SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1122 Lady Street, Suite 1145
Columbia, SC 29201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
40,881,355 shares of Common Stock, $0.0001 par value, as of August 1, 2002.
1
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001.................................................................................... 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001............................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001............................................................................... 5
Notes to Condensed Consolidated Financial Statements...................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................ 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................... 13
ITEM 2. Changes in Securities and Use of Proceeds............................................................ 13
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 14
ITEM 6. Exhibits and Reports on Form 8-K................................................................... 14
Signature....................................................................................................... 14
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30,
2002 December 31,
(Unaudited) 2001
------------------------------ -----------------------------
Assets
Current assets:
Cash and cash equivalents $ 459,682 $ 27,720
Receivables, less allowance for doubtful
accounts of $16,601 and $10,601 at June 30, 2002
and December 31, 2001, respectively 17,522 459,107
Inventories 70,379 100,379
Other current assets 30,114 114,490
------------------------------ -----------------------------
Total current assets 577,697 701,696
Property and equipment, net 137,849 182,918
Software development costs, less accumulated
amortization of $709,004 and $670,858 at
June 30, 2002 and December 31, 2001, respectively 1,969 40,114
Other assets 2,493 2,929
------------------------------ -----------------------------
Total assets $ 720,008 $ 927,657
============================== =============================
Liabilities and stockholders'
(deficiency) equity
Current liabilities:
Accounts payable $ 83,650 $ 139,758
Accrued expenses 177,050 219,371
Convertible debenture - 225,090
------------------------------ -----------------------------
Total current liabilities 260,700 584,219
------------------------------ -----------------------------
Convertible notes 830,336 -
------------------------------ -----------------------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized
60,000,000 shares, issued 43,049,363 and
42,399,363 shares at June 30, 2002 and
December 31, 2001, respectively 4,305 4,240
Additional paid-in capital 70,441,149 70,386,464
Common stock warrants 52,000 52,000
Treasury stock, at cost (2,168,008
shares at June 30, 2002 and December 31, 2001) (3,505,287) (3,505,287)
Accumulated deficit (67,363,195) (66,593,979)
------------------------------ -----------------------------
Total stockholders' (deficiency) equity (371,028) 343,438
------------------------------ -----------------------------
Total liabilities and stockholders' equity $ 720,008 $ 927,657
============================== =============================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---------------------- ----------------------- --------------------- ---------------------
Revenues:
Transactions $ 33,532 $ 68,274 $ 94,363 $ 143,652
Professional services - 20,772 - 20,772
Other income 5,760 25,851 14,190 727,079
---------------------- ----------------------- -- --------------------- ---------------------
Total revenue 39,292 114,897 108,553 891,503
Costs and expenses:
Cost of revenues 4,650 10,955 12,612 26,844
Research and development - 156,752 - 314,484
Selling, general and
administrative expenses 385,527 635,693 830,286 1,959,369
---------------------- ----------------------- --------------------- ---------------------
Total costs and expenses 390,177 803,400 842,898 2,300,697
---------------------- ----------------------- --------------------- ---------------------
Operating loss (350,885) (688,503) (734,345) (1,409,194)
Interest income - 2,164 - 9,281
Interest expense (16,752) (30,786) (34,871) (66,300)
---------------------- ----------------------- --------------------- ---------------------
Loss from continuing operations $ (367,637) $ (717,125) $ (769,216) $ (1,466,213)
Income from operations
of discontinued subsidiary - 26,928 - 46,609
Net loss $ (367,637) $ (690,197) $ (769,216) $ (1,419,604)
====================== ======================= ===================== =====================
Loss per share - basic and diluted:
Continuing operations $ (0.01) $ (0.02) (0.02) (0.04)
====================== ======================= ===================== =====================
Net loss per share $ (0.01) $ (0.02) (0.02) (0.04)
====================== ======================= ===================== =====================
Shares used in
computing net loss per share 40,775,860 38,549,511 40,529,974 35,739,907
====================== ======================= ===================== =====================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2002 2001
---------------------- ----------------------
Operating activities
Net loss $ (769,216) $ (1,419,604)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 92,934 435,238
Amortization of deferred compensation - 31,804
Provision for doubtful accounts 6,000 30,000
Inventory valuation allowance 30,000 60,000
Deferred revenue - (362,631)
Other 63,986 13,853
Changes in current assets and liabilities:
Accounts receivable 435,585 871,002
Net investment in sales-type leases - 102,896
Inventories - 11,895
Other current assets 84,376 117,147
Accounts payable and accrued expenses (93,922) (69,205)
---------------------- ----------------------
Net cash used in operating activities (150,257) (177,605)
Investing activities
Purchases of property and equipment, net (4,044) (79,949)
---------------------- ----------------------
Net cash used in investing activities (4,044) (79,949)
Financing activities
Proceeds from convertible notes 625,000 -
Proceeds from notes payable - 11,974,391
Payments on notes payable (38,737) (12,295,674)
Exercise of warrants - 347
---------------------- ----------------------
Net cash provided by (used in) financing activities 586,263 (320,936)
---------------------- ----------------------
Net increase (decrease) in cash 431,962 (578,490)
Cash and cash equivalents at beginning of period 27,720 646,198
---------------------- ----------------------
Cash and cash equivalents at end of period $ 459,682 $ 67,708
====================== ======================
See accompanying notes.
5
Notes to Condensed Consolidated Financial Statements
1. Going Concern
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. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
The Company is evaluating alternatives to secure sufficient
additional working capital to continue its business activities through 2003 and
beyond. Pursuant to its capital-raising initiatives, the Company sold certain
convertible secured notes as more fully discussed in Note 6 - Convertible Notes.
Such alternatives include the placement of additional debt and/or equity
securities and the possible sale of certain assets.
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. However, management believes that any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts of liabilities would not be material to the Company's financial
position.
2. Basis of Presentation
The accompanying unaudited financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 2001 has been derived
from the audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal, recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the periods shown. The results of operations for such periods
are not necessarily indicative of the results expected for the full year or for
any future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 2001.
In accordance with management's oversight of the Company's
operations, the Company conducts its business in one industry segment -
financial services technology (see Note 7).
Certain amounts in 2001 have been reclassified to conform to 2002
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
6
3. Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
------------------------------ ----------------------------
Electronic parts and other components $ 312,164 $ 312,164
Work in process 28,784 28,784
Finished goods 744,324 744,324
------------------------------ ----------------------------
1,085,272 1,085,272
Reserve for obsolescence (1,014,893) (984,893)
------------------------------ ----------------------------
$ 70,379 $ 100,379
============================== ============================
4. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of
the consolidated statements of operations have been computed based on the
weighted average number of shares of Common Stock outstanding in accordance with
the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Stock warrants and stock options were
not included in the calculation of diluted loss per share because the Company
has experienced operating losses in all periods presented and, therefore, the
effect would be anti-dilutive.
5. Convertible Debenture
On September 22, 2000, the Company entered into a convertible
debenture and warrants purchase agreement with AMRO International, S.A.
("AMRO"). The agreement was amended in August 2001 as described below. Under the
original agreement, on November 22, 2000 the Company issued to AMRO an 8%
convertible debenture in the principal amount of $1,000,000. The debenture was
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. Under the original agreement, the debenture matured on May 22, 2002,
subject to earlier conversion and certain provisions regarding acceleration upon
default and prepayment. Under the original 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 was $0.3542 per share.
AMRO has exercised a portion of the debenture into an aggregate of 6,214,655
shares of the Company's stock.
In August 2001, the Company and AMRO amended the convertible
debenture and warrants purchase agreement. Under the terms of the amendment, the
Company agreed to repay the debenture in full in a series of monthly payments
through June 2002, and AMRO agreed not to convert the debenture into any
additional shares of the Company's common stock. In addition, the Company agreed
to reduce the exercise price of the warrant issued to AMRO from $0.3542 per
share to $0.05 per share, and to reduce the exercise price for a warrant to
acquire 720,000 shares issued to the investor for the Company's equity line
agreement from $0.8554 per share to $0.05 per share. The effect of such warrant
repricing was not material to the Company's financial statements. AMRO's
agreement to refrain from converting the debenture into additional shares of the
Company's common stock was subject to the Company's payment of amounts under the
debenture in accordance with the amendment. The amendment required the Company
to use 25% of the net proceeds of any debt or equity financing to repay amounts
outstanding under the debenture, and to repay the debenture in full if the
Company entered into a merger, consolidation or sale of all or substantially all
of its assets. The outstanding principal and interest under the debenture as of
the date it was amended was $703,435.
7
In June 2002, the Company issued to AMRO an 8% convertible secured
note in the principal amount of $205,336 in full satisfaction of amounts
outstanding under its convertible debenture. The terms of the 8% convertible
secured notes are more fully discussed in Note 6. - Convertible Notes.
6. Convertible Notes
In June 2002, the Company issued convertible secured notes (the
"notes") to certain investors as part of its capital-raising initiatives. The
principal amount of notes issued totaled $830,336 and included the issuance of a
note to AMRO in satisfaction of the remaining principal and accrued interest of
the Company's convertible debenture previously issued to AMRO as discussed
above. The notes bear interest at 8% and principal and accrued interest are due
in June 2004. The notes are secured by the stock of the Company's wholly-owned
subsidiary, Decisioning.com, Inc. Decisioning.com is the Company's patent
licensing subsidiary and owns the Company's patent portfolio. The notes are
convertible into the Company's common stock at a conversion rate of $.20 per
share. The Company may prepay the notes subject to a prepayment penalty of 8%
and 4% if the prepayment occurs within the first twelve months or thereafter,
respectively.
7. 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. All other segment disclosures
required by SFAS 131 are included in the consolidated financial statements or in
the notes to the consolidated financial statements.
