1
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 March 31, 2001 Commission file number: 0-28152
AFFINITY TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1201 Main Street, Suite 2080
Columbia, SC 29201-3201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
38,560,630 shares of Common Stock, $0.0001 par value, as of May 1, 2001.
2
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000...................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000.......................................................... 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 6. Exhibits and Reports on Form 8-K..................................................... 13
Signature....................................................................................... 14
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,
2001 DECEMBER 31,
(UNAUDITED) 2000
----------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 489,623 $ 646,198
Receivables, less allowance for doubtful accounts of $24,467 and
$9,467 at March 31, 2001 and December 31, 2000, respectively 2,899,855 1,830,491
Net investment in sales-type leases - current 106,297 157,139
Inventories 936,954 977,274
Other current assets 201,110 388,961
----------------------------------------------------
Total current assets 4,633,839 4,000,063
Property and equipment, net 769,793 862,813
Software development costs, less accumulated amortization of
$455,474 and $411,793 at March 31, 2001 and December 31,
2000, respectively 255,498 299,179
Other assets 457,765 476,398
----------------------------------------------------
Total assets $ 6,116,895 $ 5,638,453
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 207,922 $ 252,040
Accrued expenses 707,742 566,517
Notes payable 2,343,870 922,545
Current portion of deferred revenue 41,254 42,107
----------------------------------------------------
Total current liabilities 3,300,788 1,783,209
Convertible debenture 724,627 951,456
Deferred revenue 253,035 554,806
Capital stock of subsidiary held by minority investor 20,981 22,668
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
39,222,639 and 32,713,368 shares at March 31, 2001 and
December 31, 2000, respectively 3,922 3,271
Additional paid-in capital 70,272,516 70,084,414
Common stock warrants 52,000 52,000
Deferred compensation - (31,804)
Treasury stock, at cost (2,168,008 shares at March 31, 2001 and
December 31, 2000) (3,505,287) (3,505,287)
Accumulated deficit (65,005,687) (64,276,280)
----------------------------------------------------
Total stockholders' equity 1,817,464 2,326,314
----------------------------------------------------
Total liabilities and stockholders' equity $ 6,116,895 $ 5,638,453
====================================================
See accompanying notes.
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AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
---------------------------------------------------
Revenues:
Transactions $ 75,378 $ 161,796
Mortgage processing services 393,691 73,861
Sales and rental - 3,000
Professional services - 10,000
Patent license fees - 25,000
Other income 701,228 79,460
---------------------------------------------------
1,170,297 353,117
Costs and expenses:
Cost of revenues 122,727 111,327
Research and development 157,732 329,933
Selling, general and administrative expenses 1,592,360 1,772,890
---------------------------------------------------
Total costs and expenses 1,872,819 2,214,150
---------------------------------------------------
Operating loss (702,522) (1,861,033)
Interest income 29,880 49,874
Interest expense (56,765) -
---------------------------------------------------
Net loss $ (729,407) $ (1,811,159)
===================================================
Net loss per share - basic and diluted $ (0.02) $ (0.06)
===================================================
Shares used in computing net loss per share 32,899,085 29,872,823
===================================================
See accompanying notes.
