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 September 30, 2004 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.
1053 B Sparkleberry Lane Extension
Columbia, SC 29223
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
42,062,902 shares of Common Stock, $0.0001 par value, as of November 1, 2004.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003........................................... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2004 and 2003................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003........................ 5
Notes to Condensed Consolidated Financial Statements................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 12
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk....... 17
ITEM 4. Controls and Procedures......................................... 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 17
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 18
ITEM 3. Defaults Upon Senior Securities................................. 18
ITEM 6. Exhibits........................................................ 19
Signature.................................................................... 19
Statements in this report (including the Notes to Condensed Consolidated
Financial Statements and 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 the
possibility that all or some of the holders of the convertible secured notes
issued by the Company may take action to collect the amounts outstanding under
these notes; the failure by the Company to raise additional capital or generate
revenues in amounts sufficient to permit it to continue its operations; the
result of ongoing and future challenges to the Company's patents; the result of
ongoing litigation; unanticipated costs and expenses affecting the Company's
cash position and other factors discussed in this report. These and other
factors may cause actual results to differ materially from those anticipated.
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
2004 December 31,
(Unaudited) 2003
-----------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 177,118 $ 578,398
Prepaid expenses 57,420 20,121
-----------------------------------------------
Total current assets 234,538 598,519
Property and equipment, net 13,136 18,336
Other assets - 1,147
-----------------------------------------------
Total assets $ 247,674 $ 618,002
===============================================
Liabilities and stockholder's deficiency
Current liabilities:
Accounts payable $ 22,874 $ 76,056
Accrued expenses 391,639 657,836
Convertible notes 1,206,336 756,336
Current portion of deferred revenue 17,647 17,647
-----------------------------------------------
Total current liabilities 1,638,496 1,507,875
Convertible notes - 425,000
Deferred revenue 1,471 14,706
Commitments and contingent liabilities
Stockholders' deficiency:
Common stock, par value $0.0001; authorized 60,000,000 shares,
issued 44,082,493 and 44,032,493 shares at
September 30, 2004 and December 31, 2003, respectively 4,408 4,403
Additional paid-in capital 70,635,705 70,632,210
Treasury Stock, at cost (2,168,008 shares at September
30, 2004 and December 31, 2003) (3,505,287) (3,505,287)
Accumulated deficit (68,527,119) (68,460,905)
-----------------------------------------------
Total stockholders' deficiency (1,392,293) (1,329,579)
-----------------------------------------------
Total liabilities and stockholder's deficiency $ 247,674 $ 618,002
===============================================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------------------------------- ----------------------------------
Revenues:
Patent license revenue $ 4,411 $ 4,411 $ 263,235 $ 13,235
Other income 18,600 - 18,600 -
----------------------------------- ----------------------------------
Total revenue 23,011 4,411 281,835 13,235
Costs and expenses:
Cost of revenues 442 442 63,824 1,324
General and administrative expenses 142,685 140,020 599,678 543,686
----------------------------------- ----------------------------------
Total cost and expenses 143,127 140,462 663,502 545,010
----------------------------------- ----------------------------------
Operating loss (120,116) (136,051) (381,667) (531,775)
Interest income 445 32 1,640 530
Interest expense (24,126) (20,768) (72,335) (58,737)
Litigation accrual reversal 386,148 - 386,148 -
----------------------------------- ----------------------------------
Net income (loss) $ 242,351 $ (156,787) $ (66,214) $ (589,982)
=================================== ==================================
Net income (loss) per share -
basic and diluted: $ 0.01 $ (0.00) $ (0.00) $ (0.01)
=================================== ==================================
Shares used in computing net
income (loss) per share 41,914,485 41,454,689 41,883,646 41,404,921
=================================== ==================================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2004 2003
-------------------------------------------
Operating activities
Net loss $ (66,214) $ (589,982)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,213 12,381
Writedown of organizational costs 1,147 -
Deferred revenue (13,235) (13,235)
Litigation accrual reversal (386,148) -
Other (15,100) 17,385
Changes in current assets and liabilities:
Accounts receivable - 5,666
Other current assets (37,300) 18,663
Accounts payable and accrued expenses 66,769 137,899
-------------------------------------------
Net cash used in operating activities (443,868) (411,223)
Investing activities
Sale of property and equipment, net 17,588 39,815
-------------------------------------------
Net cash provided by investing activities 17,588 39,815
Financing activities
Proceeds from convertible notes 25,000 225,000
-------------------------------------------
Net cash provided by financing activities 25,000 225,000
-------------------------------------------
Net decrease in cash (401,280) (146,408)
Cash and cash equivalents at beginning of period 578,398 156,780
-------------------------------------------
Cash and cash equivalents at end of period $ 177,118 $ 10,372
===========================================
Supplemental cash flow information:
Income taxes paid $ - $ -
===========================================
Interest paid $ - $ -
===========================================
See accompanying notes.