8. Commitments and Contingencies
The Company is subject to legal actions which from time to time have
arisen in the ordinary course of business. In addition, a claim was filed by a
plaintiff who claimed certain rights, damages and interests incidental to the
Company's formation and development. The claim resulted in a jury verdict of
$68,000 in favor of the plaintiff and the plaintiff subsequently requested, and
was granted, a new trial. The Company appealed the grant of a new trial. In May
2002 the South Carolina Appeals Court upheld the lower court's decision to grant
the plaintiff a new trial. In the opinion of management, the Company has
meritorious defenses to these claims.
On March 29, 2001, Citibank, N.A. filed a lawsuit against the Company
in the New York Federal Court seeking a declaratory judgment releasing Citibank,
N.A. from any obligation to the Company for amounts the Company has billed to
Citibank, N.A. under the Company's prior contract to develop a system to process
automobile loans for Citibank, N.A. Citibank, N.A. ultimately transferred this
contract to The Dime Savings Bank of New York. Citibank, N.A.'s lawsuit against
the Company was dismissed on January 8, 2002. Citibank, N.A. has appealed the
Court's decision. On July 19, 2001, the Company filed a lawsuit against
Citibank, N.A. in the Federal Court in South Carolina seeking to collect certain
amounts it believes it is due under the terms of the aforementioned contract.
Citibank, N.A. petitioned the court to dismiss the Company's lawsuit, and in May
2002 the court dismissed the Company's lawsuit pending the completion of certain
mandatory dispute resolution requirements of the contract. The Company and
Citibank, N.A. have subsequently refiled their respective lawsuits.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report (including Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
descriptions of historical facts, such as statements about the Company's future
prospects and cash requirements, are forward-looking statements and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Actual results may vary due to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, unanticipated
costs and expenses affecting the Company's cash position and other factors
discussed in the Company's filings with the Securities and Exchange Commission,
including the information set forth under the caption "Business Risks" in Item 1
of the Company's Annual Report on Form 10-K for the year ended December 31,
2001. These and other factors may cause actual results to differ materially from
those anticipated.
Overview
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) loan 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.
Due to capital constraints, the Company has suspended efforts to
deploy its products and services that utilize DeciSys/RT(R), including the
Affinity Automated Loan Machine (the ALM(R)), the Mortgage ALM, the e-xpert(R)
Lender system, iDEAL and rtDS. With the exception of one loan processing
contract that will expire in October 2002, the Company has suspended all of its
loan processing operations. Currently, the Company is exploring ways to license
certain of its patents.
In June 2002, the Company issued convertible secured notes (the
"notes") to certain investors as part of its capital-raising initiatives. The
principal amount of the notes issued totaled $830,336 and included the issuance
of a note in the principal amount of $205,336 to AMRO in satisfaction of the
remaining principal and accrued interest of the Company's convertible debenture
previously issued to AMRO as discussed under "Liquidity and Capital Resources."
The notes bear interest at 8% and principal and accrued interest are due in June
2004. The notes are secured by the stock of the Company's wholly-owned
subsidiary, Decisioning.com, Inc. Decisioning.com is the Company's patent
licensing subsidiary and owns the Company's patent portfolio. The notes are
convertible into the Company's common stock at a conversion rate of $.20 per
share. The Company may prepay the notes subject to a prepayment penalty of 8%
and 4% if the prepayment occurs within the first twelve months or thereafter,
respectively.
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. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
9
The Company is evaluating alternatives to secure sufficient
additional working capital to continue its business activities through 2003 and
beyond. Pursuant to its capital-raising initiatives, the Company sold certain
convertible secured notes as more fully discussed above. Such alternatives
include the placement of additional debt and/or equity securities and the
possible sale of certain assets.
The Company has been granted two patents covering its fully-automated
loan processing systems (U. S. Patents No. 5,870,721 and 5,940,811). In
addition, in 1997 the Company acquired a patent that covers the automated
processing of an insurance binder through a kiosk (U. S. Patent No. 5,537,315).
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).
Both of the Company's patents covering fully-automated loan
processing systems are being reexamined by the U.S. Patent and Trademark Office
(the "PTO") due to challenges to such patents by third parties. In March 2000,
August 2000 and January 2001, the PTO issued preliminary office actions
rejecting all previously issued claims under the Company's first patent covering
fully-automated loan processing systems. It is possible that third parties may
bring additional actions to contest all or some of the Company's patents. The
Company can make no assurances that it will not lose all or some of the claims
covered by its existing patents.
The Company's patents are specific to the e-commerce businesses of
the financial services industry and generally cover the automated establishment
of loans, financial accounts and credit accounts using specific e-commerce
related systems, processes and methods. The market for products and services
that enable e-commerce is highly competitive, rapidly developing and subject to
rapid change and technological development, 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 which
enable e-commerce. Moreover, competitors in the e-commerce market have
frequently taken different strategic approaches and have launched substantially
different products and services to exploit the same perceived market
opportunities.
The Company's patents cover specific systems, processes and methods
to establish certain accounts associated with the financial services industry.
There can be no assurance that new products will not be developed and widely
accepted by the e-commerce market that will render obsolete the systems,
processes and methods over which the Company believes it has intellectual
property rights. Moreover, the delivery of products and services through
e-commerce channels is not fully developed, and competition from traditional
channels to deliver these same products and services is intense. Any wide-scale
rejection of e-commerce channels by consumers will have a material adverse
effect on the Company's business, operating results and financial position.
Results of Operations
Revenues
The Company's revenues from continuing operations for the three and
six months ended June 30, 2002, were $39,292 and $108,553, respectively,
compared to $114,897 and $891,503 for the corresponding periods of 2001.
Transaction Fees. Revenues from transaction fees were $33,532 and
$94,363, respectively, for the three and six months ended June 30, 2002,
compared to $68,274 and $143,652 for the corresponding periods in 2001. The
decrease during the three and six months ended June 30, 2002, as compared to the
same periods in 2001 is due to the processing of fewer transactions by the
Company's only remaining customer which uses the Company's ASP services. The
Company expects that such agreement will be terminated in October 2002.
Professional Services. The Company recognized no professional
services revenue in the first six months of 2002. Professional services revenue
for the three and six months ended June 30, 2001, was $20,772. The Company
previously performed professional services pursuant to specific contracts with
certain of its customers. Such services usually involved developing or enhancing
systems for the Company's customers. The Company recognized professional
services revenues when it completed its obligations under the specific terms of
the contract. Professional services performed by the Company were performed as
needed or requested by the Company's customers and are not recurring in nature.
10
Other Income. Other income generally consists of miscellaneous
revenue typically associated with ancillary fees that are non-recurring in
nature. Other income recognized for the three and six months ended June 30,
2002, was $5,760 and $14,190, respectively, compared to $25,851 and $727,079 for
the corresponding period in 2001. The decrease in other income for the three
months ended June 30, 2002, compared to the corresponding period in 2001 was
primarily due to the continued curtailment of the Company's business activities.
The decrease in other income in the six month period ended June 30, 2002,
compared to the corresponding period in 2001 was primarily associated with the
settlement of a lawsuit in January 2001, which represented the majority of other
income recognized in the first quarter of 2001.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and six months ended
June 30, 2002 was $4,650 and $12,612, respectively, compared to $10,955 and
$26,844 for the corresponding periods in 2001. The decrease during the three and
six months ended June 30, 2002 as compared to the same periods in 2001 is
attributable to a decrease in the costs associated with processing fewer
transactions through the Company's DeciSys/RT system.
Research and Development. Costs incurred for research and development
for the three and six months ended June 30, 2001, totaled $156,752 and $314,484,
respectively. The Company has elected to stop further research and development
activities in conjunction with its decision to suspend the marketing and sales
of its loan processing products and services. Accordingly, the Company
recognized no research and development expenses in the first six months of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses associated with continuing operations totaled $385,527
and $830,286, respectively, for the three and six months ended June 30, 2002, as
compared to $635,693 and $1,959,369 for the corresponding periods in 2001. The
decrease for the three and six months ended June 30, 2002, as compared to the
corresponding periods of 2001 is primarily attributable to a decrease in
employment and related costs associated with an overall reduction in the number
of employees and reduced overall expense levels.
Interest Income. The Company recognizes interest income from its cash
and investment balances and accretion of discount associated with sales-type ALM
leases. Interest income for the three and six months ended June 30, 2001 was
$2,164 and $9,281, respectively. No interest income was recognized in the first
six months of 2002.
Interest Expense. The Company incurs interest expense on its
convertible debenture which it placed in late 2000 and its convertible notes
issued in June 2002. Interest expense for the three and six months ended June
30, 2002 was $16,752 and $34,871, respectively, compared to $30,786 and $66,300
in the corresponding periods in 2001. The decrease was due to the reduction in
the balance outstanding of its convertible debenture.
Liquidity and Capital Resources
The Company has generated net losses of $67,363,195 since its
inception and has financed its operations primarily through net proceeds from
its initial public offering in May 1996 and cash generated from operations and
other financing transactions. 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 issued a $1 million convertible debenture.
In 2001 the Company issued a $1 million note to HomeGold, and on December 31,
2001, the Company tendered the stock of Surety Mortgage, Inc., in full
satisfaction of outstanding principal and accrued interest under the note. In
June 2002, the Company also issued $830,336 in principal amount of secured
convertible notes.
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. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
11
In June 2002, the Company issued convertible secured notes (the
"notes") to certain investors as part of its capital raising initiatives. The
principal amount of notes issued totaled $830,336 and included the issuance of a
note in the principal amount of $205,336 to AMRO in satisfaction of the
remaining principal and accrued interest of the Company's convertible debenture
previously issued to AMRO. The notes bear interest at 8% and principal and
accrued interest are due in June 2004. The notes are secured by the stock of the
Company's wholly-owned subsidiary, Decisioning.com, Inc. Decisioning.com is the
Company's patent licensing subsidiary and owns the Company's patent portfolio.
The notes are convertible into the Company's common stock at a conversion rate
of $.20 per share. The Company may prepay the notes subject to a prepayment
penalty of 8% and 4% if the prepayment occurs within the first twelve months or
thereafter, respectively.
