-----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, EDzuViFjY7luT3xqATF5/DEbYv83r1LGCQ3a3lA8PxSpPhtzfjvEAY8AJN11GZ8a J+3QByKvAJ2FD+fZQvuroQ== 0001157523-05-004806.txt : 20050516 0001157523-05-004806.hdr.sgml : 20050516 20050516160324 ACCESSION NUMBER: 0001157523-05-004806 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 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: 05834387 BUSINESS ADDRESS: STREET 1: 8807 A TWO NOTCH ROAD STREET 2: SUITE A CITY: COLUMBIA STATE: SC ZIP: 29223 BUSINESS PHONE: 8037582511 MAIL ADDRESS: STREET 1: 8807 A TWO NOTCH ROAD STREET 2: SUITE A CITY: COLUMBIA STATE: SC ZIP: 29223 10-Q 1 a4888992.txt AFFINITY TECHNOLOGY GROUP 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 March 31, 2005 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. 8807-A Two Notch Road Columbia, SC 29223 (Address of principal executive offices) (Zip code) (803) 758-2511 (Registrant's telephone number, including area code) 1053-B Sparkleberry Lane Extension Columbia, SC 29223 (Former name, former address and former fiscal year, if changed since last report) 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. 42,215,096 shares of Common Stock, $0.0001 par value, as of May 1, 2005. AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004................................................... 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004................................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004....................................... 5 Notes to Condensed Consolidated Financial Statements................. 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 17 ITEM 4. Controls and Procedures........................................ 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ............................................. 18 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 19 ITEM 3. Defaults Upon Senior Securities................................ 19 ITEM 6. Exhibits....................................................... 20 Signature................................................................. 20 2 Statements in this report (including Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not descriptions of historical facts, such as statements about the Company's future prospects and cash requirements, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may vary due to risks and uncertainties, including the Company's very limited capital resources and the possibility that it may be unable to raise additional capital in amounts sufficient to permit it to continue operations; the risk that the Company may lose all or part of the claims covered by its patents as a result of existing and future challenges to its patents; the risk that its patents may be subject to additional reexamination by the U.S. Patent and Trademark Office or challenge by third parties; 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 result of ongoing litigation; and unanticipated costs and expenses affecting the Company's cash position. If the Company is not able to raise additional capital, it may be forced to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. Moreover, if any of the holders of the convertible notes issued by the Company take 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 offering its patents for sale or filing for bankruptcy protection. These and other factors discussed in the Company's filings with the Securities and Exchange Commission, including the information set forth under the caption "Business Risks" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004, may cause actual results to differ materially from those anticipated. Part I. Financial Information Item 1. Financial Statements Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets March 31, 2005 December 31, (Unaudited) 2004 ------------------------------ Assets Current assets: Cash and cash equivalents $ 9,885 $ 62,756 Prepaid expenses 28,406 47,235 ------------------------------ Total current assets 38,291 109,991 Property and equipment, net 9,249 11,249 ------------------------------ Total assets $ 47,540 $ 121,240 ============================== Liabilities and stockholders' deficiency Current liabilities: Accounts payable $ 52,803 $ 21,502 Accrued expenses 440,816 417,219 Convertible notes 1,156,336 1,181,336 Current portion of deferred revenue 10,294 14,706 ------------------------------ Total current liabilities 1,660,249 1,634,763 ------------------------------ Commitments and contingent liabilities Stockholders' deficiency: Common stock, par value $0.0001; authorized 60,000,000 shares, issued 44,383,104 shares at March 31, 2005 and 44,230,910 at December 31, 2004 4,438 4,423 Additional paid-in capital 70,695,797 70,665,373 Treasury stock, at cost (2,168,008 shares at March 31, 2005 and December 31, 2004) (3,505,287) (3,505,287) Accumulated deficit (68,807,657) (68,678,032) ------------------------------ Total stockholders' deficiency (1,612,709) (1,513,523) ------------------------------ Total liabilities and stockholders' deficiency $ 47,540 $ 121,240 ============================== See accompanying notes. 3 Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) Three months ended March 31, 2005 2004 ------------------------------ Revenues: Patent license revenue $ 4,412 $ 254,412 ------------------------------ Costs and expenses: Cost of revenues 441 62,941 General and administrative expenses 110,247 291,081 ------------------------------ Total costs and expenses 110,688 354,022 ------------------------------ Operating loss (106,276) (99,610) Other income (expenses): Interest income 61 702 Interest expense (23,410) (24,082) ------------------------------ Net loss $ (129,625) $ (122,990) ============================== Net loss per share - basic and diluted $ (0.00) $ (0.00) ============================== Shares used in computing net loss per share 42,159,292 41,864,485 ============================== See accompanying notes. 