5
Notes to Condensed Consolidated Financial Statements
1. The Company -- Going Concern
Affinity Technology Group, Inc., a Delaware corporation (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. Products and services previously offered by
the Company include its DeciSys/RT(R) loan processing system, which automated
the processing and consummation of consumer financial services transactions; the
Affinity Automated Loan Machine (the ALM(R)), which allowed an applicant to
apply for and, if approved, obtain a loan in as little as ten minutes; the
Mortgage ALM, which allowed an applicant to apply for a mortgage loan;
e-xpertLender(R), which permitted a financial institution to make automated
lending decisions through its call centers and branches; iDEAL, which permitted
automobile lenders to make automobile lending decisions for loan applications
originated at automobile dealers; and rtDS, which permitted lenders to deliver
credit decisions to applicants over the Internet. Due to capital constraints,
the Company has suspended all efforts to further develop, market and operate
these products and services. The Company's last processing contract terminated
in late 2002, and the Company has no plans to engage in further sales or other
activities related to its products or services, other than to license certain of
the patents that it owns. Currently, the Company's business activities consist
exclusively of attempting to enter into license agreements with third parties to
license the Company's rights under certain of its patents.
In conjunction with its product development activities, the Company applied
for and obtained three patents. 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 August 2000, the U.S. Patent and Trademark Office
(the "PTO") 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). 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).
Both of the Company's patents covering fully automated loan processing
systems have been subject to reexamination by the PTO due to challenges to such
patents by third parties. On January 28, 2003, the Company received a
Reexamination Certificate (U. S. Patent No. 5,870,721 C1) from the PTO which
formally concluded the reexamination of U. S. Patent No. 5,870,721. The
reexamination of the Company's other loan processing patent (U. S. Patent No.
5,940,811) is still ongoing. In March 2004, the Company received notification
from the PTO that it had rejected the claims of U.S. Patent No. 5,940,811. The
Company is contesting the PTO's rejection and will continue to prosecute the
reexamination of this patent.
On March 26, 2004, the Company was notified by Federated Department Stores,
Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") that they
had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has jointly, with Federated and Ameritrade, requested the Columbia
Federal Court to stay the lawsuits against Federated and Ameritrade pending
resolution of the reexamination of U. S. Patent No. 6,105,007. It is likely that
it will take an extended period of time to complete the reexamination
proceedings and the related litigation with Federated and Ameritrade. Moreover,
the PTO's grant of Federated's and Ameritrade's request for reexamination of U.
S. Patent No. 6,105,007 will likely have a material adverse effect on the
Company's patent licensing program and its ability to attract additional capital
resources in order to continue its operations.
In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004 the Delaware Federal Court granted the
6
Company's motion to transfer the case to the Columbia Federal Court. As
discussed previously, the PTO has granted the reexamination request filed by
Federated and Ameritrade relating to U. S. Patent No. 6,105,007. The Company has
initiated discussions with Household to jointly file a request with the Columbia
Federal Court to stay the Household action pending the resolution of the PTO's
reexamination of U. S. Patent No. 6,105,007.
To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At September 30, 2004, the Company had cash and cash equivalents of
$177,118. The Company believes that its existing cash resources are sufficient
to fund its expected ordinary course cash operating expenses through the
remainder of 2004. However, unexpected expenses or cash requirements, such as if
the Company becomes obligated to pay more than an insignificant amount of
damages in connection with the Temple Ligon litigation which is discussed in
more detail in Note 8, may exhaust the Company's remaining cash resources prior
to the end of 2004. Moreover, the Company currently does not have the resources
to repay the principal and accrued interest outstanding under its convertible
secured notes (the "notes"), which have become due and payable in full as
discussed in the following paragraph. If any of the holders of these notes takes
action to collect the amounts owed by the Company under these notes, the Company
will be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection.