In the second quarter of 2001, the Company issued a $1 million note
to HomeGold Financial, Inc., which was secured by the stock of its wholly-owned
mortgage subsidiary, Surety Mortgage, Inc. The note matured on December 31,
2001, at which time the Company tendered the stock of Surety in full
satisfaction of outstanding principal and accrued interest under the note. The
Company had previously entered into a contract with HomeGold under which it
processed certain mortgage loan applications originated by HomeGold. Such
contract expired on December 31, 2001.
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.
On September 22, 2000, the Company entered into a convertible
debenture and warrants purchase agreement with AMRO International, S.A. The
agreement was amended in August 2001 as described below. Under the original
agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture was 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.
Under the original agreement, the debenture matured on May 22, 2002, subject to
earlier conversion and certain provisions regarding acceleration upon default
and prepayment. Under the original 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 was originally $0.3542 per
share. AMRO has exercised a portion of the debenture into an aggregate of
6,214,655 shares of the Company's stock.
In August 2001, the Company and AMRO amended the convertible
debenture and warrants purchase agreement. Under the terms of the amendment, the
Company agreed to repay the debenture in full in a series of monthly payments
through June 2002, and AMRO agreed not to convert the debenture into any
additional shares of the Company's common stock. In addition, the Company agreed
to reduce the exercise price of the warrant issued to AMRO from $0.3542 per
share to $0.05 per share. AMRO's agreement to refrain from converting the
debenture into additional shares of the Company's common stock was subject to
the Company's payment of amounts under the debenture in accordance with the
amendment. The amendment required the Company to use 25% of the net proceeds of
any debt or equity financing to repay amounts outstanding under the debenture,
and to repay the debenture in full if the Company entered into a merger,
consolidation or sale of all or substantially all of its assets.
In June 2002, the Company issued to AMRO an 8% convertible secured
note in the principal amount of $205,336 in full satisfaction of amounts
outstanding under its convertible debenture. The terms of the 8% convertible
secured notes are discussed above.
Net cash used during the six months ended June 30, 2002, to fund
operations was approximately $150,000 compared to approximately $178,000 for the
same period in 2001. At June 30, 2002, cash and liquid investments were
$459,682, as compared to $27,720 at December 31, 2001. At June 30, 2002 working
capital was $316,997 as compared to $117,477 at December 31, 2001.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that its current business operations
expose it to significant market risk for changes in interest rates.
Part II. Other Information
Items 3 and 5 are not applicable.
Item 1. Legal Proceedings
On March 29, 2001, Citibank, N.A. filed a lawsuit against the Company
in the New York Federal Court seeking a declaratory judgment releasing Citibank,
N.A. from any obligation to the Company for amounts the Company has billed to
Citibank, N.A. under the Company's prior contract to develop a system to process
automobile loans for Citibank, N.A. Citibank, N.A. ultimately transferred this
contract to The Dime Savings Bank of New York. Citibank, N.A.'s lawsuit against
the Company was dismissed on January 8, 2002. Citibank, N.A. has appealed the
Court's decision. On July 19, 2001, the Company filed a lawsuit against
Citibank, N.A. in the Federal Court in South Carolina seeking to collect certain
amounts it believes it is due under the terms of the aforementioned contract.
Citibank, N.A. petitioned the court to dismiss the Company's lawsuit, and in May
2002 the court dismissed the Company's lawsuit pending the completion of certain
mandatory dispute resolution requirements of the contract. The Company and
Citibank, N.A. have subsequently refiled their respective lawsuits.
Item 2. Changes in Securities and Use of Proceeds
(c) On March 20, 2002, the Company issued 500,000 shares of its
common stock to Joseph A. Boyle, President and Chief Executive
Officer of the Company, in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933. The shares were issued in consideration of Mr. Boyle's
agreement to forego his cash compensation for six months.
On June 3, 2002, the Company issued 150,000 shares of its common
stock to a group of individuals including Wade H. Britt III, a
Director of the Company, in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933. The shares were issued in consideration of the
individuals' efforts in securing investors for the Company's
convertible note offering in June 2002.
On June 3, 2002, the Company issued $830,336 principal amount of
its convertible secured notes to a group of accredited investors
in a transaction exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
13
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Stockholders of Affinity Technology Group,
Inc. was held on May 30, 2002 (the "Annual Meeting"). At the Annual Meeting,
Joseph A. Boyle, Wade H. Britt III, Robert M. Price, and Peter R. Wilson were
duly elected to the Board of Directors of the Company. The selection of Scott
McElveen LLP as independent auditors for the year ending December 31, 2002 was
also ratified. Votes cast by the stockholders of the Company at the Annual
Meeting are as follows:
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Joseph A. Boyle 37,945,873 503,148 -
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Wade H. Britt III 37,618,473 830,548 -
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Robert M. Price 37,725,798 723,223 -
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Peter R. Wilson 37,959,173 489,848 -
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Ratification of the selection of Scott McElveen LLP
- -------------------------------------------------------------------------------------------------------------------------
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
38,247,049 114,913 87,059 -
- ----------------------------------------------- ------------------------------ ---------------------- -------------------
Item 6. Exhibits and Reports on Form 8-K
(a) 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 Form of Convertible Note Purchase Agreement dated June 3,
2002, between Affinity Technology Group, Inc., and certain
investors.
10.1* Form of Restricted Stock Agreement between Affinity
Technology Group, Inc., and Joseph A. Boyle.
10.2* Form of Stock Agreement between Affinity Technology Group,
Inc., and Wade H. Britt III.
99.1 Certification Pursuant to 18 U. S. C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Denotes a Management or Director contract or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
Joseph A. Boyle
Chairman, President, Chief Executive Officer and Chief Financial Officer
(principal executive and financial officer)
Date: August 14, 2002
14
Exhibit Index
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 Form of Convertible Note Purchase Agreement dated June 3,
2002, between Affinity Technology Group, Inc., and certain
investors.
10.1* Form of Restricted Stock Agreement between Affinity
Technology Group, Inc., and Joseph A. Boyle.
10.2* Form of Stock Agreement between Affinity Technology Group,
Inc., and Wade H. Britt III.
99.1 Certification Pursuant to 18 U. S. C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Denotes a Management or Director contract or arrangement.
15
Exhibit 4.1
AFFINITY TECHNOLOGY GROUP, INC.
CONVERTIBLE NOTE PURCHASE AGREEMENT
THIS CONVERTIBLE NOTE PURCHASE AGREEMENT (this "Agreement") is made
and entered into this 3rd day of June, 2002, by and among Affinity Technology
Group, Inc., a Delaware corporation (the "Company"), and each of the investors
identified on Schedule 1 attached hereto (collectively, the "Purchasers").
WHEREAS, the Company desires to enter into this Agreement with the
Purchasers to sell and issue up to $1,500,000 principal amount of its 8%
convertible secured notes (the "Notes") in substantially the form attached
hereto as Exhibit A; and
WHEREAS, the obligations under the Notes issued from time to time
under this Agreement shall be secured by a security interest in the Company's
equity interest in decisioning.com, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company ("decisioning.com"), pursuant to the
Security Agreement, in substantially the form attached hereto as Exhibit B (the
"Security Agreement"), to be entered into between the Company and the Purchasers
at Closing; and
WHEREAS, the Purchasers desire to enter into this Agreement to
acquire the Notes in the respective amounts set forth on Schedule 1 attached
hereto on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the Notes and the Security Agreement, the parties to this Agreement
mutually agree as follows:
1. AUTHORIZATION AND SALE.
1.1 Authorization. The Company has authorized the
issuance and sale of the Notes to the Purchasers. The Purchasers acknowledge and
agree that the maturity date of any Note issued under this Agreement shall be no
earlier than the first anniversary and no later than the second anniversary of
the date of issuance of such Notes, as such maturity dates shall be set forth on
Schedule 1.
1.2 Sale. Subject to the terms and conditions
hereof, each Purchaser agrees separately (and not jointly) to purchase from the
Company, and the Company agrees to sell and issue to each Purchaser, a Note in
the principal amount and with the maturity date as set forth next to each
Purchaser's name on Schedule 1 hereto at the respective purchase price set forth
opposite such Purchaser's name on Schedule 1. Each Purchaser shall pay such
purchase price by check or wire transfer of immediately available funds to an
account designated in writing by the Company.
2. CLOSING; DELIVERY.
2.1 Initial Closing. The initial closing of the
purchase and sale of the Notes under this Agreement shall take place at the
offices of the Company, 1122 Lady Street, Suite 1145, Columbia, South Carolina
29201, on June 3, 2002 (the "Initial Closing"), or at such other time and date
as the parties may agree in writing.
2.2 Subsequent Closings. Following the Initial
Closing, the Company may issue and sell additional Notes under this Agreement,
on the terms set forth in this Agreement, provided that the aggregate principal
amount of all Notes issued by the Company at the Initial Closing and each
subsequent closing (a "Subsequent Closing" and, together with the Initial
Closing, the "Closing") shall not exceed $1,500,000. Schedule 1 to this
Agreement and the Security Agreement shall be amended and restated at each
Subsequent Closing to reflect the Notes issued to each Purchaser under this
Agreement. Any Notes issued by the Company at a Subsequent Closing shall be
considered "Notes" for all purposes of this Agreement, and each additional
Purchaser shall be a "Purchaser" for all purposes of this Agreement.
Notwithstanding the foregoing, the Company shall not issue any Notes if an Event
of Default shall have occurred and be continuing under any Note. For purposes of
the immediately preceding sentence, an "Event of Default" shall have the meaning
given to such term in each respective Note.
16
2.3 Delivery. At the Closing, subject to the terms
and conditions hereof, the Company will deliver to the Purchasers the Notes (as
set forth on Schedule 1 hereto) and the Security Agreement, each duly executed
by the Company and dated the date of the Closing, and such other certificates,
consents, waivers and agreements as are reasonably requested by any Purchaser
(together with this Agreement and the Security Agreement, collectively the
"Transaction Documents"), against payment of the purchase price therefor payable
as of the date of such Closing by check or wire transfer. At the Closing, each
Purchaser shall deliver to the Company the Security Agreement, duly executed by
such Purchaser and dated as of the date of Closing.