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AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
----------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (729,407) $ (1,811,159)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 222,743 567,408
Amortization of deferred compensation 31,804 45,177
Provision for doubtful accounts 15,000 15,000
Inventory valuation allowance 30,000 30,000
Deferred revenue (302,624) 194,813
Other 6,484 (1,794)
Changes in current assets and liabilities:
Accounts receivable (1,084,364) (654,369)
Net investment in sales-type leases 50,842 86,443
Inventories 10,320 (6,239)
Other current assets 187,851 28,837
Accounts payable and accrued expenses 97,107 (646,064)
----------------------------------------------------
Net cash used in operating activities (1,464,244) (2,151,947)
INVESTING ACTIVITIES
Purchases of property and equipment, net (67,409) (20,916)
Sales of short term investments, net - 1,474,949
----------------------------------------------------
Net cash (used in) provided by investing activities (67,409) 1,454,033
FINANCING ACTIVITIES
Proceeds from notes payable 5,825,954 125,352
Payments on notes payable (4,451,223) -
Exercise of warrants 347 -
Exercise of options - 172,043
----------------------------------------------------
Net cash provided by financing activities 1,375,078 297,395
----------------------------------------------------
Net decrease in cash (156,575) (400,519)
Cash and cash equivalents at beginning of period 646,198 2,116,016
----------------------------------------------------
Cash and cash equivalents at end of period $ 489,623 $ 1,715,497
====================================================
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN
To date, Affinity Technology Group, Inc. (the "Company") has generated
substantial operating losses, has experienced an extremely lengthy sales cycle
for its products and has been required to use a substantial amount of existing
cash resources to fund its operations. The Company has taken certain measures to
increase and preserve its cash resources. These measures include the placement
of a $1 million convertible debenture in November 2000 and a 33% reduction in
its work force in March 2001. The Company believes that existing cash and
internally generated funds will be sufficient to fund its operations through the
second quarter of 2001. However, the Company may encounter unexpected expenses,
the loss of anticipated revenues and other developments that may impact the
Company's ability to fund operations for the entire second quarter of 2001.
Moreover, the Company believes that existing cash resources will be insufficient
to fund operations after the second quarter of 2001. To remain viable, the
Company must substantially increase its revenues or raise additional capital. To
maintain the minimal resources necessary to support its current operations, the
Company does not believe that substantial additional reductions in its operating
expenses are feasible. No assurances can be given that the Company will be able
to increase revenues or raise additional capital in a manner that will allow it
to continue its operations.
Management has developed a plan which, if successful, will generate
sufficient working capital to sustain the Company's operations in 2001 and
beyond. Management's plan included a reduction in the Company's workforce, which
resulted in a 33% decrease in employees in March 2001. In conjunction with the
reduction in workforce, management has elected to suspend the marketing of most
of its products as an Application Service Provider ("ASP"). The Company will
offer for sale its proprietary software previously utilized by the Company to
offer its ASP services.
Management's plan also includes the continued deployment of its
Mortgage ALM through its wholly owned subsidiary, Surety Mortgage, Inc.
("Surety"), and continuing to provide outsourced loan processing services for
third parties through Surety. Surety entered into its first out-sourced loan
processing contract in December 2000.
The Company has been issued three patents covering fully automated loan
processing and the establishment of financial accounts. Integral to management's
plan is the continued development of a patent licensing program to generate
patent licensing revenue.
Additionally, in November 2000 the Company entered into an equity line
agreement. Under the terms of the agreement, the Company may issue up to 6
million shares of its common stock. The agreement expires in May 2002. The rate
at which the Company may issue its common shares pursuant to the equity line
agreement is subject to certain price and trading volume requirements of the
Company's common stock. Management's ability to utilize the equity line
agreement for purposes of raising additional working capital is therefore
subject to general stock market conditions, as well as the specific perception
of the market concerning the value of the Company's common stock. Moreover, to
sell additional shares of its common stock, the Company must first register the
shares by filing the prescribed registration statement with the Securities and
Exchange Commission.
The successful execution of management's plan is subject to numerous
risks and uncertainties, many of which are beyond the control of management.
Management's plan is highly dependent upon the rapid expansion of its mortgage
operations through Surety. Demand for mortgage loan products is cyclical and is
generally proportionate to long-term interest rates and general economic
conditions. Management's plan regarding the exploitation of its patents has been
limited due to the lengthy reexamination of its loan processing patents.
Further, the Company's patents are subject to additional challenges by third
parties and may require enforcement through lengthy litigation.
Management's plan also includes the continued evaluation of new
agreements under which the Company may sell additional debt or equity
securities. Additionally, management may consider selling certain assets,
including some or all of the Company's patents or its mortgage banking
operations.
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7
As a result of the above, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result from this uncertainty.
2. 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, 2000 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, 2000.
In accordance with management's oversight of the Company's operations,
the Company conducts its business in two industry segments - financial services
technology and mortgage processing (see Note 7).
