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, 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.
41,864,485 shares of Common Stock, $0.0001 par value, as of May 1, 2004.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003...................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 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............................................................ 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk....................... 18
ITEM 4. Controls and Procedures.......................................................... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................ 18
ITEM 2. Changes in Securities and Use of Proceeds........................................ 19
ITEM 6. Exhibits and Reports on Form 8-K................................................. 19
Signature................................................................................. 19
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 failure by
the Company to raise additional capital or generate revenues in amounts
sufficient to permit it to continue its operations, 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 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, 2003. These
and other factors 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,
2004 December 31,
(Unaudited) 2003
---------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 502,084 $ 578,398
Other current assets 51,858 20,121
---------------------------------------
Total current assets 553,942 598,519
Property and equipment, net 17,213 18,336
Other assets - 1,147
---------------------------------------
Total assets $ 571,155 $ 618,002
=======================================
Liabilities and stockholders' deficiency
Current liabilities:
Accounts payable $ 102,163 $ 76,056
Accrued expenses 687,284 657,836
Convertible notes 956,336 756,336
Current portion of deferred revenue 17,647 17,647
---------------------------------------
Total current liabilities 1,763,430 1,507,875
Convertible notes 250,000 425,000
Deferred revenue 10,294 14,706
Commitments and contingent liabilities
Stockholders' deficiency:
Common stock, par value $0.0001; authorized 60,000,000 shares,
issued 44,032,493 shares at March 31, 2004 and December 31, 2003 4,403 4,403
Additional paid-in capital 70,632,210 70,632,210
Treasury stock, at cost (2,168,008 shares at March 31, 2004 and
December 31, 2003) (3,505,287) (3,505,287)
Accumulated deficit (68,583,895) (68,460,905)
---------------------------------------
Total stockholders' deficiency (1,452,569) (1,329,579)
---------------------------------------
Total liabilities and stockholders' deficiency $ 571,155 $ 618,002
=======================================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2004 2003
----------------------------------------
Revenues:
Patent license revenue $ 254,412 $ 4,412
Costs and expenses:
Cost of revenues 62,941 442
General and administrative expenses 291,081 222,567
----------------------------------------
Total costs and expenses 354,022 223,009
----------------------------------------
Operating loss (99,610) (218,597)
Interest income 702 250
Interest expense (24,082) (17,362)
----------------------------------------
Net loss $ (122,990) $ (235,709)
========================================
Net loss per share - basic and diluted $ (0.00) $ (0.01)
========================================
Shares used in computing net loss per share 41,864,485 41,296,170
========================================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2004 2003
----------------------------------------
Operating activities
Net loss $ (122,990) $ (235,709)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,134 4,416
Write-off of organizational costs 1,147 -
Deferred revenue (4,412) (4,412)
Other - 25,840
Changes in current assets and liabilities:
Accounts receivable - 5,666
Other current assets (31,736) 12,671
Accounts payable and accrued expenses 55,555 51,780
----------------------------------------
Net cash used in operating activities (100,302) (139,748)
Investing activities
(Purchases) sales of property and equipment (1,012) 22,160
----------------------------------------
Net cash (used in) provided by investing activities (1,012) 22,160
Financing activities
Proceeds from convertible notes 25,000 200,000
----------------------------------------
Net cash provided by financing activities 25,000 200,000
Net (decrease) increase in cash (76,314) 82,412
Cash and cash equivalents at beginning of period 578,398 156,780
----------------------------------------
Cash and cash equivalents at end of period $ 502,084 $ 239,192
========================================
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 intends to contest the PTO's rejection and to 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. 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 the PTO's determination as to
whether it will grant the reexamination request. The procedural rules of the PTO
require the PTO to make a determination as to whether it will initiate a
reexamination within 90 days from the date it receives the request. If the PTO
grants the reexamination request, 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, if the PTO grants the
reexamination request, it is likely such decision will 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. 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. As discussed previously, Ameritrade and Federated have jointly filed a
reexamination request with the PTO relating to the Company's U. S. Patent No.
6,105,007. It is possible the Company will request the Columbia Federal Court to
stay the Household action pending the PTO's decision to grant Ameritrade's and
Federated's request for 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, 2004, the Company had cash and cash equivalents of
$502,084. The Company believes that its existing cash resources are sufficient
to fund its ordinary course operating expenses through the remainder of 2004.