2.4 Conditions to Closing. Each Purchaser's
obligation to purchase, and the Company's obligation to sell, the Notes at the
Closing is subject to the Purchasers having received a certificate, dated as of
the Closing Date, of the President of the Company certifying that the board of
directors of the Company has authorized the transactions contemplated by this
Agreement and that the Certificate of Incorporation and Bylaws of the Company
attached thereto are true, complete and correct.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers as follows:
3.1 Organization and Good Standing. Each of the
Company and its subsidiaries is a corporation duly organized and validly
existing under the laws of Delaware. Each of the Company and its subsidiaries
has all requisite corporate power and authority necessary to conduct its
business as it is now being conducted and as proposed to be conducted and to own
or lease the properties and assets it now owns or holds under lease, and is duly
qualified and in good standing as a foreign corporation in each jurisdiction
where the failure to qualify would have a material adverse effect upon its
operations or financial condition. The Company owns all the issued and
outstanding capital stock of decisioning.com, and no other person, firm or
entity has an equity interest in decisioning.com.
3.2 Capital Stock. The authorized capital stock of
the Company consists of 60,000,000 shares of common stock, par value $.0001 per
share ("Common Stock"), and 5,000,000 shares of preferred stock, par value
$.0001 per share ("Preferred Stock"). As of the close of business on May 1,
2002, (i) 40,731,355 shares of Common Stock were issued and outstanding, (ii)
2,856,690 shares of Common Stock were reserved for issuance upon exercise of
options granted by the Company under the Company's stock option plans, (iii)
1,439,848 shares of Common Stock were reserved for issuance upon exercise of
warrants issued by the Company to certain investors and (iv) no shares of
Preferred Stock were issued and outstanding. Except as set forth in the
immediately preceding sentence or in the SEC Reports (as defined below), as of
May 1, 2002, there was outstanding (i) no shares of capital stock or other
voting securities of the Company, (ii) no securities of the Company convertible
into or exchangeable for shares of capital stock or voting securities of the
Company, and (iii) no options, warrants or other rights to acquire from the
Company, and no subscriptions or other rights, convertible securities,
agreements, arrangements or commitments of any character, obligating the Company
to issue, transfer or sell any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company or obligating the Company to grant, extend or enter into any such
option, warrant, subscription or other right, convertible security, agreement,
arrangement or commitment, other than under this Agreement and the Notes issued
hereunder. All of the Company's outstanding securities have been duly and
validly authorized and issued and are fully paid and nonassessable. The shares
of Common Stock that may be issued upon conversion of the Notes are duly
authorized and, when issued in accordance with the terms of the Notes, will be
validly issued, fully paid and nonassessable.
3.3 Authorization. The Company has the full
corporate power and authority to enter into this Agreement and each of the
Transaction Documents and to perform all of its obligations contemplated
hereunder and thereunder. The execution, delivery and performance of this
Agreement and each of the Transaction Documents to which the Company is a party
have been duly authorized by all necessary corporate action, and this Agreement
and each of the Transaction Documents constitutes (or will constitute, upon
execution thereof) a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules and laws governing specific performance, injunctive relief and other
equitable remedies. No further authorization on the part of the Company, its
board of directors or its stockholders is necessary to consummate the
transactions contemplated by this Agreement or any of the Transaction Documents.
Except for any filings required by federal or state securities laws that have
been or will be made by the Company, no consent, approval, authorization or
order of, or declaration by, filing or registration with, any court or
governmental or regulatory agency or board is or will be required in connection
with the execution and delivery of this Agreement and the Transaction Documents
and the consummation of the transactions contemplated hereby or thereby.
17
3.4 SEC Reports; Financial Statements. The Company
has furnished to the Purchasers the Company's proxy statement, dated as of April
30, 2002, with respect to its 2002 annual meeting of stockholders (the "Proxy
Statement"), annual report on Form 10-K for the year ended December 31, 2001
(the "Form 10-K"), and quarterly report on Form 10-Q for the quarter ended March
31, 2002 (together with the Proxy Statement and the Form 10-K, the "SEC
Reports"), which contain, among other things, the Company's 2001 audited
consolidated financial statements and interim unaudited consolidated condensed
financial statements for the quarter ended March 31, 2002 (collectively, the
"Financial Statements"). The Financial Statements consist of the consolidated
statements of operations, stockholders' equity and cash flows of the Company for
each of the three years in the period ended December 31, 2001, the consolidated
balance sheet of the Company as of December 31, 2001, the condensed consolidated
statements of operations and cash flows for the three months ended March 31,
2002 and March 31, 2001, and the condensed consolidated balance sheet as of
March 31, 2002 (the "Balance Sheet"). As of its filing date, each SEC Document
complied in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended, and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Financial Statements (a) are in accordance with the books
and records of the Company, (b) have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied (subject, in the
case of interim financial statements, to normal recurring year-end adjustments
and the absence of notes), and (c) fairly present the financial position of the
Company as of the respective dates thereof, and the results of operations and
cash flows for each of the periods presented.
3.5 Absence of Undisclosed Liabilities. Except as
disclosed in the SEC Reports, neither the Company nor any of its subsidiaries
has any liabilities or obligations (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due) other than (a)
liabilities or obligations reserved against or otherwise disclosed in the
Balance Sheet, or (b) other liabilities or obligations (including accounts
payable, accrued expenses, wages and salaries) that were incurred after the date
of the Balance Sheet in the ordinary course of business consistent with past
practice.
3.6 Absence of Material Changes. Except as disclosed
in the SEC Reports, since the date of the Balance Sheet, the Company and its
subsidiaries have conducted their business in the ordinary course, consistent
with past practice, and there has not been (a) any material adverse change in
the condition (financial or otherwise), results of operations, business, assets,
or liabilities of the Company or any subsidiary, individually or taken together
as a whole, or any event or condition which would have such a material adverse
change, (b) any waiver or cancellation of any right of the Company or any
subsidiary to the extent such waiver or cancellation has had or would have a
material adverse effect on the condition (financial or otherwise) results of
operations, business or assets of the Company or any subsidiary, or the
cancellation of any material debt or claim held by the Company or any
subsidiary, (c) any encumbrances upon the assets of the Company or any
subsidiary, other than a Permitted Lien (as defined in Section 5(c)(ii) hereof),
(d) any sale, assignment or transfer of any tangible or intangible assets of the
Company or any subsidiary, except in the ordinary course of business, (e) any
loan by the Company or any subsidiary to any officer, director, employee,
consultant or shareholder of the Company or any subsidiary (other than advances
to such persons in the ordinary course of business in connection with bona fide
business expenses), (f) any damage, destruction or loss (whether or not covered
by insurance) materially and adversely affecting the assets, property, financial
condition or results of operations of the Company or any subsidiary,
individually and taken as a whole, (g) any change in the accounting methods,
practices or policies of the Company or any subsidiary, (h) any indebtedness
incurred for borrowed money by the Company or any subsidiary, other than under
this Agreement, (i) any default that has not been waived or material adverse
amendment or premature termination of any material contract of the Company or
any subsidiary or (j) any agreement or commitment (contingent or otherwise) by
the Company or any subsidiary to do any of the foregoing.
18
3.7 Title to Properties and Assets; Liens, Etc. The
Company and each of its subsidiaries has good and marketable title to its
properties and assets, including the properties and assets reflected in the
Balance Sheet, and good title to its leasehold estates, in each case subject to
no mortgage, pledge, lien, lease, encumbrance or charge, other than Permitted
Liens. All facilities, equipment, fixtures, and other properties owned, leased
or used by the Company and its subsidiaries are in reasonable operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used. The Company and each of its subsidiaries are in
substantial compliance with all material terms of each lease to which they are
parties or otherwise bound.
3.8 Tax Matters. The Company and its subsidiaries
have filed all tax returns that they are required to file pursuant to any
applicable law, and all such returns are complete and correct in all material
respects. The Company and its subsidiaries have paid all taxes due and owing by
them and have withheld and paid over all taxes which they are obligated to
withhold from amounts paid or owing to any employee, partner, creditor or other
third party. Neither the Company nor any subsidiary has waived any statute of
limitations with respect to taxes or agreed to any extension of time with
respect to a tax assessment or deficiency. The federal income tax returns of the
Company and its subsidiaries have never been audited, no federal, state or local
tax audits are pending or being conducted with respect to the Company or any of
its subsidiaries, no information related to tax matters has been requested by
any federal, state or local taxing authority, and no notice indicating an intent
to open an audit or other review has been received by the Company or any of its
subsidiaries from any federal, state or local taxing authority.
3.9 Compliance with Law and Other Instruments. To the
Company's knowledge, the Company and its subsidiaries have complied in all
material respects with, and are not in material violation of, any and all
statutes, laws, regulations, decrees and orders of the United States and of all
states, municipalities and agencies applicable to the Company, its subsidiaries
or the conduct of their respective businesses. Upon consummation of this
Agreement, neither the Company nor any of its subsidiaries will be in default in
any material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, promissory note, indenture, loan
agreement or other material contract to which it is a party or by which its
properties are bound. Neither the issuance of the Notes, or the execution and
delivery of this Agreement and the Transaction Documents nor the consummation of
the transactions contemplated herein or therein, will (i) conflict with,
constitute a breach of, constitute a default under, or an event which, with
notice or lapse of time or both, would be a breach of or default under, the
respective certificates of incorporation or bylaws of the Company or any of its
subsidiaries, (ii) conflict with or constitute a breach of, constitute a default
under, or an event which, with notice or lapse of time or both would be a breach
of or default under, any agreement, indenture, mortgage, deed of trust or other
instrument or undertaking to which the Company or any of its subsidiaries is a
party or by which any of its properties are bound which would have a material
adverse effect on the Company's business, (iii) constitute a violation of any
law, regulation, judgment, order or decree applicable to the Company or any of
its subsidiaries, (iv) result in the creation or imposition of any lien or
material charge or encumbrance upon any property of the Company or any of its
subsidiaries, other than under the Security Agreement, or (v) permit any party
to terminate any agreement to which the Company or any of its subsidiaries is a
party or beneficiary thereto which would have a material adverse effect on the
Company's business.