Certain amounts in 2000 have been reclassified to conform to 2001
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2001 2000
--------------------------------------------------
Electronic parts and other components $ 676,227 $ 676,546
Work in process 774,331 774,331
Finished goods 744,324 754,325
--------------------------------------------------
2,194,882 2,205,202
Reserve for obsolescence (1,257,928) (1,227,928)
--------------------------------------------------
$ 936,954 $ 977,274
==================================================
4. LOAN WAREHOUSING AGREEMENT
Surety Mortgage, Inc., a wholly owned subsidiary of the Company
("Surety"), has a credit facility with a maximum borrowing amount of $4,000,000.
Pursuant to the terms of the credit facility, Surety may obtain advances from
the lender for funding of mortgage loans made by Surety during the interim
period between the funding and sale of the loans to permanent investors. All
advances made pursuant to the agreement are secured by a security interest in
the rights and benefits due Surety in conjunction with the making of the
underlying loan. The credit facility bears interest at the lender's prime rate
plus 50 basis points and expires on June 1, 2001. There were outstanding
borrowings under the Loan Warehousing Agreement as of March 31, 2001 of
$2,343,870.
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8
5. 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.
6. STOCKHOLDERS' EQUITY
On September 22, 2000, the Company entered into a convertible debenture
and warrants purchase agreement with AMRO International, S.A. ("AMRO"). Under
the agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture matures 18 months
after its issuance, subject to earlier conversion and certain provisions
regarding acceleration upon default and prepayment. Under the agreement, on
November 22, 2000 the Company also issued to AMRO a three-year warrant to
acquire 200,000 shares of the Company's common stock. The warrant exercise price
is $0.3542. The warrant exercise price is subject to reduction in certain
instances. As of March 31, 2001, AMRO had exercised a portion of the debenture
into an aggregate of 3,037,931 shares of the Company's stock. The outstanding
principal amount as of March 31, 2001, was $765,000, net of unamortized discount
in the amount of $40,373.
7. SEGMENT INFORMATION
Prior to the first quarter of 2001 the Company operated in one industry
segment - financial services technology. During the first quarter of 2001 the
Company entered into certain contracts under which it will provide mortgage loan
processing services to unrelated third parties through its wholly-owned
subsidiary Surety Mortgage, Inc. Accordingly, the Company has reevaluated and
expanded its reporting structure and strategic initiatives to include two
distinct segments - financial services technology and mortgage processing
services. Amounts related to the recomposition of its reportable segments have
been restated for the first quarter of 2000. Additionally, mortgage processing
services revenues for the three month period ended March 31, 2001 includes
$169,000, or 14% of total revenue, associated with mortgage loan processing
services performed for one customer.
8
9
Financial data by segment consist of the following:
THREE MONTHS ENDED MARCH 31,
2001 2000
Revenues:
Financial services technology $ 776,606 $ 279,256
Mortgage processing services 393,691 73,861
-------------------------------
$1,170,297 $ 353,117
===============================
Cost of revenues:
Financial services technology $ 15,889 $ 71,552
Mortgage processing services 106,838 39,775
-------------------------------
$ 122,727 $ 111,327
===============================
Operating income (loss):
Financial services technology $ (720,691) $(1,708,771)
Mortgage processing services 18,169 (152,262)
-------------------------------
$ (702,522) $(1,861,033)
===============================
MARCH 31, 2001 DECEMBER 31, 2000
Assets:
Financial services technology $2,151,991 $ 3,262,523
Mortgage processing services 3,964,904 2,375,930
-------------------------------
$6,116,895 $ 5,638,453
===============================
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 is appealing the grant of a new trial. The
Company intends to vigorously contest all such actions and, in the opinion of
management, the Company has meritorious defenses and the resolution of such
actions will not materially affect the financial position of the Company.
The Company settled its lawsuit against The Dime Savings Bank of New
York on January 22, 2001. The lawsuit arose out of the Company's contract with
The Dime Savings Bank relating to the development of a system to process and
automate decisioning of automobile loans. This contract was acquired by The Dime
Savings Bank in connection with its acquisition of the indirect automobile loan
business formerly operated by Citibank, N. A.