However, the Company's ability to continue its operations for the remainder of
2004 is contingent upon the final outcome of the Company's litigation with
Temple Ligon, which is discussed below, and the ability of the Company to extend
the maturity date of all or substantially all of its convertible notes that are
due in June 2004. If the Company becomes obligated to pay more than an
insignificant amount of damages in connection with the Temple Ligon litigation
or is unable to extend the maturity date of all or substantially all of the
convertible notes that are due in June 2004, the Company will be forced to
consider alternatives for winding down its business, which may include filing
for bankruptcy protection.
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 a result, the
Company has been forced to become involved in litigation with alleged
infringers. Currently, the Company is involved in three patent litigation
actions. 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. As discussed previously, two of the alleged
infringers (Federated and Ameritrade) have notified the Company that they have
filed a request with the PTO to reexamine the Company's patent covering the
fully automated establishment of a financial account (U. S. Patent No.
6,105,007). If the PTO grants the reexamination request, it is likely that it
will take an extended period of time to complete the reexamination proceeding
and the related litigation with Federated and Ameritrade. Moreover, the
uncertainties of these litigation matters and other factors affecting the
Company's short and long-term liquidity discussed in the preceding paragraph
will likely impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations 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 is 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 $386,148. The
Company is seeking to have the verdict overturned by the trial judge. If it is
unsuccessful in doing so, the Company intends to appeal any adverse decision. No
assurances can be given that the Company will be successful in overturning the
verdict or, if it appeals the decision, in obtaining a favorable outcome on
appeal. 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.
As of March 31, 2004, the Company had outstanding $1,206,336 in aggregate
principal amount of convertible secured notes (the "notes"). Under the terms of
these notes, principal and accrued interest is due and payable on the second
anniversary of the date on which the notes were issued. On June 2, 2004,
principal and accrued interest of $756,336 and $121,014, respectively, are due.
The Company's ability to continue operations for the remainder of 2004 is
subject to its ability to extend the maturity date of all or substantially all
of the notes that are due in June 2004. The Company intends to initiate
discussions with certain holders of the notes that are due in June 2004 to
extend the maturity date of these notes. However, no assurances can be given
that the Company will be able to extend the maturity date of these notes. Under
the terms of the convertible notes, principal and accrued interest will become
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. If the Company
is not able to extend the maturity date of substantially all of these notes, it
will be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. The Company's convertible notes are
further discussed in Note 6.
7
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.
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, 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' 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 April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which amends
and clarifies accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and loan commitments that relate to the origination
of mortgage loans held for sale, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative, clarifies when a derivative contains
a financing component, amends the definition of an underlying to conform it to
language used in FIN 45, and amends certain other existing pronouncements. The
pronouncement was generally effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the
financial position or operating results of the Company.
8
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires an issuer to classify certain financial instruments that include
certain obligations, such as mandatory redemption, repurchase of the issuer's
equity, or settlement by issuing equity, previously classified as equity, as
liabilities or assets in some circumstances. SFAS No. 150 was generally
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any
impact on the financial position or operating results of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees and warranties that it
has issued. FIN 45 requires a company, at the time it issues a guarantee, to
recognize an initial liability for the fair value of obligations assumed under
the guarantee. The initial recognition requirements of FIN 45 were effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements were effective for financial statements for periods ending after
December 15, 2002. The adoption of FIN 45 did not have any impact on the
Company's financial position or results of operations.
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 November 2003, the Emerging Issues Task Force ("EITF") reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that
are impaired at the balance sheet date but for which other-than-temporary
impairment has not been recognized. Accordingly the EITF issued EITF No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." This issue addresses the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS No. 115 and provides guidance
on quantitative and qualitative disclosures. EITF No. 03-1 was effective for
fiscal years ending after December 15, 2003. The adoption of the disclosure
provisions of EITF No. 03-1 did not have any 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 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 Statement 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.