3.10 Litigation. Except as disclosed in the SEC
Reports, there is no litigation or governmental proceeding or investigation
pending or, to the Company's knowledge, threatened against or affecting the
Company or any of its subsidiaries, which would reasonably be expected to result
in any judgment or liability which would materially and adversely affect any of
the property and assets of the Company or any of its subsidiaries, or the right
of the Company or any of its subsidiaries to conduct its or their businesses as
now conducted or as proposed to be conducted.
3.11 Intellectual Property. Except as disclosed in the
SEC Reports, the Company and its subsidiaries own or possess sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information and other intellectual property and proprietary
rights and processes (collectively, "Intellectual Property") used in their
business as now conducted and as presently proposed to be conducted, without any
known infringement of the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business as presently proposed, would violate any of the patents, trademarks,
service marks, trade names, copyrights, trade secrets or other proprietary
rights of any other person or entity. The Company has transferred and assigned
all of its rights under the following patents to decisioning.com: U.S. Patent
No. 5870721 ("System and Method for Real Time Loan Approval"); U.S. Patent No.
5940811 ("Closed Loop Financial Transaction Method and Apparatus"); and U.S.
Patent No. 6105007 ("Automatic Financial Account Processing System")
(collectively, the "Patents").
19
3.12 Disclosure. Neither this Agreement nor any of the
Transaction Documents contains any untrue statement of any material fact, or
omits to state any material fact that is necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, complete and not misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby severally represents and warrants to the
Company as follows:
4.1 Purchase for Own Account. Such Purchaser is
acquiring the Notes and the securities into which they may be converted for its
own account, for investment and not with a view to or in connection with any
distribution or resale thereof. Such Purchaser does not have any contract,
understanding, agreement or arrangement with any person to sell or transfer the
Notes or the securities into which they may be converted.
4.2 Restrictions on Transfer. Such Purchaser
understands that (a) neither the Notes nor any securities issuable upon
conversion thereof has been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or the securities laws of any jurisdiction and
(b) the economic risk of an investment in the Notes must be borne for an
indefinite period of time because neither the Notes nor the securities into
which they may be converted may be sold or otherwise transferred unless
subsequently registered under the Securities Act or an exemption from
registration under the Securities Act is or becomes available.
4.3 Knowledge of the Purchaser. Such Purchaser (a)
is knowledgeable with respect to the financial, tax and business aspects of
ownership of the Notes and the securities into which they may be converted and
of the business of the Company and (b) can bear the economic risk of an
investment in the Notes including the complete loss thereof. By virtue of his or
its own knowledge and experience in financial and business matters, such
Purchaser is capable of evaluating the merits and risks of making this
investment. Such Purchaser is an "accredited investor" within the meaning of
Rule 501(a) of Regulation D promulgated under the Securities Act.
4.4 Power and Authority. Such Purchaser has the
requisite power and authority to enter into this Agreement, to purchase the
Notes and to carry out and perform his or its obligations under the terms of
this Agreement. The execution, delivery and performance by such Purchaser of
this Agreement and the other Transaction Documents to which such Purchaser is a
party do not contravene the terms of such Purchaser's organizational documents
and do not violate, conflict with or result in any breach or contravention of
any contract or agreement of such Purchaser or constitute a violation of any
law, regulation, judgment, order or decree applicable to such Purchaser
4.5 Due Execution. This Agreement has been duly
authorized, executed and delivered by such Purchaser and, upon due execution and
delivery by the Company, will be a valid and binding agreement of such
Purchaser, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules and laws governing specific
performance, injunctive relief and other equitable remedies.
5. COVENANTS. Until the date that any amounts due under the
Notes are no longer outstanding:
(a) The Company and each of its subsidiaries will maintain true books
and records of account in which full and correct entries will be made
of all its business transactions pursuant to a system of accounting
established and administered in accordance with GAAP consistently
applied, and will set aside on its books all such proper accruals and
reserves as shall be required under GAAP consistently applied.
(b) The Company will furnish the Purchasers, promptly upon request,
such information about the business, condition (financial or
otherwise) or operations of the Company and its subsidiaries as the
Purchasers may from time to time reasonably request, provided that
the requested information is reasonably available to the Company or
can be easily obtained and provided further that each requesting
Purchaser shall have entered into a confidentiality agreement with
the Company in form and substance reasonably satisfactory to the
Company.
(c) The Company shall not, and shall not permit any of its
subsidiaries to, directly or indirectly, take any of the following
actions without first obtaining the approval of Purchasers holding at
least a majority of the aggregate principal balance of all Notes then
outstanding:
20
(i) create, incur, or assume any indebtedness for
money borrowed in excess of $500,000 in the aggregate by
the Company or any of its subsidiaries other than
indebtedness pursuant to this Agreement;
(ii) mortgage, encumber, create, or incur liens
on the assets of the Company or any of its subsidiaries,
other than (A) under this Agreement and the Security
Agreement, (B) liens incurred in the ordinary course of
business, (C) liens in favor of carriers, warehousemen,
mechanics, landlords and materialmen and other similar
persons that are incurred in the ordinary course of
business for sums not yet due and payable; (D) liens for
current taxes incurred in the ordinary course of business
that are not delinquent or remain payable without any
penalty or are being contested in good faith by appropriate
proceedings; (E) statutory liens of banks and statutory
rights of set-off; (F) as to any leased assets or
properties, rights of the lessors thereof, including liens
evidenced by the filing, for notice purposes only, of
financing statements in respect of true leases; (G) liens
incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance or other
forms of governmental insurance or benefits, or to secure
the performance of letters of credit, bids, tenders,
statutory obligations, surety and appeal bonds, leases,
government contracts and other similar obligations (other
than obligations for borrowed money) entered into in the
ordinary course of business; and (H) liens and encumbrances
that do not materially detract from the value of the
property subject thereto or materially impair the
operations of the Company and its subsidiaries
(collectively, "Permitted Liens");
(iii) pay, or set aside any sums for the payment
of, any distributions or dividends on the equity securities
of the Company, or repurchase or otherwise acquire any of
the Company's outstanding equity securities, other than in
connection with the termination of an employee's employment
with the Company or any of its subsidiaries;
(iv) cause decisioning.com to convey, distribute,
assign or transfer the Patents to the Company or any
affiliate thereof; or
(v) agree or otherwise commit to take any of the
actions set forth in the foregoing clauses (i) through
(iv).
(d) In case any one or more of the covenants and/or
agreements set forth in this Agreement or the Transaction Documents
shall have been breached by any party hereto, the Purchasers, with
respect to a breach by the Company, and the Company, with respect to
a breach by the Purchasers, may proceed to protect and enforce his or
its rights either by suit in equity or by action at law or by both,
including but not limited to an action for damages as a result of any
such breach or an action for specific performance of any such
covenant or agreement contained in the Transaction Documents.
7. MISCELLANEOUS.
7.1 Entire Agreement; Effectiveness. This Agreement
and the documents referred to herein constitute the entire agreement among the
parties with respect to the subject matter hereof, and no party shall be liable
or bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth herein or therein. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
7.2 Governing Law. This Agreement shall be governed
by and construed under the laws of the State of South Carolina, without regard
to the conflicts of laws provisions of the State of South Carolina or any other
state.
21
7.3 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
7.4 Headings. The headings used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.5 Notices. Any notice required or permitted under
this Agreement shall be given in writing and shall be deemed effectively given
upon personal delivery, after three business days following deposit with the
United States Post Office, postage prepaid, or after one business day if sent by
confirmed telecopy, addressed:
(a) If to the Company: Affinity Technology Group, Inc.
1122 Lady Street, Suite 1145
Columbia, South Carolina 29201
Attn: Joseph A. Boyle
President and Chief Executive Officer
Facsimile: (803) 758-2560
or at such other address as the Company shall have furnished to the Purchasers
in writing; and
(b) If to any Purchaser, the address set forth on Schedule 1 attached
hereto or at such other address as such Purchaser shall have furnished to the
Company in writing.
7.6 Severability. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
practicable, be modified so as to make it valid, legal and enforceable and to
retain as nearly as practicable the intent of the parties, and the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
7.7 Delays or Omissions. No delay or omission to
exercise any right, power or remedy accruing to the Company or the Purchasers
upon any breach, default or noncompliance of the Purchasers or the Company under
this Agreement shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on the part of the Company or the Purchasers
of any breach, default or noncompliance under this Agreement or any waiver on
the Company's or the Purchasers' part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing and that all remedies, whether under this
Agreement, by law, or otherwise afforded to the Company and the Purchasers,
shall be cumulative and not alternative.
7.8 Amendments and Waivers. Except as otherwise
expressly provided herein, any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely) with the written consent of the
Company and the Purchasers holding at least a majority of the principal amount
of all Notes then outstanding.
7.9 Survival of Covenants and Agreements,
Representations and Warranties. Except as expressly provided in Section 5, all
covenants and agreements contained herein or made in writing by the Company or
the Purchasers in connection with the transactions contemplated hereby shall
survive the execution and delivery of this Agreement, the Transaction Documents
and the Closing until the respective Purchaser ceases to own any Notes. All
warranties and representations contained herein shall survive for a period of
two years after the Closing.
7.10 Further Assurances. Prior to and after the
Closing, at the request of the Purchasers, the Company will take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
in doing, as the Purchasers may reasonably deem necessary or desirable, all
things necessary to consummate and make effective, in a practicable manner, the
Closing and the other transactions contemplated by this Agreement and the
Transaction Documents, including, without limitation, (a) the execution and
delivery of any additional waivers, consents, confirmations, agreements,
instruments or documents, or the taking of all actions, whether prior to or
after the Closing, necessary to issue and sell the Notes to the Purchasers and
(b) to otherwise carry out the purpose and intent of this Agreement and the
Transaction Documents.
