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Affinity Technology Group Inc (1007508) SEC Filing 10-K Annual report for the fiscal year ending Monday, December 31, 2007

Affinity Technology Group Inc

CIK: 1007508

10-K
1
a5644917.txt
AFFINITY TECHNOLOGY GROUP, INC. 10-K


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
[X] ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2007

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.

                         Commission file number 0-28152

                         Affinity Technology Group, Inc.
             (Exact name of registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   57-0991269
                      (I.R.S. Employer Identification No.)

                           1310 Lady Street, Suite 601
                               Columbia, SC 29201
                    (Address of principal executive offices)
                                   (Zip code)

                                (803) 758-2511  (Registrant's  telephone number,
             including area code)

         Securities registered pursuant to Section 12(b) of the Act:
                                      None

         Securities registered pursuant to Section 12(g) of the Act:
                   Common Stock, par value $.0001 per share
                                (Title of class)

      Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [_]   No [X]

      Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_]   No [X]

      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 [_]


                                       1




      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

      Indicate  by check mark  whether  the  registrant  is a large  accelerated
filer, an accelerated  filer, a  non-accelerated  filer, or a smaller  reporting
company.  See the definitions of "large accelerated filer,"  "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

            Large Accelerated Filer [_]      Accelerated Filer [_]
            Non-Accelerated Filer   [_]      Smaller Reporting Company [X]

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes [_]   No [X]

      The aggregate  market value of the Registrant's  outstanding  Common Stock
held by non-affiliates of the Registrant was approximately $2,991,000 as of June
29, 2007.  For purposes of such  calculation,  persons who hold more than 10% of
the outstanding shares of Common Stock, directors and officers of the Registrant
and certain of their  immediate  family members have been treated as affiliates.
This determination is not conclusive.

      There were 47,142,398 shares of the Registrant's  Common Stock outstanding
as of March 15, 2008.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Certain portions of the  Registrant's  proxy statement with respect to the
2008 Annual Meeting of Stockholders of the Registrant have been  incorporated by
reference herein in response to certain Items in Part III of this report.


                                       2



                                  Introduction

      As used in this report,  unless the context otherwise requires,  the terms
"we,"  "our," "us" (or similar  terms),  the  "Company"  or  "Affinity"  include
Affinity Technology Group, Inc. and its subsidiaries, except that when used with
reference to common stock or other securities described herein and in describing
the positions held by management of the Company, the term includes only Affinity
Technology Group, Inc. The Company maintains a web site at  http://www.affi.net,
although  the contents of such web site are not  incorporated  into this report.
The Company has made its annual reports on Form 10-K,  quarterly reports on Form
10-Q,  and  current  reports  on Form 8-K and any  amendments  to these  reports
available  through  its web site free of charge  through a link to the SEC's web
site. These documents are available for access as soon as reasonably practicable
after we electronically file these documents with the SEC.

                             Forward-Looking Statements

      Statements  in this report,  including in Part I, Item 1,  "Business"  and
Part II, Item 7,  "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.  Forward-looking
statements  typically are identified by words such as "may,"  "will,"  "should,"
"anticipate,"  "estimate,"  "expect," "plan," "believe," predict,"  "potential,"
"intend,"  "continue"  and similar  expressions,  although some  forward-looking
statements may be expressed differently.  Forward-looking statements are subject
to known and unknown risks, assumptions that may prove inaccurate, uncertainties
and other  factors,  including  those set forth below in Part I, Item 1A,  "Risk
Factors,"  that  could  cause  actual  results to differ  materially  from those
expressed or implied by these forward-looking  statements. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date they are made.  The  Company  undertakes  no ongoing  obligation  to
update  these   forward-looking   statements   if  we  learn  that  any  of  the
forward-looking statements or the underlying assumptions are incorrect.