As of September 30, 2004, the Company had outstanding $1,389,177 in
aggregated principal and accrued interest under its notes. The amounts
outstanding as of September 30, 2004 include $896,894 in principal and accrued
interest outstanding under notes that became due and payable on June 2, 2004.
The Company has not been successful in extending the maturity date of the notes
that became due and payable on June 2, 2004. As a result, and as discussed in
more detail in Note 6, all notes have become due and payable in full.
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the pending reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is likely that the Company will be required to
raise additional capital. The uncertainties of these litigation matters, the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and other factors
affecting the Company's short and long-term liquidity discussed above will
likely impede the Company's ability to raise additional capital. To maintain the
minimal resources necessary to support its current operations, prosecute the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and execute a patent
licensing strategy, 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 generate working
capital from its patent licensing business.
In order to fund its operations, the Company may need to raise additional
funds through the issuance of additional equity securities, in which case the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to common stock. There can be no
assurance that additional financing will be available on terms acceptable to the
Company or at all. If adequate funds are not available or not available on
acceptable terms, the Company may be unable to continue operations.
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 materially change the Company's financial
position.
7
2. Basis of Presentation
The accompanying unaudited condensed consolidated 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,
2003 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, 2003.
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 2003 have been reclassified to conform to 2004
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' deficiency or net loss.
3. New Accounting Standards
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by the
Company:
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104 Revenue Recognition ("SAB No. 104"),
which codifies, revises and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have any effect on the Company's
financial position, results of operations or cash flow.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." In December 2003, FIN 46 was
replaced by FASB interpretation No. 46(R) ("FIN 46(R)"), "Consolidation of
Variable Interest Entities." FIN 46(R) clarifies the application of Accounting
Research Bulletin No. 51 "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46(R) requires an enterprise to consolidate a
variable interest entity if that enterprise will absorb a majority of the
entity's expected losses, is entitled to receive a majority of the entity's
expected residual returns, or both. FIN 46 applied immediately to variable
interest entities created or obtained after January 31, 2003, and applied to the
first fiscal year or interim period ending after December 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that was
acquired before February 1, 2003. FIN 46(R) is effective for entities being
evaluated under FIN 46(R) for consolidation no later than the end of the first
reporting period that ends after March 15, 2004. The adoption of FIN 46(R) did
not have a significant impact on the Company's financial position or results of
operations.
In March 2004, the FASB issued an exposure draft on "Share-Based Payment".
The proposed Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for a) equity instruments of
the enterprise or b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. This proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. This
Statement, if approved, will be effective for awards that are granted, modified,
or settled in fiscal years
8
beginning after a) December 15, 2004 for public entities and nonpublic entities
that used the fair-value-based method of accounting under the original
provisions of SFAS 123 for recognition or pro forma disclosure purposes and b)
December 15, 2005 for all other nonpublic entities. Earlier application is
encouraged provided that financial statements for those earlier years have not
yet been issued. Retrospective application of this Statement is not permitted.
Management has not determined the impact adoption of this Statement, if
approved, will have on the Company's financial position or results of
operations.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the Company's consolidated
financial statements upon adoption.
4. Stock Based Compensation
The Company accounts for stock options in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the Company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the Company records
compensation expense related to these options over the performance period.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123" as amended by FASB Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148")), provides an alternative to APB 25 in accounting for stock based
compensation issued to employees. SFAS 123 provides for a fair value based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock based compensation
arrangements under APB 25, SFAS 123 requires disclosure of the pro forma effect
on net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied. The Company intends to continue to
account for stock based compensation arrangements under APB No. 25 and has
adopted the pro forma disclosure requirements of SFAS 123.