22
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date of Closing.
THE COMPANY: AFFINITY TECHNOLOGY GROUP, INC.
a Delaware corporation
By:
------------------------------------
Joseph A. Boyle
President and Chief Executive Officer
[SIGNATURE PAGES FOR THE PURCHASERS FOLLOW THIS PAGE.]
23
PURCHASER SIGNATURE PAGE
Principal Amount of
Note Purchased: $
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
24
Schedule 1
Name and Address Principal Amount
of Purchaser of Note Acquired Purchase Price Maturity Date
- ---------------- ---------------- -------------- -------------
25
8% CONVERTIBLE SECURED NOTE
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
No. X US $XXXXXX
Affinity Technology Group, Inc.
8% CONVERTIBLE SECURED NOTE DUE JUNE XX, 2004
THIS NOTE is issued by Affinity Technology Group, Inc., a corporation
organized and existing under the laws of the State of Delaware (the "Company"),
and is designated as its 8% Convertible Secured Note Due June XX, 2004.
FOR VALUE RECEIVED, the Company promises to pay to XXX XXX, or his or
its permitted assigns (the "Holder"), the principal sum of XXXXX XXXXXXX and
00/100 Dollars ($XXX,XXX) plus interest on the principal sum outstanding from
time to time at the rate of 8% per annum on June XX, 2004 (the "Maturity Date").
Accrual of interest shall commence on the first day after the date of initial
issuance and continue until payment in full of the principal sum has been made
or duly provided for. If the Maturity Date is not a business day in the State of
South Carolina, then such payment shall be made on the next succeeding business
day. The delivery of a check shall constitute payment of principal and interest
hereunder and shall satisfy and discharge the liability for principal and
interest under this Note to the extent of the sum represented by such check plus
any amounts withheld in accordance with paragraph 1 below.
This Note is subject to the following additional provisions:
1. The Company shall be entitled to withhold from all payments of interest on
this Note any amounts required to be withheld under the applicable provisions of
federal and state income tax laws and other applicable laws at the time of such
payments, and the Holder shall execute and deliver all required documentation in
connection therewith.
2. This Note has been issued in reliance upon investment representations of the
original purchaser hereof and may be resold, transferred and disposed of only in
compliance with the Securities Act of 1933, as amended (the "Act"), and all
applicable state and foreign securities laws. The Holder shall deliver written
notice to the Company of any proposed transfer of this Note. In the event of any
proposed transfer of this Note, the Company may require, prior to issuance of a
new Note in the name of the transferee, that it receive reasonable transfer
documentation (including legal opinions) that the transfer of the Note will not
cause a violation of the Act or any applicable state or foreign securities laws.
Prior to due presentment for transfer of this Note, the Company and any agent of
the Company may treat the person in whose name this Note is duly registered on
the Company's Note Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this Note
be overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary. This Note has been executed and delivered pursuant to
the Convertible Note Purchase Agreement, dated as of June XX, 2002, between the
Company and the Purchasers named therein (the "Purchase Agreement"), and is
subject to the terms and conditions of the Purchase Agreement, which are, by
this reference, incorporated herein and made a part hereof. Capitalized terms
used and not otherwise defined herein shall have the meanings ascribed to them
in the Purchase Agreement.
26
3. The Holder of this Note is entitled, at its option, to convert, at any time
commencing on the date hereof, the principal amount of this Note or any portion
thereof into shares of Common Stock of the Company (the "Conversion Shares") at
a conversion price for each share of Common Stock (the "Conversion Price") equal
to $0.20 per share (subject to adjustment, as equitable, for stock splits, stock
dividends, reverse stock splits, recapitalizations and similar transactions). If
the Holder shall elect to convert all or a portion of the principal amount of
this Note, the Company shall, concurrently with such conversion, pay all accrued
and unpaid interest in respect of the principal amount of this Note being
converted. Payment of accrued and unpaid interest shall be made, at the
Company's option, (a) in cash in accordance with the terms of this Note or (b)
by converting such accrued and unpaid interest into Conversion Shares at the
Conversion Price.
4. The rate of interest on this Note shall be eight percent (8%), per annum, on
the outstanding principal until paid or converted. Subject to Section 3, the
Company shall pay accrued and unpaid interest in cash.
5. The Company may prepay principal and interest under this Note in whole or in
part at any time. The Company shall pay a prepayment fee of eight percent (8%)
of the principal amount being prepaid for any prepayments made during the first
year following the issuance of this Note, and the Company shall pay a prepayment
fee of four percent (4%) of the principal amount being prepaid for any
prepayments made during the second year following the issuance of this Note. The
Company shall give the Holder at least five (5) days' notice prior to the date
of prepayment of any portion of this Note (the "Prepayment Date") and shall
include in such notice the portion of the outstanding principal amount of this
Note that it intends to prepay pursuant to this Section 5. The Holder shall have
the right to convert the then outstanding principal amount of this Note (or any
portion hereof) into Conversion Shares in accordance with Section 3 of this Note
until the close of business on the business day immediately prior to any
Prepayment Date.
6. On the Maturity Date, the Company will pay the principal of and any accrued
but unpaid interest due upon this Note, less any amounts required by law to be
deducted, to the registered holder of this Note, and such payment shall be sent
to such holder at the last address appearing on the Note Register.
7. Conversion shall be effectuated by surrendering this Note to the Company
together with the form of conversion notice attached hereto as Exhibit A (the
"Notice of Conversion"), executed by the Holder, evidencing such Holder's
intention to convert this Note or a specified portion (as above provided)
hereof, and accompanied, if required by the Company, by proper assignment hereof
in blank. If this Note shall have been converted in part, the Company shall
deliver to the Holder a new Note evidencing the rights of the Holder to convert
the unconverted portion of this Note, which new Note shall in all other respects
be identical to this Note. Interest accrued or accruing from the date of
issuance to the date of conversion shall be paid as set forth above. No fraction
of a share or scrip representing a fraction of a share will be issued on
conversion, but the number of shares issuable shall be rounded to the nearest
whole share. The date on which Notice of Conversion is given (the "Conversion
Date") shall be deemed to be the date on which the Holder faxes the duly
executed Notice of Conversion to the Company. Facsimile delivery of the Notice
of Conversion shall be accepted by the Company at facsimile number (803)
758-2560, Attn: Joseph A. Boyle, President and Chief Executive Officer of the
Company. Certificates representing Common Stock issuable upon conversion will be
delivered to the Holder within five business days from the date the Notice of
Conversion is delivered to the Company. Delivery of shares upon conversion shall
be made to the address specified by the Holder in the Notice of Conversion.
8. No recourse shall be had for the payment of the principal of, or the interest
on, this Note, or for any claim based hereon, or otherwise in respect hereof,
against any shareholder, employee, officer or director, as such, past, present
or future, of the Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issue hereof, expressly waived and released.
27
9. In case of any (1) merger or consolidation of the Company into another
company, or (2) sale by the Company of all or substantially all the assets of
the Company in one or a series of related transactions, the Holder shall have
the right to (A) deem such an occurrence an Event of Default and exercise its
rights of prepayment pursuant to Section 12 herein, (B) convert its aggregate
principal amount of this Note then outstanding into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger, consolidation or sale, and the
Holder shall be entitled upon such event or series of related events to receive
such amount of securities, cash and property as the shares of Common Stock into
which such aggregate principal amount of this Note could have been converted
immediately prior to such merger, consolidation or sale would have been
entitled, or (C) in the case of a merger or consolidation, (x) require the
surviving entity to issue convertible Notes in such face amount, as the case may
be, equal to the aggregate principal amount of this Note then held by the
Holder, plus all accrued and unpaid interest and other amounts owing thereon,
which newly issued Notes shall have terms identical (including with respect to
conversion) to the terms of this Note and shall be entitled to all of the rights
and privileges of the Holder of this Note set forth, and (y) simultaneously with
the issuance of such convertible Notes, shall have the right to convert such
instrument only into shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger or consolidation. In the case of clause (C), the conversion price
applicable for the newly issued convertible Notes shall be based upon the amount
of securities, cash and property that each share of Common Stock would receive
in such transaction and the Conversion Price in effect immediately prior to the
effectiveness or closing date for such transaction. The terms of any such
merger, sale or consolidation shall include such terms so as to continue to give
the Holder the right to receive the securities, cash and property set forth in
this Section upon any conversion or redemption following such event. This
Section shall similarly apply to successive such events.
10. The Holder of this Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Note or the Conversion Shares issuable upon conversion
thereof except under circumstances which will not result in a violation of the
Act or any applicable state or foreign securities laws or similar laws relating
to the sale of securities.
11. This Note shall be governed by and construed in accordance with the laws of
the State of South Carolina. Each of the parties consents to the jurisdiction of
the federal courts whose districts encompass any part of the City of Columbia or
the state courts of the State of South Carolina sitting in the City of Columbia
in connection with any dispute arising under this Note and hereby waives, to the
maximum extent permitted by law, any objection, including any objection based on
forum non conveniens, to the bringing of any such proceeding in such
jurisdictions.
12. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest on this
Note and same shall continue for a period of ten (10) business days; or
b. There shall occur an Event of Default under any Note issued under the
Purchase Agreement that is not waived by the holder thereof; or
c. Any of the material representations or warranties made by the Company in
the Purchase Agreement shall be false or misleading in any material respect
at the time made; or
d. The Company shall fail to perform or observe, in any material respect, any
other material covenant, term, provision, condition, agreement or
obligation of the Company under the Purchase Agreement, the Security
Agreement executed in connection therewith or this Note and such failure
shall continue uncured for a period of thirty (30) days after written
notice from the Holder of such failure; or
e. The Company shall (1) admit in writing its inability to pay its debts
generally as they mature; (2) make an assignment for the benefit of
creditors or commence proceedings for its dissolution; or (3) apply for or
consent to the appointment of a trustee, liquidator or receiver for its or
for a substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the Company or for
a substantial part of its property or business without its consent and
shall not be discharged within one hundred and twenty days (120) after such
appointment; or
28
g. Any governmental agency or any court of competent jurisdiction, at the
instance of any governmental agency, shall assume custody or control of the
whole or any substantial portion of the properties or assets of the Company
and such action shall not be dismissed within one hundred and twenty days
(120) days thereafter; or
h. Any money judgment, writ or warrant of attachment, or similar process in
excess of Five Hundred Thousand Dollars ($500,000) in the aggregate shall
be entered against the Company or any of its properties or other assets and
shall remain unpaid, unvacated, unbonded or unstayed for a period of one
hundred and twenty days (120) days; or
i. Bankruptcy, reorganization, insolvency or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief
of debtors shall be instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within one hundred and twenty
days (120) days after such institution or the Company shall by any action
or answer approve of, consent to, or acquiesce in any such proceedings or
admit the material allegations of, or default in answering a petition filed
in, any such proceeding; or
j. There shall be a Change in Control of the Company. For such purposes, a
Change in Control shall be deemed to occur as of: (i) the date on which any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Securities Act of 1934, as amended (the "1934 Act") becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the 1934 Act)
of shares representing more than 25% of the combined voting power of the
then-outstanding securities entitled to vote generally in elections of
directors of the Company ("Voting Stock"); (ii) the date on which the
stockholders of the Company approve a definitive agreement under which the
Company will consolidate with or merge into any other corporation, or
convey, transfer or lease all or substantially all of its assets to any
person, or any other corporation will merge into the Company, and, in the
case of any such transaction, the outstanding Common Stock of the Company
will be converted into cash, securities or other property, unless the
stockholders of the Company immediately before such transaction own,
directly or indirectly immediately following such transaction, at least 51%
of the combined voting power of the outstanding securities of the
corporation resulting from such transaction in substantially the same
proportion as their ownership of the Voting Stock immediately before such
transaction; or (iii) the date on which there shall have been a change in a
majority of the Board of Directors of the Company within a 12-month period
unless the nomination for election of each new director was approved by the
vote of a majority of the directors then still in office who were in office
at the beginning of the 12-month period.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Note immediately due and payable, without presentment, demand, protest or notice
of any kind, all of which are hereby expressly waived, anything herein or in any
note or other instruments contained to the contrary notwithstanding, and the
Holder may immediately enforce any and all of the Holder's rights and remedies
provided herein or any other rights or remedies afforded by law.
13. Nothing contained in this Note shall be construed as conferring upon the
Holder the right to vote or to receive dividends or to consent or receive notice
as a stockholder in respect of any meeting of stockholders or any rights
whatsoever as a stockholder of the Company, unless and to the extent converted
in accordance with the terms hereof.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
29
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: June XX, 2002
AFFINITY TECHNOLOGY GROUP, INC.
By:
-------------------------------------
Joseph A. Boyle
President and Chief Executive Officer
Attest:
- ---------------------
30
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ______________ of
the principal amount of the above Note No. _____ into shares of Common Stock of
Affinity Technology Group, Inc. according to the terms hereof, as of the date
written below.
Date of Conversion
-------------------------------------------------------------
Signature
----------------------------------------------------------------------
[Name]
Address:
-----------------------------------------------------------------------
31
EXHIBIT B
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of the 3rd day of June, 2002 (the "Security
Agreement"), is made by and among Affinity Technology Group, Inc., a Delaware
corporation (the "Company"), whose address is 1122 Lady Street, Suite 1145,
Columbia, South Carolina 29201, and each of the investors identified on Schedule
1 attached hereto (collectively, the "Purchasers"). WHEREAS, the Company and the
Purchasers have entered into a Convertible Note Purchase Agreement, dated as of
June 3, 2002 (the "Note Purchase Agreement"), pursuant to which the Company has
issued and sold to the Purchasers its 8% convertible secured notes (the
"Notes"); and WHEREAS, to induce the Purchasers to enter into the Note Purchase
Agreement and acquire the Notes, the Company has agreed to enter into this
Security Agreement and to grant to the Purchasers a security interest in the
Collateral (as defined below); NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Purchasers hereby agree for themselves, their successors and
assigns, as follows:
DEFINITIONS
For purposes of this Security Agreement, in addition to the terms
defined elsewhere herein, the following terms shall have the meanings set forth
below: "Collateral" shall mean, collectively, the Company's interest in all
issued and outstanding shares (the "Shares") of common stock, par value $.001
per share, of decisioning.com, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company (the "Subsidiary"), together with all (a)
certificates, instruments and entries upon the books of the Subsidiary
evidencing the foregoing, (b) rights to receive interest, dividends,
distributions, returns of capital and other amounts in respect thereof, (c)
additional stock, warrants, options, securities, interests and other property
from time to time paid or payable or distributed and/or distributable in respect
thereof, and (d) all proceeds of any of the foregoing. For purposes of this
Security Agreement, the term "proceeds" shall mean and include all cash,
securities and other property for any nature received or receivable upon the
sale, exchange or other disposition of a realization upon any Collateral,
together with distributions in respect of any Collateral, including pursuant to
any liquidation, reorganization or similar proceeding with respect to the
Company or the Subsidiary. "Collateral Agent" shall mean XXX XXXX, a resident of
XXX, XXXXX, and a Purchaser under the Note Purchase Agreement. "Event of
Default" shall have the meaning given to such term in the Notes.
"Obligations" shall mean the Company's indebtedness and other obligations under
the Notes issued from time to time pursuant to the Note Purchase Agreement.
All terms in this Security Agreement that are not capitalized shall
have the meanings provided by the Uniform Commercial Code of South Carolina to
the extent the same are used or defined therein.
CREATION OF SECURITY INTEREST
To secure the prompt payment and other performance of the Obligations
under the Notes as issued from time to time under the Note Purchase Agreement,
the Company hereby grants, pledges, assigns and delivers to the Collateral
Agent, for the ratable benefit of the Purchasers, a security interest in the
Collateral.
The Company shall execute and deliver to the Collateral Agent,
concurrent with the execution of this Security Agreement, (a) all certificates
evidencing the Collateral, together with the endorsement of the Company and
undated stock powers or other necessary instruments of transfer or assignment,
duly executed in blank, (b) all related UCC financing statements, and (c) all
other documents or instruments as may, from time to time, be reasonably
necessary to fully carry out the intent of this Security Agreement in order to
perfect and maintain the security interest and lien created hereunder, as a
legal, valid, and binding security interest and lien upon the Collateral.
The Company does hereby irrevocably make, constitute and appoint the
Collateral Agent as the true and lawful attorney of the Company with power to,
upon the occurrence and during the continuance of an Event of Default, take or
bring at the Company's cost, in the Company's name or in the name of the
Purchasers, all steps, actions and suits deemed by the Collateral Agent and the
Purchasers to be necessary or desirable to effect foreclosure on, and
collections of, the Collateral. This power, being coupled with an interest, is
irrevocable so long as any of the Obligations remain unpaid.
32
Neither the Purchasers or the Collateral Agent nor their respective
attorneys will be liable for any act or omission nor for any error of judgment
or mistake of fact unless such act, omission, error or mistake shall occur as a
result of the willful misconduct of such persons.
appointment of COLLATERAL agent
Without in any way limiting the rights of the Purchasers hereunder or
otherwise, the Purchasers hereby appoint the Collateral Agent to hold the
Collateral and any and all certificates evidencing the Collateral for the
ratable benefit of all Purchasers hereunder. The Collateral Agent hereby accepts
such appointment and agrees to hold the Collateral and such certificates for the
ratable benefit of all Purchasers.
PRIORITY OF SECURITY INTERESTS
The Company warrants and represents that as to those assets for which
perfection may be accomplished by filing under the UCC, the security interests
granted to the Collateral Agent for the ratable benefit of the Purchasers
hereunder, when properly perfected by filing, shall constitute at all times a
valid and perfected security interest in and upon the Collateral vested in the
Collateral Agent for the ratable benefit of the Purchasers. The Company further
warrants and represents that the security interests in the Collateral granted
hereunder are not and hereinafter shall not become subordinate or junior to any
other security interests, liens or claims in the Collateral.
33
ARTICLE V
COVENANTS OF THE COMPANY
5.1 So long as no Event of Default shall have occurred and be
continuing, the Company may, in any lawful manner not inconsistent with the
provisions of this Security Agreement and the Note Purchase Agreement, use,
control and manage the Collateral in the operation of its business, and receive
and use the income, revenue and profits arising therefrom and the proceeds
thereof, in the same manner and with the same effect as if this Security
Agreement had not been made; provided, however, that without the written consent
of the Purchasers holding at least a majority of the aggregate principal balance
of all Notes then outstanding, the Company will not sell, assign or otherwise
dispose of, grant any option with respect to, or mortgage, pledge, grant any
lien with respect to or otherwise encumber any of the Collateral or any interest
therein, except for the security interest created in favor of the Collateral
Agent hereunder and except as may be otherwise expressly permitted in accordance
with the terms of this Security Agreement and the Note Purchase Agreement.
5.2 So long as no Event of Default shall have occurred and be
continuing, the Company shall be entitled to exercise all voting rights
pertaining to the Shares, and for that purpose the Collateral Agent will execute
and deliver or cause to be executed and delivered to the Company all such
proxies and other instruments as the Company may reasonably request in writing
to enable the Company to exercise such voting rights; provided, however, that
the Company will not cast any vote, give any consent, waiver or ratification, or
take or fail to take any action in any manner that would, or could reasonably be
expected to, violate or be inconsistent with any of the terms of this Security
Agreement or the Note Purchase Agreement, or have the effect of impairing the
position or interests of the Collateral Agent or any Purchaser.