9
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. 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 below:
Three Months Ended March 31,
2004 2003
------------ ------------
Net loss:
As reported $ (122,990) $ (235,709)
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 (9,057) (15,792)
------------ ------------
Pro forma net loss $ (132,047) $ (251,501)
============ ============
Net loss per common share:
As reported:
Basic and diluted $ (0.00) $ (0.01)
Pro forma:
Basic and diluted $ (0.00) $ (0.01)
10
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
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital raising initiatives. The principal
amount of notes issued totaled $830,336 and included the issuance of a note in
the principal amount of $205,336 to AMRO International, S.A. ("AMRO") in
satisfaction of the principal and accrued interest outstanding under AMRO's
convertible debenture previously acquired by AMRO. The notes issued in 2002 also
include a note in the principal amount of $125,000 issued to the Company's
Chairman and Chief Executive Officer. The notes bear interest at 8% and
principal and accrued interest are due in June 2004. In 2003 and the first
quarter of 2004, the Company issued additional convertible notes in the
aggregate amount of $425,000 and $25,000, respectively. Such notes also bear
interest at 8% and mature at various dates in 2005 and 2006. Included in the
aggregate $425,000 of convertible notes issued by the Company in 2003 is a
$100,000 convertible note issued to a subsidiary of The South Financial Group,
which owns approximately 12% of the Company's outstanding common stock. All
notes 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.
In October 2003, AMRO converted $74,000 principal and $7,959 accrued
interest related to its $205,336 convertible note into 409,796 shares of the
Company's common stock.
11
The maturities of the principal of the Company's 8% convertible notes are
as follows:
March 31, December 31,
Maturity Date 2004 2003
--------------------------- ----------------------------
June 2004 $ 756,336 $ 756,336
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 -
----------- -----------
1,206,336 1,181,336
Less: current portion (956,336) (756,336)
----------- -----------
Long -term portion $ 250,000 $ 425,000
=========== ===========
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, 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 $386,148. The Company has filed a
motion to have the verdict overturned by the trial judge. If it is unsuccessful
in doing so, the Company intends to appeal any adverse decision. The Company
believes that it has meritorious defenses to the claims made by Mr. Ligon and
intends to vigorously defend itself. However, no assurances can be given that
the Company will be successful in overturning the verdict or, if it appeals the
decision, in obtaining a favorable outcome on appeal. 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.
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 failure by
the Company to raise additional capital or generate revenues in amounts
sufficient to permit it to continue its operations, 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 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, 2003. 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 in the near term 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 intends to contest the PTO's rejection and to 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. 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 the PTO's determination as to
whether it will grant the reexamination request. The procedural rules of the PTO
require the PTO to make a determination as to whether it will initiate a
reexamination within three months from the date it receives the request. If the
PTO grants the reexamination request, 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, if the PTO grants the
reexamination request, it is likely such decision will 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.
13
In November 2003, Household International, Inc. 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. As discussed previously, Ameritrade and Federated have jointly filed a
reexamination request with the PTO relating to the Company's U. S. Patent No.
6,105,007. It is possible the Company will request the Columbia Federal Court to
stay the Household action pending the PTO's decision to grant Ameritrade's and
Federated's request for 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, 2004, the Company had cash and cash equivalents of
$502,084. The Company believes that its existing cash resources are sufficient
to fund its ordinary course operating expenses through the remainder of 2004.
However, the Company's ability to continue its operations for the remainder of
2004 is contingent upon the final outcome of the Company's litigation with
Temple Ligon, which is discussed below, and the ability of the Company to extend
the maturity date of all or substantially all of its convertible notes that are
due in June 2004. If the Company becomes obligated to pay more than an
insignificant amount of damages in connection with the Temple Ligon litigation
or is unable to extend the maturity date of all or substantially all of the
convertible notes that are due in June 2004, the Company will be forced to
consider alternatives for winding down its business, which may include filing
for bankruptcy protection.
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 a result, the
Company has been forced to become involved in litigation with alleged
infringers. Currently, the Company is involved in three patent litigation
actions. 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. As discussed previously, two of the alleged
infringers (Federated and Ameritrade) have notified the Company that they have
filed a request with the PTO to reexamine the Company's patent covering the
fully automated establishment of a financial account (U. S. Patent No.
6,105,007). If the PTO grants the reexamination request, it is likely that it
will take an extended period of time to complete the reexamination proceeding
and the related litigation with Federated and Ameritrade. Moreover, the
uncertainties of these litigation matters and other factors affecting the
Company's short and long-term liquidity discussed in the preceding paragraph
will likely impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations 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 is 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 $386,148. The
Company is seeking to have the verdict overturned by the trial judge. If it is
unsuccessful in doing so, the Company intends to appeal any adverse decision. No
assurances can be given that the Company will be successful in overturning the
verdict or, if it appeals the decision, in obtaining a favorable outcome on
appeal. 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.