Had compensation cost for options granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with SFAS 123, the Company's net income and earnings per share would
have changed to the pro forma amounts listed as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------------------------- -------------------------------
Net loss:
As reported $ 242,351 $ (156,787) $ (66,214) $ (589,982)
Add: stock-based compensation expense
included in reported net income - - - -
Deduct: stock-based compensation expense
determined under the fair value based
method for all awards (4,402) (11,696) (18,736) (37,186)
-------------------------------- -------------------------------
Pro forma net loss $ 237,949 $ (168,483) $ (84,950) $ (627,168)
================================ ===============================
Net loss per common share:
As reported:
Basic and diluted $ 0.01 $ (0.00) $ (0.00) $ (0.01)
Pro forma:
Basic and diluted $ 0.01 $ (0.00) $ (0.00) $ (0.02)
9
The pro forma disclosures required by SFAS 123 regarding net loss and net
loss per share are stated as if the Company had accounted for stock options
using fair values. Compensation expense is recognized on a straight-line basis
over the vesting period of each option installment. Using the Black-Scholes
option-pricing model the fair value at the date of grant for these options was
estimated using the following assumptions: expected volatility, 85% to 142%;
risk free rate of return, 1.99% to 6.60%; dividend yield, 0%; and expected
option life, 3 years.
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. The Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
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 SFAS
No. 128, "Earnings Per Share." Stock warrants and stock options were not
included in the calculation of diluted earnings or loss per share because the
Company has either experienced an operating loss in the period presented and,
therefore, the effect would be anti-dilutive or the exercise price of the
potentially dilutive security is greater than the average share price during the
period presented.
6. Convertible Notes
In 2002, 2003, and the first quarter of 2004, the Company issued
convertible secured notes (the "notes") to certain investors as part of its
efforts to raise additional capital. These notes include a note in the principal
amount of $125,000 issued to the Company's Chairman, President and Chief
Executive Officer and a note in the principal amount of $100,000 issued to a
subsidiary of The South Financial Group, which owns approximately 12% of the
Company's outstanding common stock. As of September 30, 2004, and December 31,
2003, the principal and accrued interest outstanding under all notes was
$1,389,177 and $1,291,841, respectively.
These notes bear interest at 8%, are convertible into the Company's common
stock at a conversion rate of $.20 per share, and are secured by the Company's
equity interest in decisioning.com, Inc., which owns the Company's patent
portfolio. Principal and interest under these notes generally becomes payable in
full on the second anniversary of the date on which these notes were issued.
However, under the terms of the notes, principal and interest under all notes
becomes immediately due and payable in certain events, including bankruptcy or
similar proceedings involving the Company, a default in the payment of principal
and interest under any note, or a change in control of the Company.
On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. The Company has initiated discussions with the holders of these notes
regarding the extension of the maturity date of these notes. However, the
Company has not been successful in reaching an agreement with all of the holders
of these notes regarding an extension of their maturity date. Because the
Company is currently in default regarding payment of principal and interest due
under the notes that matured on June 2, 2004, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of September 30, 2004. If the
holder of any note takes action to collect the amounts owed by the Company under
the note, the Company will be forced to consider alternatives for winding down
its business, which may include filing for bankruptcy protection.
On October 6, 2004 AMRO International, S. A. converted $29,683 in principal
and accrued interest outstanding under its note into an aggregate of 148,417
shares of common stock. Such conversion reduced AMRO's outstanding principal and
accrued interest under its note to $106,336 and $19,944, respectively. AMRO
acquired its note on June 2, 2002 in satisfaction of a convertible debenture it
acquired in November of 2000.
10
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.
8. Commitments and Contingencies
The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include filing for bankruptcy protection.
The Company is involved in three other lawsuits related to infringement by
third parties of its patents.
9. Subsequent Events
In October 2004, AMRO International, S.A. converted $25,000 principal
amount and accrued interest of $4,683 under its secured convertible note into an
aggregate of 148,417 shares of the Company's common stock. Such conversion
reduced the principal of the convertible secured note issued to AMRO to
$106,336.
11
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 the Notes to Condensed Consolidated
Financial Statements and 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 the
possibility that all or some of the holders of the convertible secured notes
issued by the Company may take action to collect the amounts outstanding under
these notes; the failure by the Company to raise additional capital or generate
revenues in amounts sufficient to permit it to continue its operations; the
result of ongoing and future challenges to the Company's patents; the result of
ongoing litigation; unanticipated costs and expenses affecting the Company's
cash position and other factors discussed in this report. 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. Products and services previously offered by the Company include
its DeciSys/RT(R) loan processing system, which automated the processing and
consummation of consumer financial services transactions; the Affinity Automated
Loan Machine (the ALM(R)), which allowed an applicant to apply for and, if
approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which
allowed an applicant to apply for a mortgage loan; e-xpertLender(R), which
permitted a financial institution to make automated lending decisions through
its call centers and branches; iDEAL, which permitted automobile lenders to make
automobile lending decisions for loan applications originated at automobile
dealers; and rtDS, which permitted lenders to deliver credit decisions to
applicants over the Internet. Due to capital constraints, the Company has
suspended all efforts to further develop, market and operate these products and
services. The Company's last processing contract terminated in late 2002, and
the Company has no plans to engage in further sales or other activities related
to its products or services, other than to license certain of the patents that
it owns. Currently, the Company's business activities consist exclusively of
attempting to enter into license agreements with third parties to license the
Company's rights under certain of its patents.