4 Affinity Technology Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2005 2004 ------------------------------ Operating activities Net loss $ (129,625) $ (122,990) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,000 2,134 Write-off of organizational costs - 1,147 Deferred revenue (4,412) (4,412) Changes in current assets and liabilities: Other current assets 18,829 (31,736) Accounts payable and accrued expenses 60,337 55,555 ------------------------------ Net cash used in operating activities (52,871) (100,302) Investing activities Purchases of property and equipment - (1,012) ------------------------------ Net cash used in investing activities - (1,012) Financing activities Proceeds from convertible notes - 25,000 ------------------------------ Net cash provided by financing activities - 25,000 Net decrease in cash (52,871) (76,314) Cash and cash equivalents at beginning of period 62,756 578,398 ------------------------------ Cash and cash equivalents at end of period $ 9,885 $ 502,084 ============================== 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. (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), 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 in the near term to engage in further sales or other activities related to its products or services, other than to attempt 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 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 U.S. Patent and Trademark Office (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. On March 30, 2005, the Company received a Notice of Intent to Issue Ex Parte Reexamination Certificate from the PTO indicating that the reexamination of its other loan processing patent (U. S. Patent No. 5,940,811) had been completed. The Company expects to receive the Reexamination Certificate for this patent in due course. 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 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 raise 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 the 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 certain of the Company's patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007) and that these 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 above, the PTO has granted the reexamination request filed by Federated and Ameritrade relating to U. S. Patent No. 6,105,007. The Company has jointly, with Household, requested 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. 6 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 March 31, 2005, the Company had cash and cash equivalents of $9,885. In May 2005, the Company sold an additional $75,000 principal amount of its convertible secured notes (the "notes"). The Company believes that the proceeds from its latest issuance of notes will be sufficient to fund its ordinary course operating expenses through June 2005. However, to continue its operations through the remainder of 2005 and beyond, the Company must raise additional capital. Unless the Company raises additional capital, it may have to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 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 in the following paragraphs. If any of the holders of these notes take 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 offering its patents for sale or filing for bankruptcy protection. In 2002 the Company initiated a convertible note program under which it is authorized to issue up to $1,500,000 principal amount of its notes. To date, the Company has issued an aggregate of $1,355,336 principal amount of notes under this program, including $75,000 principal amount of notes issued in May 2005 as discussed above. 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. The outstanding notes include a note in the principal amount of $125,000 acquired on June 3, 2002 by the Company's Chief Executive Officer and a note in the principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The South Financial Group, which owns approximately 12% of the Company's outstanding capital stock. The full amount of 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, the full amount of 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. Additionally, on March 13, 2005 notes with a principal amount of $200,000 became due and payable. The Company has had 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 certain of the notes, 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 March 31, 2005 and December 31, 2004. As of March 31, 2005, and December 31, 2004, the amount of principal and accrued interest outstanding under all of the notes was $1,376,120 and $1,383,149, respectively. Under the terms of the note purchase agreement that governs the Company's convertible secured note program, the Company previously was not permitted to issue any additional notes if there was an existing default under any of the notes. As discussed above, because the Company currently is in default regarding payment of principal and interest due under certain of the notes, it was not permitted to issue any additional notes under the note purchase agreement. In May 2005, the note purchase agreement was amended to remove this provision. Following this amendment, in May 2005 the Company issued an additional $75,000 principal amount of notes. 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 7 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 ongoing 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 critical that the Company raise additional capital. The uncertainties of these litigation matters, the reexamination of U. S. Patent No. 6,105,007, and other factors affecting the Company's short and long-term liquidity discussed above has impeded and will likely continue to 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 No. 