14
As of March 31, 2004, the Company had outstanding $1,206,336 in aggregate
principal amount of convertible secured notes (the "notes"). Under the terms of
these notes, principal and accrued interest is due and payable on the second
anniversary of the date on which the notes were issued. The maturity dates for
the notes outstanding as of March 31, 2004 is as follows:
Accrued Interest Total Principal and
Maturity Date Principal at Maturity Accrued Interest
- ------------- --------- ---------------- -------------------
June 2, 2004 $756,336 $121,014 $877,350
March 13, 2005 200,000 32,000 232,000
August 28, 2005 25,000 4,000 29,000
November 3, 2005 100,000 16,000 116,000
November 12, 2005 50,000 8,000 58,000
December 18, 2005 50,000 8,000 58,000
January 8, 2006 25,000 4,000 29,000
The notes bear interest at 8% and are collateralized by the stock of the
Company's wholly owned subsidiary, decisioning.com, Inc. 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 outstanding notes include a note in the current principal
amount of $131,336 issued to AMRO International, S.A. ("AMRO"). In June 2002,
the Company issued to AMRO a convertible note in the principal amount of
$205,336 in satisfaction of the principal and accrued interest outstanding under
a convertible debenture previously issued by the Company to AMRO. In October
2003, AMRO converted $74,000 of principal and $7,959 of accrued interest related
to its convertible note into 409,796 shares of the Company's common stock. The
outstanding notes also include a note in the principal amount of $125,000
acquired on June 3, 2002 by the Company's Chairman and 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 Company's ability to continue
operations for the remainder of 2004 is subject to its ability to extend the
maturity date of all or substantially all of the notes that are due in June
2004. The Company intends to initiate discussions with certain holders of the
notes that are due in June 2004 to extend the maturity date of these notes.
However, no assurances can be given that the Company will be able to extend the
maturity date of these notes. Under the terms of the notes, principal and
accrued interest under all of the notes will become 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. If the Company is not able to extend the
maturity date of substantially all of these notes that are due in June 2004, 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. 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, 2004
and December 31, 2003, the Company recorded a valuation allowance that reduced
its deferred tax assets to equal its deferred tax liability.
15
Results of Operations
Revenues
General. The Company recognized revenues of $254,412 associated with its
patent licensing activities for the three months ended March 31, 2004. The
Company has exited all of its previous business activities and is exclusively
pursuing opportunities to license its patents.
Patent license revenue. The Company recognized $254,412 associated with its
patent licensing activities for the three months ended March 31, 2004. Of the
total amount recognized, $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, 2004 and 2003, the Company also 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,
2004 was $62,941, compared to $442 for the corresponding period in 2003. Cost of
revenues consists of commissions paid to the Company's patent licensing
representatives. The increase in cost of revenues during the three months ended
March 31, 2004 compared to the same 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 $291,081 for the three months ended March 31, 2004, as compared to
$222,567 for the corresponding period in 2003. The increase for the three months
ended March 31, 2004, as compared to the corresponding period of 2003 is
primarily attributable to legal expenses incurred by the Company in connection
with the Temple Ligon trial. The Company has incurred approximately $125,000 of
expenses associated with this trial during the quarter.
Interest expense. Interest expense for the three months ended March 31,
2004, was $24,082, compared to $17,362 for the corresponding period 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 month period
ended March 31, 2004 compared to the corresponding period in 2003 is due to the
issuance of additional notes in 2003. Convertible note principal outstanding at
March 31, 2004, December 31, 2003, and March 31, 2003 totaled $1,206,336,
$1,181,336, and $1,030,336, respectively.
Liquidity and Capital Resources
The Company has generated net losses of $68,583,895 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, 2004, the Company had cash and cash equivalents of
$502,084. The Company believes that its existing cash resources are sufficient
to fund its ordinary course operating expenses through the remainder of 2004.
However, the Company's ability to continue its operations for the remainder of
2004 is contingent upon the final outcome of the Company's litigation with
Temple Ligon, which is discussed below, and the ability of the Company to extend
the maturity date of all or substantially all of its convertible notes that are
due in June 2004. If the Company becomes obligated to pay more than an
insignificant amount of damages in connection with the Temple Ligon litigation
or is unable to extend the maturity date of all or substantially all of the
convertible notes that are due in June 2004, the Company will be forced to
consider alternatives for winding down its business, which may include filing
for bankruptcy protection.