Part I

Item 1. Business

        Overview

      Affinity   Technology   Group,  Inc.  was  incorporated  as  a  Delaware
corporation  in 1994.  Its  principal  executive  offices  are located at 1310
Lady Street,  Suite 601,  Columbia,  South Carolina  29201,  and its telephone
number is (803) 758-2511.

      Affinity  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 Affinity include its DeciSys/RT 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,  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,  we have  suspended  all  efforts  to further  develop,  market and
operate these products and services.  Our last processing contract terminated in
late 2002,  and we have no plans in the near term to engage in further  sales or
other activities  related to our products or services,  other than to attempt to
license certain of the patents that we own.  Currently,  our business activities
consist  exclusively of attempting to enter into license  agreements  with third
parties to license our rights  under  certain of our patents and in pursuing the
patent  litigation  described  below in an effort to  protect  our  intellectual
property and obtain  recourse  against alleged  infringement of our patents.  In
2007, our sole revenues from  operations  were  generated  from one  outstanding
license of our patents.


                                       3



      Patents and Legal Matters

      In conjunction with our product development activities, we applied for and
obtained  three  patents.   We  have  been  granted  two  patents  covering  our
fully-automated  loan  processing  systems  (U.S.  Patent Nos.  5,870,721 C1 and
5,940,811  C1). In August 2000,  the U.S.  Patent and Trademark  Office  ("PTO")
issued to us a patent covering the fully-automated  establishment of a financial
account including credit accounts (U.S. Patent No. 6,105,007 C1).

      All of these  patents have been subject to  reexamination  by the PTO as a
result of challenges to such patents by third  parties.  On January 28, 2003, we
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
December 20, 2005,  we received a  Reexamination  Certificate  (U.S.  Patent No.
5,940,811 C1) from the PTO which formally  concluded the  reexamination  of U.S.
Patent No. 5,940,811. On July 25, 2006, we received a Reexamination  Certificate
(U.S.  Patent  No.  6,105,007  C1) from the PTO  which  formally  concluded  the
reexamination  of U.S.  Patent  No.  6,105,007  and  which  indicated  that  the
reexamination  resulted in the full  allowance of all the claims of this patent.
It is possible that third parties may bring additional actions to contest all or
some of our patents. We can give no assurances that we will not lose all or some
of the claims covered by our existing patents.

      In June 2003, we filed a lawsuit against Federated Department Stores, Inc.
("Federated"), and certain of its subsidiaries alleging that Federated infringed
one of our patents (U. S. Patent No.  6,105,007).  In September 2003, we filed a
similar  lawsuit  against  Ameritrade  Holding  Corporation  and its subsidiary,
Ameritrade, Inc. (collectively "Ameritrade"),  alleging infringement of the same
patent.  Both  lawsuits  were  filed  in the  United  States  District  Court in
Columbia,  South  Carolina  (the  "Columbia  Federal  Court"),  and both  sought
unspecified  damages.  In 2004, at the request of Federated and Ameritrade,  the
PTO  determined  to  reexamine  U.S.  Patent No.  6,105,007.  As a result of the
reexamination  of U.S.  Patent No.  6,105,007,  we,  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.  In March 2006,  we were notified that the PTO had concluded the
reexamination of U.S. Patent No. 6,105,007 and that such reexamination  resulted
in the full  allowance  of all the  claims  of this  patent.  As a result of the
completion of the PTO's reexamination of U.S. Patent No. 6,105,007,  the stay of
these lawsuits against  Federated and Ameritrade was automatically  lifted,  and
the lawsuits proceeded.

      In November 2003,  Household  International,  Inc.  ("Household")  filed a
declaratory  judgment  action against us 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 our 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. We filed  counterclaims
against Household  claiming that Household  infringed U. S. Patent No. 5,870,721
C1, No. 5,940,811,  and No. 6,105,007.  We 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 our motion to transfer the case to Columbia
Federal Court. As a result of the  reexamination  of U.S. Patent No.  6,105,007,
we,  jointly with  Household,  requested  and  received a stay of the  Household
action from the  Columbia  Federal  Court  pending the  resolution  of the PTO's
reexamination  of  U.S.  Patent  No.  6,105,007.  As  discussed  above,  the PTO
subsequently   concluded  the   reexamination  of  U.S.  Patent  No.  6,105,007.
Accordingly,  the stay of this lawsuit was automatically lifted, and the lawsuit
proceeded.