ITEM 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,
2000. These and other factors may cause actual results to differ materially from
those anticipated.
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OVERVIEW
The Company was formed in 1994 to develop and market technologies that
enable financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. From the period
of inception (January 12, 1994) through December 31, 1994, the Company was a
development stage company, and its activities principally related to developing
its DeciSys/RT technology (formerly known as the "DSS System") and the Affinity
ALM ("ALM"), raising capital and recruiting personnel.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company has taken certain measures to increase and preserve its
cash resources. These measures include the placement of a $1 million convertible
debenture in November 2000 and a 33% reduction in its work force in March 2001.
The Company believes that existing cash and internally generated funds will be
sufficient to fund its operations through the second quarter of 2001. However,
the Company may encounter unexpected expenses, the loss of anticipated revenues
and other developments that may impact the Company's ability to fund operations
for the entire second quarter of 2001. Moreover, the Company believes that
existing cash resources will be insufficient to fund operations after the second
quarter of 2001. To remain viable, the Company must substantially increase its
revenues or raise additional capital. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to increase revenues or
raise additional capital in a manner that will allow it to continue its
operations.
The market for the Company's products and services is new, evolving and
uncertain, and it is difficult to determine the size and predict the future
growth rate, if any, of this market. In addition, the market for products and
services that enable electronic commerce is highly competitive and is subject to
rapid innovation and competition from traditional products and services having
all or some of the same features as products and services enabling electronic
commerce. Competitors in this market have frequently taken different strategic
approaches and have launched substantially different products or services in
order to exploit the same perceived market opportunity. Until the market has
validated a strategy through widespread acceptance of a product or service, it
is difficult to identify all current or potential market participants or gauge
their relative competitive position.
RESULTS OF OPERATIONS
REVENUES
The Company's revenues for the three months ended March 31, 2001, were
$1,170,297 compared to $353,117 for the corresponding period of 2000.
Transaction fees. Revenues from transaction fees were $75,378 for the
three months ended March 31, 2001, compared to $161,796 for the corresponding
period in 2000. The decrease during the three months ended March 31, 2001, as
compared to the same period in 2000 is primarily attributable to the decision by
the Company's only iDEAL customer to suspend its indirect automobile lending
activities in late 2000, which resulted in a decrease in the number of financial
service applications processed using DeciSys/RT.
Mortgage processing services. Mortgage processing services represents
fees earned by Surety Mortgage, Inc. ("Surety"), a wholly-owned subsidiary of
the Company, for originating and processing mortgage loan applications generated
through the Company's proprietary Mortgage ALMs and fees earned for underwriting
and processing certain mortgage loan applications pursuant to an outsourcing
mortgage loan processing contract into which Surety entered in late 2000.
Revenues from mortgage processing services were $393,691 for the three months
ended March 31, 2001, compared to $73,861 for the corresponding period in 2000.
The increase during the three months ended March 31, 2001, compared to the
corresponding period in 2000 is attributable to an increase in the number of
mortgage loans processed by Surety due to the continued expansion of its
Mortgage ALM network and fees received in conjunction with its outsourcing
mortgage loan processing contract. Fees received pursuant to
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its outsourcing mortgage loan processing contract were approximately $169,000
during the three month period ended March 31, 2001.
Professional services. During the three months ended March 31, 2000,
the Company recognized revenue associated with the performance of professional
services for one customer. No professional service revenue was recognized in the
comparable period of 2001.
Patent license revenue. During the three months ended March 31, 2000,
the Company recognized $25,000 associated with one patent license agreement. No
patent license revenue was recognized in the comparable period of 2001.
Other income. Other income generally consists of miscellaneous revenue
typically associated with ancillary fees that are non-recurring in nature. The
increase in other income in the three month period ended March 31, 2001,
compared to the corresponding period in 2000 was primarily associated with the
settlement of a lawsuit in January 2001.
COSTS AND EXPENSES
Cost of Revenues. Cost of revenues for the three months ended March 31,
2001 was $122,727, compared to $111,327 for the corresponding period in 2000.