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. 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. 2. Basis of Presentation The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2004 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, 2004. 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 2004 have been reclassified to conform to 2005 presentation for comparability. These reclassifications have no effect on previously reported stockholders' equity 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 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (SFAS 123R). This accounting standard, which is effective for interim and annual periods beginning after January 1, 2006, requires the recognition of compensation expense related to stock options under SFAS 123. The Company plans to adopt SFAS 123R prospectively in the first quarter of 2006 with an anticipated impact to earnings per share of less than $0.01 per share in 2006. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs (SFAS 151), an amendment of Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing. This accounting standard, which is effective for annual periods beginning after June 15, 2005, requires that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges. The adoption of SFAS 151 is not expected to have a material effect on the Company's financial position or results of operations. 8 In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS 153), Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board Opinion ("APB") No. 29, Accounting for Nonmonetary Transactions (APB 29). This Statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. Retroactive application is not permitted. Management believes that SFAS 153 will not have a significant impact on the Company's financial position, results of operations or cash flows. 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 Statements 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. Until the Company adopts SFAS 123R as discussed above in Note 1, 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. 9 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 below: Three Months Ended March 31, 2005 2004 ---------------- ---------------- Net loss: As reported $ (129,625) $ (122,990) 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 (3,463) (9,057) ---------------- ---------------- Pro forma net loss $ (133,088) $ (132,047) ================ ================ Net loss per common share: As reported: Basic and diluted $ (0.00) $ (0.00) Pro forma: Basic and diluted $ (0.00) $ (0.00) 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 loss per share because the Company has experienced operating losses in all periods presented and, therefore, the effect would be anti-dilutive. 6. Convertible Notes The Company has issued convertible secured notes (the "notes") to certain investors as part of its capital raising initiatives. As of March 31, 2005, the Company had issued an aggregate of $1,280,336 in principal amount of the notes under this program. The notes bear interest at 8% and are collateralized by the stock of the Company's wholly-owned subsidiary, decisioning.com. decisioning.com is the Company's patent licensing subsidiary and owns the Company's patent portfolio. The notes are convertible into the Company's common stock at a conversion rate of $.20 per share. The Company may prepay the notes subject to a prepayment penalty of 8% and 4% if the prepayment occurs within the first twelve months or thereafter, respectively. The full amount of principal and interest under the 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, the full amount of 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. 10 On June 2, 2004, notes with a principal amount of $756,336 became due and payable. Additionally, on March 13, 2005 notes with a principal amount of $200,000 became due and payable. The Company has had 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 certain of the notes, 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 March 31, 2005 and December 31, 2004. As of March 31, 2005, and December 31, 2004, the amount of principal and accrued interest outstanding under all of the notes was $1,376,120 and $1,383,149, respectively. The notes issued by the Company include a note in the principal amount of $125,000 issued in 2002 to the Company's Chairman and Chief Executive Officer and a note in the principal amount of $100,000 issued in 2003 to a subsidiary of The South Financial Group, which owns approximately 12% of the Company's outstanding common stock The notes issued by the Company also include a note in the original principal amount of $205,336 issued in 2002 to AMRO International, S.A. ("AMRO") in satisfaction of the principal and accrued interest outstanding under AMRO's convertible debenture previously acquired by AMRO. In October 2003, AMRO converted $74,000 principal and $7,959 accrued interest under its note into 409,796 shares of the Company's common stock. In October 2004, AMRO converted an additional $25,000 principal and $4,683 accrued interest related to its note into 148,417 shares of the Company's common stock. In February 2005, AMRO converted an additional $25,000 principal and $5,439 accrued interest related to its note into 152,194 shares of the Company's common stock. The contractual maturities of the principal of the Company's 8% convertible notes are as follows: March 31, December 31, Maturity Date 2005 2004 --------------------------- -------------------------------- June 2004 $ 706,336 $ 731,336 March 2005 200,000 200,000 August 2005 25,000 25,000 November 2005 150,000 150,000 December 2005 50,000 50,000 January 2006 25,000 25,000 -------------- -------------- 1,156,336 1,181,336 Less: current portion (1,156,336) (1,181,336) -------------- -------------- Long-term portion $ - $ - ============== ============== 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 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 lawsuit resulted in another 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 11 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 offering its patents for sale or filing for bankruptcy protection. The Company is involved in three other lawsuits related to infringement by third parties of its patents. 