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 a result, the
Company has been forced to become involved in litigation with alleged
infringers. Currently, the Company is involved in three patent litigation
actions. 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. As discussed previously, two of the alleged
infringers (Federated and Ameritrade) have notified the Company that they have
filed a request with the PTO to reexamine the Company's patent covering the
fully automated establishment of a financial account (U. S. Patent No.
6,105,007). If the PTO grants the reexamination request, it is likely that it
will take an extended period of time to complete the reexamination proceeding
and the related litigation with Federated and Ameritrade. Moreover, the
uncertainties of these litigation matters and other factors affecting the
Company's short and long-term liquidity discussed in the preceding paragraph
will likely impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations 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.
16
The Company is 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 $386,148. The
Company is seeking to have the verdict overturned by the trial judge. If it is
unsuccessful in doing so, the Company intends to appeal any adverse decision. No
assurances can be given that the Company will be successful in overturning the
verdict or, if it appeals the decision, in obtaining a favorable outcome on
appeal. 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.
As of March 31, 2004, the Company had outstanding $1,206,336 in aggregate
principal amount of convertible secured notes (the "notes"). Under the terms of
these notes, principal and accrued interest is due and payable on the second
anniversary of the date on which the notes were issued. The maturity dates for
the notes outstanding as of March 31, 2004 is as follows:
Accrued Interest Total Principal and
Maturity Date Principal at Maturity Accrued Interest
- ------------- --------- ---------------- -------------------
June 2, 2004 $756,336 $121,014 $877,350
March 13, 2005 200,000 32,000 232,000
August 28, 2005 25,000 4,000 29,000
November 3, 2005 100,000 16,000 116,000
November 12, 2005 50,000 8,000 58,000
December 18, 2005 50,000 8,000 58,000
January 8, 2006 25,000 4,000 29,000
The notes bear interest at 8% and are collateralized by the stock of the
Company's wholly owned subsidiary, decisioning.com, Inc. 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's ability to continue operations for the
remainder of 2004 is subject to its ability to extend the maturity date of all
or substantially all of the notes that are due in June 2004. The Company intends
to initiate discussions with certain holders of the notes that are due in June
2004 to extend the maturity date of these notes. However, no assurances can be
given that the Company will be able to extend the maturity date of these notes.
Under the terms of the notes, principal and accrued interest will become
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. If the Company
is not able to extend the maturity date of substantially all of these notes, it
will be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection.
17
Net cash used during the three months ended March 31, 2004, to fund
operations was approximately $100,000, compared to approximately $140,000 used
by operations for the same period in 2003. At March 31, 2004 cash and liquid
investments were $502,084, as compared to $578,398 at December 31, 2003. At
March 31, 2004 working capital was a deficit of $1,209,488 as compared to a
deficit of $909,356 at December 31, 2003.
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 March 31,
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 3, 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 $386,148. The Company has filed a
motion to have the verdict overturned by the trial judge. If it is unsuccessful
in doing so, the Company intends to appeal any adverse decision. The Company
believes that it has meritorious defenses to the claims made by Mr. Ligon and
intends to vigorously defend itself. However, no assurances can be given that
the Company will be successful in overturning the verdict or, if it appeals the
decision, in obtaining a favorable outcome on appeal. 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 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 ("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. The Company has jointly, with Federated and
Ameritrade, requested the Court to stay the lawsuits against Federated and
Ameritrade pending the PTO's determination as to whether it will grant the
reexamination request. The procedural rules of the PTO require the PTO to make a
determination as to whether it will initiate a reexamination within three months
from the date it receives the request. If the PTO grants the reexamination
request, it is likely that it will take an extended period of time to complete
the reexamination proceedings, and it is likely that the pending lawsuits
against Federated and Ameritrade will be stayed until the reexamination
proceedings are completed.
18
In November 2003, Household International, Inc. 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. As discussed previously, Ameritrade and Federated have jointly filed a
reexamination request with the PTO relating to the Company's U. S. Patent No.
6,105,007. It is possible the company will request the Columbia Federal Court to
stay the Household action pending the PTO's decision to grant Ameritrade's and
Federated's request for reexamination of U. S. Patent No. 6,105,007.
Item 2. Changes in Securities and Use of Proceeds
On January 9, 2004, the Company issued $25,000 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.
Item 6. Exhibits and Reports on Form 8-K
(a) 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
(b) Reports on Form 8-K
None
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 17, 2004
19