The increase during the three months ended March 31, 2001, as compared to the
same period in 2000 is attributable to an increase in the costs associated with
processing more mortgage loans in the three-month period ended March 31, 2001,
compared to the corresponding period in 2000. The overall increase was offset by
a decrease in the costs associated with processing fewer transactions through
the Company's DeciSys/RT system and a decrease in the costs associated with
certain ALM contracts.
Research and Development. Costs incurred for research and development
for the three months ended March 31, 2001, totaled $157,732, compared to
$329,933 for the corresponding period in 2000. The decrease in research and
development costs for the three months ended March 31, 2001 compared to the same
period in 2000 is attributable to a reduction in the number of employees
involved in research and development activities in 2001 compared to 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $1,592,360 for the three months ended March 31,
2001, as compared to $1,772,890 for the corresponding period in 2000. The
decrease for the three months ended March 31, 2001, as compared to the
corresponding period of 2000 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, accretion of discount associated with sales-type ALM
leases and mortgage loans between the time the loans are closed by Surety and
the time Surety places the loans with investors pursuant to firm purchase
commitments. Interest income for the three months ended March 31, 2001 was
$29,880, compared to $49,874 in the corresponding period in 2000. The decrease
was attributable to lower cash and investment balances and fewer ALMs under
sales-type leases in the first three months of 2001 compared to the first three
months of 2000. The overall decrease was offset by a slight increase in interest
earned on mortgage loans due to increased loan production levels for the three
months ended March 31, 2001 compared to the corresponding period in 2000.
Interest expense. The Company incurs interest expense on its line of
credit used to fund mortgage loans closed by Surety and its convertible
debenture which it placed in late 2000. Interest expense for the three months
ended March 31, 2001 was $56,765. The Company did not recognize any interest
expense in the corresponding period in 2000 due to the use of the Company's own
cash resources to fund Surety's mortgage loan originations during that period.
11
12
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses of $65,005,687 since its inception
and has financed its operations primarily through net proceeds from its initial
public offering in May 1996. Net proceeds from the Company's initial public
offering were $60,088,516. Additionally, in 2000 the Company sold 484,848 shares
of its common stock for $500,000 and issued a $1 million convertible debenture.
The Company continues to use a substantial amount of existing cash
resources to fund its operations. If the Company had continued to use cash at
the rate used during 2000, the Company would have depleted its existing cash
reserves in the first quarter of 2001. The Company has taken certain measures to
increase and preserve its cash resources. These measures include the placement
of a $1 million convertible debenture in November 2000 and a 33% reduction in
its work force in March 2001. The Company believes that existing cash and
internally generated funds will be sufficient to fund its operations through the
second quarter of 2001. However, the Company may encounter unexpected expenses,
the loss of anticipated revenues and other developments that may impact the
Company's ability to fund operations for the entire second quarter of 2001.
Moreover, the Company believes that existing cash resources will be insufficient
to fund operations after the second quarter of 2001. To remain viable, the
Company must substantially increase its revenues or raise additional capital. To
maintain the minimal resources necessary to support its current operations, the
Company does not believe that substantial additional reductions in its operating
expenses are feasible. No assurances can be given that the Company will be able
to increase revenues or raise additional capital in a manner that will allow it
to continue its operations.
In June 2000, the Company entered into an agreement with Redmond Fund,
Inc. ("Redmond") under which Redmond acquired, for $500,000, 484,848 shares of
the Company's common stock and a warrant to acquire an additional 484,848 shares
for $1.37 per share.
On September 22, 2000, the Company entered into a convertible debenture
and warrants purchase agreement with AMRO International, S.A. ("AMRO"). Under
the agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture is convertible,
at the option of AMRO, into shares of the Company's common stock at a price
equal to the lesser of $1.00 per share or 65% of the average of the three lowest
closing prices of the Company's stock during the month prior to conversion. The
debenture matures 18 months after its issuance, subject to earlier conversion
and certain provisions regarding acceleration upon default and prepayment. In
this regard, the debenture requires the Company to use no less than 25% of the
proceeds from any future equity financing to repay as much of the debenture as
it can at a price equal to 120% of the principal amount of the debenture plus
all accrued and unpaid interest. Under the agreement, on November 22, 2000 the
Company also issued to AMRO a three-year warrant to acquire 200,000 shares of
the Company's common stock. The warrant exercise price is $0.3542. As of May 15,
2001, AMRO had exercised a portion of the debenture into an aggregate of
4,543,930 shares of the Company's stock. The outstanding principal amount as of
May 15, 2001 was $710,000.
