-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BD49IVyuITeJXLfY3GiZSUTe82avpTZexjmVUEmqPruFMiVY2Tal8sizbe5oUZUo BjLnXBj0fsUIdOXuqmGugQ== 0001157523-04-010783.txt : 20041115 0001157523-04-010783.hdr.sgml : 20041115 20041115160056 ACCESSION NUMBER: 0001157523-04-010783 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFINITY TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0001007508 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 570991269 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28152 FILM NUMBER: 041145191 BUSINESS ADDRESS: STREET 1: 1053 B SPARKLEBERRY LANE EXTENSION STREET 2: SUITE B CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037582511 MAIL ADDRESS: STREET 1: 1053 B SPARKLEBERRY LANE EXTENSION STREET 2: SUITE B CITY: COLUMBIA STATE: SC ZIP: 29223 10-Q 1 a4764635.txt AFFINITY 10-Q 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 EX-31 2 a4764635ex31.txt AFFINITY EX 31 Exhibit 31 CERTIFICATIONS I, Joseph A. Boyle, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Affinity Technology Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted]; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /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 20 EX-32 3 a4764635ex32.txt AFFINITY EX 32 Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Affinity Technology Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph A. Boyle, President, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph A. Boyle - ------------------- Joseph A. Boyle President, Chief Executive Officer and Chief Financial Officer November 15, 2004 21 -----END PRIVACY-ENHANCED MESSAGE-----