9. Subsequent Event Under the terms of the note purchase agreement that governs the Company's convertible secured note program, the Company previously was not permitted to issue any additional notes if there was an existing default under any of the notes. As discussed above in Note 6, because the Company currently is in default regarding payment of principal and interest due under certain of the notes, it was not permitted to issue any additional notes under the note purchase agreement. In May 2005, the note purchase agreement was amended to remove this provision. Following this amendment, in May 2005 the Company issued an additional $75,000 principal amount of notes. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements in this report (including Management's Discussion and Analysis of Financial Condition and Results of Operations) that are not descriptions of historical facts, such as statements about the Company's future prospects and cash requirements, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may vary due to risks and uncertainties, including the Company's very limited capital resources and the possibility that it may be unable to raise additional capital in amounts sufficient to permit it to continue operations; the risk that the Company may lose all or part of the claims covered by its patents as a result of existing and future challenges to its patents; the risk that its patents may be subject to additional reexamination by the U.S. Patent and Trademark Office or challenge by third parties; 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 result of ongoing litigation; and unanticipated costs and expenses affecting the Company's cash position. If the Company is not able to raise additional capital, it may be forced to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. Moreover, if any of the holders of the convertible notes issued by the Company take 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 offering its patents for sale or filing for bankruptcy protection. These and other factors discussed in the Company's filings with the Securities and Exchange Commission, including the information set forth under the caption "Business Risks" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004, 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), 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 in the near term to engage in further sales or other activities related to its products or services, other than to attempt 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 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 U.S. Patent and Trademark Office (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. On March 30, 2005, the Company received a Notice of Intent to Issue Ex Parte Reexamination Certificate from the PTO indicating that the reexamination of its other loan processing patent (U. S. Patent No. 5,940,811) had been completed. The Company expects to receive the Reexamination Certificate for this patent in due course. 13 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 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 raise 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 the 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 certain of the Company's patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007) and that these 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 above, the PTO has granted the reexamination request filed by Federated and Ameritrade relating to U. S. Patent No. 6,105,007. The Company has jointly, with Household, requested 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. 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 March 31, 2005, the Company had cash and cash equivalents of $9,885. In May 2005, the Company sold an additional $75,000 principal amount of its notes. The Company believes that the proceeds from its latest issuance of notes will be sufficient to fund its ordinary course operating expenses through June 2005. However, to continue its operations through the remainder of 2005 and beyond, the Company must raise additional capital. Unless the Company raises additional capital it may have to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 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 in the following paragraphs. If any of the holders of these notes take 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 offering its patents for sale or filing for bankruptcy protection. In 2002 the Company initiated a convertible note program under which it is authorized to issue up to $1,500,000 principal amount of its notes. To date, the Company has issued an aggregate of $1,355,336 principal amount of notes under this program, including $75,000 principal amount of notes issued in May 2005 as discussed above. 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. The outstanding notes include a note in the principal amount of $125,000 acquired on June 3, 2002 by the Company's Chief Executive Officer and a note in the principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The South Financial Group, which owns approximately 12% of the Company's outstanding capital stock. 