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.

AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

INDEX

PAGE

Part I. Financial Information

Item 1. Financial Statements

Affinity Technology Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes.

Affinity Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes.

Affinity Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

Notes to Condensed Consolidated Financial Statements

1. Going Concern

To date, Affinity Technology Group, Inc. (the "Company") has generated substantial operating losses, has experienced an extremely lengthy sales cycle for its products and has been required to use a substantial amount of existing cash resources to fund its operations. 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.

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.

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.

Financial data by segment consist of the following:

Three Months Ended March 31,

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.

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 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.

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.

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) 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 SmallCap Market.

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: May 15, 2001