On September 26, 2000, the Company entered into a common stock purchase
agreement with another accredited investor. Under the agreement, the Company may
sell, periodically in monthly installments during a period of 18 months, up to
6,000,000 shares of the Company's common stock at a price equal to 85% of the
volume adjusted average market price of the Company's stock at the time of
issuance. The Company would not be permitted to sell any shares until it has
registered such shares for resale by the investor under the Securities Act of
1933. Under the agreement, the Company issued to the investor a three-year
warrant to acquire 720,000 shares of the Company's common stock at $0.8554 per
share. In addition, any time the Company sells any shares of stock under the
agreement, it would be required to issue to the investor a 35-day warrant to
acquire 25% of the number of shares sold. The warrant would be exercisable at
the average purchase price paid by the investor for such shares. The amount of
capital the Company may raise under the common stock purchase agreement during
any month may not be less than $100,000 or more than the lesser of $1,000,000 or
4.5% of the product of the daily volume-weighted average stock price during the
three-month period prior to a drawdown request and the total trading volume in
the Company's stock during the same three-month period. Based on these
limitations, the Company would not be able to sell any shares of its stock under
the equity line agreement as of May 15, 2001.
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Net cash used during the three months ended March 31, 2001, to fund
operations was approximately $1,464,000 compared to approximately $2,152,000 for
the same period in 2000. Proceeds from the offering and other sources of cash
were used to fund current period operations and research and development of
approximately $158,000. During the three months ended March 31, 2000, net
proceeds from the offering and other sources of cash were used to fund
operations and research and development of approximately $330,000. At March 31,
2001, cash and liquid investments were $489,623, as compared to $646,198 at
December 31, 2000. At March 31, 2001 working capital was $1,333,051 as compared
to $2,216,854 at December 31, 2000.
Surety has established a credit facility with a maximum borrowing
amount of $4,000,000. Pursuant to the terms of the credit facility, Surety may
obtain advances from the lender for funding of mortgage loans made by Surety
during the interim period between the funding and sale of the loans to permanent
investors. All advances made pursuant to the agreement are secured by a security
interest in the rights and benefits due Surety in conjunction with the making of
the underlying loan. The credit facility bears interest at the lender's prime
rate plus 50 basis points and expires on June 1, 2001. Outstanding borrowings
under the Loan Warehousing Agreement as of March 31, 2001 were $2,343,870.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on investments and the Company's
mortgage brokerage business. The Company does not believe such risk is material.
The Company's cash and cash equivalents consist of highly liquid investments
with maturities of three months or less. Further, when the Company receives a
commitment to originate a mortgage loan from a consumer or correspondent, the
Company immediately receives a commitment from an investor to buy such mortgage
loan. The Company does not believe that its mortgage brokerage business exposes
it to significant market risk for changes in interest rates.
PART II. OTHER INFORMATION
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE.
ITEM 1. LEGAL PROCEEDINGS
The Company settled its lawsuit against The Dime Savings Bank of New
York on January 22, 2001. The lawsuit arose out of the Company's contract with
The Dime Savings Bank relating to the development of a system to process and
automate decisioning of automobile loans. This contract was acquired by The Dime
Savings Bank in connection with its acquisition of the indirect automobile loan
business formerly operated by Citibank, N. A.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
On February 16, 2001 the Company filed a current report on Form 8-K to
disclose the Company's common stock had been delisted from the Nasdaq Small Cap
Market.
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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
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Joseph A. Boyle
Chairman, President, Chief Executive Officer and Chief Financial Officer
(principal executive and financial officer)
Date: May 15, 2001
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