5.3 So long as no Event of Default shall have occurred and be
continuing (or would occur as a result thereof), and except as provided
otherwise herein, all interest, income, dividends, distributions and other
amounts payable in cash in respect of the Shares may be paid to and retained by
the Company; provided, however, that all such interest, income, dividends,
distributions and other amounts shall, at all times after the occurrence and
during the continuance of an Event of Default, be paid to the Collateral Agent
for the ratable benefit of all the Purchasers and retained by it as part of the
Collateral. The Collateral Agent shall also be entitled at all times (whether or
not during the continuance of an Event of Default) to receive directly, and to
retain as part of the Collateral, (a) all interest, income, dividends,
distributions or other amounts paid or payable in cash or other property in
respect of the Shares in connection with the dissolution, liquidation,
recapitalization or reclassification of the capital of the Subsidiary to the
extent representing an extraordinary, liquidating or other distribution in
return of capital, (b) all additional equity interests or other securities or
property (other than cash) paid or payable or distributed or distributable in
respect of the Shares in connection with any noncash dividend, distribution,
return of capital, spin-off, stock split, split-up, reclassification,
combination of shares or similar rearrangement, and (c) without affecting any
restrictions against such actions contained in this Security Agreement, all
additional capital stock, equity interests or other securities or property
(including cash) paid or payable or distributed or distributable in respect of
the Shares in connection with any consolidation, merger, exchange of securities,
liquidation or other reorganization. All interest, income, dividends,
distributions or other amounts that are received by the Company in violation of
the provisions of this Section shall be received in trust for the benefit of the
Collateral Agent, shall be segregated from other property or funds of the
Company and shall be forthwith delivered to the Collateral Agent as Collateral
in the same form as so received (with any necessary endorsements).
5.4 If the Company shall, at any time and from time to time after
the date hereof, acquire any additional capital stock or other equity interests
in the Subsidiary, the same shall be automatically deemed to be Collateral, and
to be pledged to the Collateral Agent pursuant to Section 2.1, and the Company
will forthwith pledge and deposit the same with the Collateral Agent for the
ratable benefit of the Purchasers and deliver to the Collateral Agent any
certificates or instruments therefor, together with the endorsement of the
Company and undated stock powers or other necessary instruments of transfer or
assignment, duly executed in blank, to the Collateral Agent for the ratable
benefit of the Purchasers, together with such other certificates and instruments
as the Collateral Agent may reasonably request (including UCC financing
statements or appropriate amendments thereto).
5.5 Unless the Company shall have obtained the written consent of
the Purchasers holding at least a majority of the aggregate principal balance of
all Notes then outstanding:
34
(a) The Company will cause the Shares pledged by it hereunder to
constitute at all times 100% of the outstanding capital and equity interests in
the Subsidiary, such that the Subsidiary shall be a wholly-owned subsidiary of
the Company; and
(b) The Company will not cause or permit the Subsidiary to issue or
sell any new capital stock in the Subsidiary, any warrants, options or rights to
acquire any such capital stock, or other equity interests in the Subsidiary of
any nature to any person, firm or entity other than the Company, or cause,
permit or consent to the admission of any other person, firm or entity as a
stockholder, partner or member of the Subsidiary.
I
DEFAULT
6.1 Subject to the immediately succeeding sentence, if an Event of
Default shall have occurred and be continuing, the Purchasers shall have, in
addition to any other rights and remedies contained in this Security Agreement,
all the rights and remedies of a secured party under the Uniform Commercial
Code, and all other rights and remedies provided by law, all of which shall be
cumulative to the extent permitted by law. Upon the occurrence of an Event of
Default and at any time thereafter if such or any other Event of Default shall
then be continuing, the Purchasers, acting by the written consent of the
Purchasers holding at least two-thirds of the aggregate principal balance of all
Notes then outstanding, shall have the right without further notice to the
Company to settle, compromise or release, in whole or in part, any amounts owing
on the Collateral, to prosecute any action, suit or proceeding with respect to
the Collateral, to sell, assign and deliver the Collateral (or any part
thereof), at public or private sale, at broker's board, for cash, upon credit or
otherwise, at the Purchasers' sole option and discretion and the Purchasers may
bid or become purchasers at any such sale, if public, free from any right of
redemption, which is hereby expressly waived. The net cash proceeds resulting
from the exercise of any of the foregoing rights or remedies shall be applied by
the Purchasers to the payment of the Obligations in such order as the Purchasers
may elect, and the Company shall remain liable to the Purchasers for any
deficiency, together with interest thereon at the rate provided in the Notes,
and the cost and expenses of collection of such deficiency, including (to the
extent permitted by law), without limitation, attorneys' fees, expenses and
disbursements.
6.2 If at any time or times hereafter the Purchasers or the
Collateral Agent employ counsel for advice with respect to this Security
Agreement, or to intervene, file a petition, answer, motion or other pleading in
any suit or proceeding relating to this Security Agreement or relating to any
Collateral, or to protect, take possession of, or liquidate any Collateral, or
to attempt to enforce any security interest or lien in any Collateral, or to
represent the Purchasers in any pending or threatened litigation with respect to
the affairs of the Company in any way relating to any of the Collateral or to
the Obligations or to enforce any rights of the Purchasers or liabilities of the
Company, account debtors, or any other person, firm or corporation which may be
obligated to the Purchasers by virtue of this Security Agreement or any
instrument or document now or hereafter delivered to the Purchasers by or for
the benefit of the Company, then in any of such events, all of the attorneys'
fees arising from such services, and any expenses, costs and charges relating
thereto, shall become a part of the Obligations secured by the Collateral
payable on demand.
I
MISCELLANEOUS
7.1 The laws of the State of South Carolina shall govern this
Security Agreement.
7.2 All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered (a)
upon receipt, if delivered personally or by fax, or (b) three (3) days after
deposit in the United States mails with postage prepaid, and addressed to the
party to be notified as provided above, if sent by mail.
7.3 Except as otherwise expressly provided herein, any term of this
Security Agreement may be amended and the observance of any term of this
Security Agreement may be waived (either generally or in a particular instance,
either retroactively or prospectively and either for a specified period of time
or indefinitely) with the written consent of the Company and the Purchasers
holding at least a majority of the principal amount of all Notes then
outstanding.
7.4 The terms and conditions of this Security Agreement shall inure
to the benefit of and be binding upon the successors and assigns of the parties.
Nothing in this Security Agreement, express or implied, is intended to confer
upon any third party any rights, obligations or liabilities under or by reason
of this Security Agreement, except as expressly provided in this Security
Agreement.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
35
IN WITNESS WHEREOF, this Security Agreement has been executed as of
the day and year first above written.
THE COMPANY: AFFINITY TECHNOLOGY GROUP, INC.,
a Delaware corporation
By:
------------------------------------
Joseph A. Boyle
President and Chief Executive Officer
[SIGNATURE PAGES FOR THE PURCHASERS FOLLOW THIS PAGE.]
36
PURCHASER SIGNATURE PAGE
Principal Amount of
Note Purchased: $xxx,xxx
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
37
Schedule 1
Name and Address Principal Amount
of Purchaser of Note Acquired Purchase Price Maturity Date
- --------------- ---------------- -------------- -------------
38
Exhibit 10.1
AFFINITY TECHNOLOGY GROUP, INC.
1122 Lady Street, Suite 1145
Columbia, SC 29201
March 20, 2002
Mr. Joseph A. Boyle
President and Chief Executive Officer
Affinity Technology Group, Inc.
1122 Lady Street, Suite 1145
Columbia, SC 29201
Re: Restricted Stock Award
Dear Joe:
On behalf of Affinity Technology Group, Inc., a Delaware corporation
(the "Company"), I am writing this letter to evidence and confirm the award by
the Company to you of 500,000 shares of the Company's common stock, par value
$.0001 per share, as authorized by the Board of Directors at its March 20, 2002
meeting. These shares are being awarded to you as partial consideration of your
agreement to forego your cash compensation for the first six months of 2002.
Although these shares will vest immediately upon the effective date of grant
(March 20, 2002), they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be sold, transferred or
otherwise disposed of unless they are registered under the Securities Act or
there is an exemption from registration available. Please confirm our agreement
regarding your restricted shares by signing this letter where indicated below
and returning a copy of it to me for our files.
Sincerely,
Sean Douglas
Senior Vice President - Finance,
Operations and Administration
ACCEPTED AND AGREED to effective
the 20th day of March, 2002.
- --------------------------------
Joseph A. Boyle
39
Exhibit 10.2
AFFINITY TECHNOLOGY GROUP, INC.
1122 Lady Street, Suite 1145
Columbia, SC 29201
June 3, 2002
Wade H. Britt III
c/o Affinity Technology Group, Inc.
1122 Lady Street, Suite 1145
Columbia, SC 29201
Re: Restricted Stock Award
Dear Wade:
On behalf of Affinity Technology Group, Inc., a Delaware corporation
(the "Company"), I am writing this letter to evidence and confirm the award by
the Company to you of 70,000 shares of the Company's common stock, par value
$.0001 per share, as authorized by the Special Committee of the Board of
Directors by written consent effective May 31, 2002. These shares are being
awarded to you for your role in identifying and introducing the Company to
prospective investors in connection with the Company's convertible note
offering. Although these shares will vest immediately upon the effective date of
grant (June 3, 2002), they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be sold, transferred or
otherwise disposed of unless they are registered under the Securities Act or
there is an exemption from registration available. Please confirm our agreement
regarding your restricted shares by signing this letter where indicated below
and returning a copy of it to me for our files.
Sincerely,
Joseph A. Boyle
President and Chief Executive Officer
ACCEPTED AND AGREED to effective
the 3rd day of June, 2002.
- --------------------------------
Wade H. Britt III
40
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Affinity Technology Group,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Joseph A. Boyle, President, Chief Executive Officer and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Joseph A. Boyle
Joseph A. Boyle
President, Chief Executive Officer
and Chief Financial Officer
August 14, 2002
41