In conjunction with its product development activities, the Company applied
for and obtained three patents. 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 August 2000, the U.S. Patent and Trademark Office
(the "PTO") 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). 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).
Both of the Company's patents covering fully automated loan processing
systems have been subject to reexamination by the PTO due to challenges to such
patents by third parties. On January 28, 2003, the Company received a
Reexamination Certificate (U. S. Patent No. 5,870,721 C1) from the PTO which
formally concluded the reexamination of U. S. Patent No. 5,870,721. The
reexamination of the Company's other loan processing patent (U. S. Patent No.
5,940,811) is still ongoing. In March 2004, the Company received notification
from the PTO that it had rejected the claims of U.S. Patent No. 5,940,811. The
Company is contesting the PTO's rejection and will continue to prosecute the
reexamination of this patent.
On March 26, 2004, the Company was notified by Federated Department Stores,
Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") that they
had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has jointly, with Federated and Ameritrade, requested the Columbia
Federal Court to stay the lawsuits against Federated and Ameritrade
12
pending resolution of the reexamination of U. S. Patent No. 6,105,007. It is
likely that it will take an extended period of time to complete the
reexamination proceedings and the related litigation with Federated and
Ameritrade. Moreover, the PTO's grant of Federated's and Ameritrade's request
for reexamination of U. S. Patent No. 6,105,007 will likely have a material
adverse effect on the Company's patent licensing program and its ability to
attract additional capital resources in order to continue its operations.
In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed previously,
the PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has initiated discussions
with Household to jointly file a request with the Columbia Federal Court to stay
the Household action pending the resolution of the PTO's reexamination. The
Company believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.
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.
To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At September 30, 2004, the Company had cash and cash equivalents of
$177,118. The Company believes that its existing cash resources are sufficient
to fund its expected ordinary course cash operating expenses through the
remainder of 2004. However, unexpected expenses or cash requirements, such as if
the Company becomes obligated to pay more than an insignificant amount of
damages in connection with the Temple Ligon litigation which is discussed in
more detail below, may exhaust the Company's remaining cash resources prior to
the end of 2004. Moreover, the Company currently does not have the resources to
repay the principal and accrued interest outstanding under its convertible
secured notes, which have become due and payable in full as discussed below. If
any of the holders of these notes takes action to collect the amounts owed by
the Company under these notes, the Company will be forced to consider
alternatives for winding down its business, which may include filing for
bankruptcy protection.
In 2002, 2003, and the first quarter of 2004, the Company issued
convertible secured notes (the "notes") to certain investors as part of its
efforts to raise additional capital. These notes bear interest at 8%, are
convertible into the Company's common stock at a conversion rate of $.20 per
share, and are secured by the Company's equity interest in decisioning.com,
Inc., which owns the Company's patent portfolio. Principal and interest under
these notes generally becomes payable in full on the second anniversary of the
date on which these notes were issued. However, under the terms of the notes,
principal and interest under all notes becomes immediately due and payable in
certain events, including bankruptcy or similar proceedings involving the
Company, a default in the payment of principal and interest under any note, or a
change in control of the Company.
On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. The Company has initiated discussions with the holders of these notes
regarding the extension of the maturity date of these notes. However, the
Company has not been successful in reaching an agreement with all of the holders
of these notes regarding an extension of their maturity date. Because the
Company is currently in default regarding payment of principal and interest due
under the notes that matured on June 2, 2004, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of September 30, 2004. As of
September 30, 2004, and December 31, 2003, the principal and accrued interest
outstanding under all of the notes was $1,389,177 and $1,291,841, respectively.