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, the full amount of 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. 14 On June 2, 2004, notes with a principal amount of $756,336 became due and payable. Additionally, on March 13, 2005 notes with a principal amount of $200,000 became due and payable. The Company has had 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 certain of the notes, 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 March 31, 2005 and December 31, 2004. As of March 31, 2005, and December 31, 2004, the amount of principal and accrued interest outstanding under all of the notes was $1,376,120 and $1,383,149, respectively. Under the terms of the note purchase agreement that governs the Company's convertible secured note program, the Company previously was not permitted to issue any additional notes if there was an existing default under any of the notes. As discussed above, because the Company currently is in default regarding payment of principal and interest due under certain of the notes, it was not permitted to issue any additional notes under the note purchase agreement. In May 2005, the note purchase agreement was amended to remove this provision. Following this amendment, in May 2005 the Company issued an additional $75,000 principal amount of notes. 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 ongoing 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 critical that the Company raise additional capital. The uncertainties of these litigation matters, the reexamination of U. S. Patent No. 6,105,007, and other factors affecting the Company's short and long-term liquidity discussed above has impeded and will likely continue to 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 No. 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 offering its patents for sale or 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. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our 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 March 31, 2005 and December 31, 2004, the Company recorded a valuation allowance that reduced its deferred tax assets to equal its deferred tax liability. 15 Results of Operations Revenues Patent license revenue. The Company recognized $4,412 and $254,412 associated with its patent licensing activities for the three months ended March 31, 2005 and 2004, respectively. Of the total amount recognized in the three month period ended March 31, 2004, $250,000 was related to a settlement agreement with an institution that formerly maintained a system that permitted consumers to apply for credit cards over the Internet. During the three-month periods ended March 31, 2005 and 2004, the Company recognized $4,412 related to a three-year license agreement entered into in 2002. Costs and Expenses Cost of Revenues. Cost of revenues for the three months ended March 31, 2005 was $441, compared to $62,941 for the corresponding period in 2004. Cost of revenues consists of commissions paid to the Company's patent licensing representatives. The decrease in cost of revenues during the three months ended March 31, 2005 compared to the same period in 2004 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 $110,247 for the three months ended March 31, 2005, as compared to $291,081 for the corresponding period in 2004. The decrease for the three months ended March 31, 2005, as compared to the corresponding period of 2004 is primarily attributable to patent litigation and legal expenses incurred by the Company in connection with the Temple Ligon trial during the first quarter of 2004. Interest expense. Interest expense for the three months ended March 31, 2005, was $23,410, compared to $24,082 for the corresponding period in 2004. Interest expense is related to the Company's convertible notes which accrue interest at 8%. The decrease in interest expense during the three month period ended March 31, 2005 compared to the corresponding period in 2004 is due to the conversion of an aggregate of $50,000 in principal amount of the Company's convertible notes in the fourth quarter of 2004 and first quarter of 2005. Convertible note principal outstanding at March 31, 2005, December 31, 2004, and March 31, 2004 totaled $1,156,336, $1,181,336, and $1,206,336, respectively. Liquidity and Capital Resources The Company has generated net losses of $68,807,657 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. 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 March 31, 2005, the Company had cash and cash equivalents of $9,885. In May 2005, the Company sold an additional $75,000 principal amount of its notes in May 2005. The Company believes that the proceeds from its latest issuance of notes will be sufficient to fund its ordinary course operating expenses through June 2005. However, to continue its operations through the remainder of 2005 and beyond, the Company must raise additional capital. Unless the Company raises additional capital it may have to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 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 in the following paragraphs. 