. 333-1170).
10.5* Amended and Restated 1996 Stock Option Plan of Affinity Technology Group, Inc., which is
hereby incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
10.6* Non-Employee Directors' Stock Option Plan of Affinity Technology Group, Inc., which is hereby
incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of
Affinity Technology Group, Inc. (File No. 333-1170).
10.7 Stock Rights Agreement, dated October 20, 1995, between Affinity Technology Group, Inc. and
certain investors, which is hereby incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170).
10.8* Declaration of First Amendment to 1995 Stock Option Plan of Affinity Technology Group, Inc.
21 Subsidiaries of Affinity Technology Group, Inc.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K filed in the 4th quarter of 2000:
The Registrant did not file any Current Reports on Form 8-K during the
last fiscal quarter of the period covered by this report.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are filed herewith
and incorporated by reference herein. The response to this portion of Item 14 is
submitted under Item 14(a) (3).
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted under Item
14(a)(2).
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
Date: March 30, 2001 By: /s/ Joseph A. Boyle
-----------------------------------------
Joseph A. Boyle
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
----------------------------------- --------------------------------------------------- ---------------------
/s/ Joseph A. Boyle March 30, 2001
-----------------------------------
Joseph A. Boyle Chairman, President, Chief Executive and Chief
Financial Officer and Director
(principal executive and financial officer)
/s/ Alan H. Fishman March 30, 2001
-----------------------------------
Alan H. Fishman Director
/s/ Robert M. Price, Jr. March 30, 2001
-----------------------------------
Robert M. Price, Jr. Director
/s/ Edward J. Sebastian March 30, 2001
-----------------------------------
Edward J. Sebastian Director
/s/ Peter R. Wilson, Ph.D. March 30, 2001
-----------------------------------
Peter R. Wilson, Ph.D. Director
/s/ S. Sean Douglas March 30, 2001
-----------------------------------
S. Sean Douglas Vice President and Controller
(principal accounting officer)
Schedule II - Valuation and Qualifying Accounts
- ---------------------------------------- ----------------- ---------------------------------- ----------------- ------------------
COL. A COL. B. COL. C COL. D COL. E
- ---------------------------------------- ----------------- ---------------------------------- ----------------- ------------------
Additions
----------------------------------
--------------- ------------------
Balance at Charged to Charged to Other
Beginning of Costs and Accounts - Deductions-DescribeBalance at End
Description Period Expenses Describe of Period
- ---------------------------------------- ----------------- --------------- ------------------ ----------------- ------------------
YEAR ENDED DECEMBER 31, 2000
Reserves and allowances deducted
From asset accounts:
Allowance for doubtful
accounts $ 105,076 $ 60,000 $ - $ 155,609 (1) $ 9,467
Reserve for inventory
obsolescence 1,713,986 120,000 - 606,058 (2) 1,227,928
YEAR ENDED DECEMBER 31,
1999
Reserves and allowances deducted from asset accounts:
Allowance for doubtful
accounts $ 45,513 $ 60,000 $ - $ 437 (1) $ 105,076
Reserve for inventory
obsolescence 1,095,698 694,940 - 76,652 (2) 1,713,986
YEAR ENDED DECEMBER 31,
1998
Reserves and allowances deducted from asset accounts:
Allowance for doubtful $ 400,120 $ 370,000 $ - $ 724,607 (1) $ 45,513
accounts
Reserve for inventory 173,007 1,060,000 - $ 137,309 (2) 1,095,698
obsolescence
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete parts written off.
Exhibit Index
Exhibit Number Description
- ------------------------ ------------------------------------------------------
21 Subsidiaries of Affinity Technology Group, Inc.
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
Exhibit 21 - Subsidiaries of Affinity Technology Group, Inc.
Name Jurisdiction of Incorporation Percent Owned
Affinity Bank Technology Corporation Delaware, USA 100%
Affinity Clearinghouse Corporation Delaware, USA 100%
Affinity Credit Corporation Delaware, USA 100%
Affinity Processing Corporation Delaware, USA 100%
Affinity Mortgage Technology Corporation Delaware, USA 100%
decisioning.com, inc. Delaware, USA 100%
Multi Financial Services, Inc. Delaware, USA 100%
Surety Mortgage, Inc. Delaware, USA 100%
Palmetto Mortgage Loans L.L.C. South Carolina, USA 51%
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-10435) pertaining to the Affinity Technology Group, Inc. 1995 Stock
Option Plan, 1996 Stock Option and the Non-Employee Directors' Stock Option
Plan, of our report dated March 30, 2001, with respect to the consolidated
financial statements and schedule of Affinity Technology Group, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 2000.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
March 30, 2001