13
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the pending reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is likely that the Company will be required to
raise additional capital. The uncertainties of these litigation matters, the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and other factors
affecting the Company's short and long-term liquidity discussed above will
likely impede the Company's ability to raise additional capital. To maintain the
minimal resources necessary to support its current operations, prosecute the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and execute a patent
licensing strategy, 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 generate working
capital from its patent licensing business.
The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include filing for bankruptcy protection.
Critical Accounting Policies
The Company applies certain accounting policies, which are critical in
understanding the Company's results of operations and the information presented
in the condensed consolidated financial statements. The Company considers
critical accounting policies to be those that require more significant judgments
and estimates in the preparation of its financial statements, the most critical
of which pertains to the valuation reserve on net deferred tax assets. The
Company records a valuation allowance to reduce its deferred tax assets to the
amount that it estimates is more likely than not to be realized. As of September
30, 2004 and December 31, 2003, the Company recorded a valuation allowance that
reduced its deferred tax assets to equal its deferred tax liability.
Results of Operations
Revenues
Patent license revenue. The Company recognized patent licensing revenues of
$4,411 and $263,235 for the three and nine month periods ended September 30,
2004, respectively, compared to $4,411 and $13,235 recognized in the
corresponding periods in 2003. During the three and nine month periods ended
September 30, 2004, and September 30, 2003, the Company recognized $4,411 and
$13,235, respectively, related to a three-year license agreement entered into in
2002. Of the total amount recognized during the nine-month period ended
September 30, 2004, $250,000 was related to a settlement agreement entered into
in January 2004 with an institution that formerly maintained a system that
permitted consumers to apply for credit cards over the Internet. These revenues
are not recurring.
Other income. Other income consists of sales proceeds related to the
liquidation of miscellaneous property and equipment items. Such income is not
recurring in nature.
14
Costs and Expenses
Cost of revenues. Cost of revenues for the three and nine month periods
ended September 30, 2004 was $442 and $63,824, respectively, compared to $442
and $1,324 for the corresponding periods in 2003. Cost of revenues consists of
commissions paid to the Company's patent licensing representatives. The increase
in cost of revenues during the nine months ended September 30, 2004 compared to
the corresponding period in 2003 is attributable to a settlement agreement
entered into in the first quarter of 2004 for which commissions of $62,500 were
paid to the Company's patent licensing representatives.
General and administrative expenses. General and administrative expenses
totaled $142,685 and $599,678 for the three and nine month periods ended
September 30, 2004, respectively, compared to $140,020 and $543,686 in the
corresponding periods in 2003. The increase of $2,665 for the three month period
ending September 30, 2004, compared to the same period in 2003 was primarily
attributable to an increase in salaries expense associated with the Chief
Executive Officer's return to the Company on a full-time basis in August 2004
and the accrual of compensation expense for another employee. The increase of
$55,992 for the nine month period ended September 30, 2004, compared to the same
period in 2003 was primarily attributable to legal fees and related expenses
incurred in conjunction with the Temple Ligon trial and the Company's patent
infringement litigation. Other than litigation related expenses, most other
general and administrative expenses for the nine month period ended September
30, 2004 decreased compared to the corresponding period in 2003.
Interest expense. Interest expense for the three and nine month periods
ended September 30, 2004, was $24,126 and $72,335, respectively, compared to
$20,768 and $58,737 for the corresponding periods in 2003. Interest expense is
related to the Company's convertible notes which accrue interest at 8%. The
increase in interest expense during the three and nine month period ended
September 30, 2004 compared to the corresponding period in 2003 is primarily due
to the issuance of additional notes in late 2003 and the first quarter of 2004.
Convertible note principal outstanding at September 30, 2004, December 31, 2003,
and September 30, 2003 totaled $1,206,336, $1,181,336, and $1,055,336,
respectively.
Litigation accrual reversal. The Company has been a defendant in a lawsuit
which resulted in a jury verdict against the Company of $382,148 in January
2004. The Company recorded a reserve for the estimated loss in this litigation
of $386,148 in the fourth quarter of 2003 as a result of the jury verdict. In
July 2004 the trial judge ruled on post-trial motions submitted by the Company
and set aside the jury verdict.
Liquidity and Capital Resources
The Company has generated net losses of $68,527,119 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.