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 offering its patents for sale or filing for bankruptcy protection. In 2002 the Company initiated a convertible note program under which it is authorized to issue up to $1,500,000 principal amount of its notes. To date, the Company has issued an aggregate of $1,355,336 principal amount of convertible secured notes to raise additional capital under this program, including $75,000 principal amount of notes issued in May 2005 as discussed above. These notes bear interest at 8%, are convertible into the Company's common stock at a 16 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. The outstanding notes include a note in the principal amount of $125,000 acquired on June 3, 2002 by the Company's Chief Executive Officer and a note in the principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The South Financial Group, which owns approximately 12% of the Company's outstanding capital stock. The full amount of 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, the full amount of 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. Additionally, on March 13, 2005 notes with a principal amount of $200,000 became due and payable. The Company has had 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 certain of the notes, 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 March 31, 2005 and December 31, 2004. As of March 31, 2005, and December 31, 2004, the amount of principal and accrued interest outstanding under all of the notes was $1,376,120 and $1,383,149, respectively. Under the terms of the note purchase agreement that governs the Company's convertible secured note program, the Company previously was not permitted to issue any additional notes if there was an existing default under any of the notes. As discussed above, because the Company currently is in default regarding payment of principal and interest due under certain of the notes, it was not permitted to issue any additional notes under the note purchase agreement. In May 2005, the note purchase agreement was amended to remove this provision. Following this amendment, in May 2005 the Company issued an additional $75,000 principal amount of notes. 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 ongoing 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 critical that the Company raise additional capital. The uncertainties of these litigation matters, the reexamination of U. S. Patent No. 6,105,007, and other factors affecting the Company's short and long-term liquidity discussed above has impeded and will likely continue to 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 No. 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. Net cash used during the three months ended March 31, 2005, to fund operations was approximately $53,000, compared to approximately $100,000 used by operations for the same period in 2004. At March 31, 2005 cash and liquid investments were $9,885, as compared to $62,756 at December 31, 2004. At March 31, 2005 working capital was a deficit of $1,621,958 as compared to a deficit of $1,524,772 at December 31, 2004. 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. 17 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 March 31, 2005, 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, are 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 lawsuit resulted in another 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 offering its patents for sale or filing for bankruptcy protection. In June 2003, the Company filed a lawsuit against Federated Department Stores, Inc., and certain of its subsidiaries 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., alleging infringement of the same patent. Both lawsuits were filed in the United States District Court in Columbia, South Carolina, 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 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 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 certain of the Company's patents (U.S. Patent No. 5,870,721 C1, No. 5,940,811, and No. 6,105,007) and that these 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 18 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 jointly, with Household, requested 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. Unregistered Sales of Equity Securities and Use of Proceeds (a) On May 6, 2005, the Company issued $75,000 principal amount of its convertible secured notes for cash in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. These notes are convertible into shares of common stock of the Company at a price of $0.20 per share. On February 22, 2005, AMRO converted $25,000 principal and $5,439 accrued interest related to its convertible secured note into 152,194 shares of the Company's common stock. AMRO's note was issued on June 3, 2002 and is convertible into shares of common stock of the Company at a price of $0.20 per share. (b) Not applicable. (c) Not applicable. Item 3. Defaults Upon Senior Securities In 2002 the Company initiated a convertible note program under which it is authorized to issue up to $1,500,000 principal amount of its notes. To date, the Company has issued an aggregate of $1,355,336 principal amount of convertible secured notes to raise additional capital under this program, including $75,000 principal amount of notes issued by the Company in May 2005. 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. The full amount of 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, the full amount of 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. Additionally, on March 13, 2005 notes with a principal amount of $200,000 became due and payable. The Company has had 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 certain of the notes, 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 March 31, 2005 and December 31, 2004. As of the date of this report, the amount of principal and accrued interest outstanding under all of the notes was $1,463,123. If any of the holders of these notes take 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 offering its patents for sale or filing for bankruptcy protection. 19 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: May 16, 2005 20 EX-31 2 a4888992ex31.txt EXHIBIT 31 - CERTIFICATIONS 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: May 16, 2005 21 EX-32 3 a4888992ex32.txt EXHIBIT 32 - CERTIFICATION 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 March 31, 2005, 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 May 16, 2005 22 -----END PRIVACY-ENHANCED MESSAGE-----