Net cash used during the nine months ended September 30, 2004, to fund
operations was $443,868, compared to $411,223 used for operations for the same
period in 2003. The increase in cash used to fund operations for the nine months
ended September 30, 2004 compared to the corresponding period in 2003 is
primarily attributable to increased legal expenses. At September 30, 2004 cash
and liquid investments were $177,118, as compared to $578,398 at December 31,
2003. At September 30, 2004 working capital was a deficit of $1,403,958, as
compared to a deficit of $909,356 at December 31, 2003.
To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At September 30, 2004, the Company had cash and cash equivalents of
$177,118. The Company believes that its existing cash resources are sufficient
to fund its expected ordinary course cash operating expenses through the
remainder of 2004. However, unexpected expenses or cash requirements, such as if
the Company becomes obligated to pay more than an insignificant amount of
damages in connection with the Temple Ligon litigation which is discussed in
more detail below, may exhaust the Company's remaining cash resources prior to
the end of 2004. Moreover, the Company currently does not have the resources to
repay the principal and accrued interest outstanding under its convertible
secured notes, which have become due and
15
payable in full as discussed below. If any of the holders of these notes takes
action to collect the amounts owed by the Company under these notes, the Company
will be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection.
In 2002, 2003, and the first quarter of 2004, the Company issued
convertible secured notes (the "notes") to certain investors as part of its
efforts to raise additional capital. These notes bear interest at 8%, are
convertible into the Company's common stock at a conversion rate of $.20 per
share, and are secured by the Company's equity interest in decisioning.com,
Inc., which owns the Company's patent portfolio. Principal and interest under
these notes generally becomes payable in full on the second anniversary of the
date on which these notes were issued. However, under the terms of the notes,
principal and interest under all notes becomes immediately due and payable in
certain events, including bankruptcy or similar proceedings involving the
Company, a default in the payment of principal and interest under any note, or a
change in control of the Company.
On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. The Company has initiated discussions with the holders of these notes
regarding the extension of the maturity date of these notes. However, the
Company has not been successful in reaching an agreement with all of the holders
of these notes regarding an extension of their maturity date. Because the
Company is currently in default regarding payment of principal and interest due
under the notes that matured on June 2, 2004, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of September 30, 2004. As of
September 30, 2004, and December 31, 2003, the principal and accrued interest
outstanding under all of the notes was $1,389,177 and $1,291,841, respectively.
On October 6, 2004 AMRO International, S. A. converted $29,683 in principal
and accrued interest outstanding under its note into an aggregate of 148,417
shares of common stock. Such conversion reduced AMRO's outstanding principal and
accrued interest under its note to $106,336 and $19,944, respectively. AMRO
acquired its note on June 2, 2002 in satisfaction of a convertible debenture it
acquired in November of 2000.
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the pending reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is likely that the Company will be required to
raise additional capital. The uncertainties of these litigation matters, the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and other factors
affecting the Company's short and long-term liquidity discussed above will
likely impede the Company's ability to raise additional capital. To maintain the
minimal resources necessary to support its current operations, prosecute the
reexamination of U. S. Patent Nos. 5,940,811 and 6,105,007, and execute a patent
licensing strategy, 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 generate working
capital from its patent licensing business.
The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include filing for bankruptcy protection.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that its current business exposes it to
significant market risk for changes in interest rates.
Item 4. Controls and Procedures
The Company has carried out an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Rule 13a-15 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2004, in recording, processing, summarizing and reporting information required
to be disclosed by the Company (including consolidated subsidiaries) in the
Company's Exchange Act filings.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Part II. Other Information
Items 4 and 5 are not applicable.
Item 1. Legal Proceedings
The Company and its founder, Jeff Norris, have been defendants in a
lawsuit filed by Temple Ligon on November 30, 1996 in the Court of
Common Pleas for the County of Richland in Columbia, South Carolina.
Mr. Ligon claims, among other things, that the Company and Mr. Norris
breached an agreement to give him a 1% equity interest in the Company
in consideration of services Mr. Ligon claims to have performed in
1993 and 1994 in conjunction with the formation of the Company, and
seeks monetary damages of $5,463,000. This lawsuit initially resulted
in a jury verdict against the Company of $68,000. However, Mr. Ligon
subsequently requested and was granted a new trial. In January 2004,
this litigation resulted in another jury verdict against the Company
of $382,148. In connection with this jury verdict, the Company filed
post-trial motions with the trial court in which, among other things,
it claimed that the jury verdict should be set aside. On July 23,
2004, the trial judge granted the Company's motions, set aside the
jury verdict, and ordered entry of a judgment in favor of the Company.
The plaintiff has appealed the trial judge's ruling to the South
Carolina Court of Appeals. If the Company becomes obligated to pay
more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding
down its business, which may include filing for bankruptcy protection.
In June 2003, the Company filed a lawsuit against Federated Department
Stores, Inc., and certain of its subsidiaries ("Federated") alleging
that Federated has infringed one of the Company's patents (U. S.
Patent No. 6,105,007). In September 2003, the Company filed a similar
lawsuit against Ameritrade Holding Corporation and its subsidiary,
Ameritrade, Inc. ("Ameritrade"), alleging infringement of the same
patent. Both lawsuits were filed in the United States District Court
in Columbia, South Carolina (the "Columbia Federal Court"), and both
seek unspecified damages. On March 26, 2004, the Company was notified
by Federated and Ameritrade that they had jointly filed a request with
the PTO to reexamine U. S. Patent No. 6,105,007. On June 23, 2004, the
Company received notification that the PTO had granted the request for
reexamination. The Company has jointly, with Federated and Ameritrade,
requested the Columbia Federal Court to stay the lawsuits against
Federated and Ameritrade pending resolution of the reexamination of U.
S. Patent No. 6,105,007. It is likely that it will take an extended
period of time to complete the reexamination proceedings and the
related litigation with Federated and Ameritrade.
In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States
District Court in Wilmington, Delaware (the "Delaware Federal Court").
17
In its complaint Household requested the Delaware Federal Court to
rule that Household was not infringing any of the claims of the
Company's patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and
No. 6,105,007) and that the patents were not valid. The Company filed
counterclaims against Household claiming that Household infringes U.
S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also
filed a motion with the Delaware Federal Court to transfer the case to
the Columbia Federal Court. In April 2004 the Delaware Federal Court
granted the Company's motion to transfer the case to the Columbia
Federal Court. As discussed previously, the PTO has granted the
reexamination request filed by Federated and Ameritrade relating to U.
S. Patent No. 6,105,007. The Company has initiated discussions with
Household to jointly file a request with the Columbia Federal Court to
stay the Household action pending the resolution of the PTO's
reexamination of U.S. Patent No. 6,105,007.
Item 2. Unrestricted Sales of Equity Securities and Use of Proceeds
On October 6, 2004, the Company issued 148,417 shares of its common
stock upon conversion of principal and interest of $29,683 outstanding
under the Company's convertible notes issued in June 2002. These
shares were issued in a transaction exempt from registration pursuant
to Section 3(a)(9) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
In 2002, 2003 and the first quarter of 2004, the Company issued
convertible secured notes (the "notes") to certain investors as part
of its efforts to raise additional capital. These notes bear interest
at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity
interest in decisioning.com, Inc., which owns the Company's patent
portfolio. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these
notes were issued. However, under the terms of the notes, principal
and interest under all notes becomes immediately due and payable in
certain events, including bankruptcy or similar proceedings involving
the Company, a default in the payment of principal and interest under
any note, or a change in control of the Company.
On June 2, 2004, notes issued on June 3, 2002 with a principal amount
of $756,336 became due and payable. The Company has initiated
discussions with the holders of these notes regarding the extension of
the maturity date of these notes. However, the Company has not been
successful in reaching an agreement with all of the holders of these
notes regarding an extension of their maturity date. Because the
Company is currently in default regarding payment of principal and
interest due under the notes that matured on June 2, 2004, the full
amount of principal and interest outstanding under all notes has
become due and payable. Accordingly, the full amount of principal and
accrued interest under all of these notes is shown as a current
liability of the Company as of September 30, 2004. As of September 30,
2004 and November 15, 2004 (the date on which this report was filed
with the Securities and Exchange Commission), the aggregate amount of
principal and accrued interest outstanding under these notes was
$1,389,177 and $1,371,335, respectively.
If a holder of any of the notes takes action to collect the amounts
owed by the Company under the note, the Company will be forced to
consider alternatives for winding down its business, which may include
filing for bankruptcy protection.
18
Item 6. 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).
31 Rule 13a-14(a) 15d-14(a) Certifications
32 Section 1350 Certifications
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: November 15, 2004
19