      In accordance with the patent  infringement  lawsuits with  Federated,  TD
Ameritrade  (formerly  Ameritrade) and HSBC (formerly  Household),  as described
above,  a "Markman  Hearing"  was held in December  2006.  Markman  hearings are
proceedings  under U.S.  patent law in which  plaintiffs and defendants  present
their  arguments to the court as to how they  believe the patent  claims - which
define  the scope of the  patent  holder's  rights  under the patent - should be
interpreted  for purposes of  determining at trial whether the patents have been
infringed. For purposes of the Markman hearing, the Federated, TD Ameritrade and
HSBC cases were  consolidated  into one hearing and held by the Columbia Federal
Court.  As a result  of the  Markman  proceedings  the  Columbia  Federal  Court
interpreted  and construed the meaning of numerous claim terms which bear on the
scope of our patents.  Although  most claim terms were  construed in a manner we
believe are favorable,  the trial judge  interpreted and construed certain claim
terms,  most notably those related to the term "remote  interface" as claimed in
our  second  loan  processing  patent  (U.S.  Patent No.  5,940,811  C1) and our
financial   account  patent  (U.S.   Patent  No.  6,105,007  C1),  in  a  manner
unacceptable and unfavorable to us. In these patents,  the Court interpreted and
construed  "remote  interface" to mean computer  equipment,  including  personal
computer equipment,  that is not owned by a consumer.  The Court applied no such
limitation  in  construing  the term  "remote  interface"  under our first  loan
processing patent (U.S. Patent No. 5,870,721 C1).


                                       4



      Subsequent to the Markman  ruling,  Federated,  Ameritrade  and HSBC filed
summary  judgment  motions with the Columbia  Federal Court  requesting that the
lawsuits be  dismissed.  In March 2007,  the Columbia  Federal Court granted the
summary  judgment motions filed by Federated and Ameritrade and in April 2007 it
granted the summary  judgment  motions filed by HSBC.  Accordingly,  our lawsuit
with each of the  defendants was  dismissed.  The basis of the Columbia  Federal
Court's rulings stemmed from the interpretation and application of certain claim
terms the Court  interpreted  and  defined as part of the  Markman  Hearing,  as
discussed above.

We have  appealed  to the U.S.  Court of Appeals for the  Federal  Circuit  (the
"Federal Appeals Court") and have requested the Federal Appeals Court to reverse
certain of the Markman  rulings made by the Columbia  Federal Court and grant to
us more  favorable  interpretations  and  definitions  related to certain of the
claim terms in our patents.  Additionally,  the  defendants  have  requested the
Federal  Appeals Court to reverse  certain  Markman rulings that we believe were
favorable to us. Oral  arguments in our cases were heard by the Federal  Appeals
Court on December 3, 2007. Unless we can obtain a more favorable  interpretation
of certain claim terms and maintain the favorable rulings we obtained during the
Markman hearing,  it is possible the scope of our patents could be significantly
limited. Furthermore, we believe it is unlikely that the U.S. Supreme Court, the
only  further  appeals  body beyond the Federal  Appeals  Court,  will review or
reconsider  their rulings and,  therefore,  we believe that the Federal  Appeals
Court's rulings will be dispositive  and will probably  determine the outcome of
our business. Moreover, we believe that the rulings made by the Columbia Federal
Court, including the Markman rulings that necessitated our appeal to the Federal
Appeals  Court,  has and will  continue  to hinder our  ability  to license  our
patents.  Further, our appeal will likely require substantial  resources and may
require  an  extended  period of time to  complete,  which  will in turn  likely
increase the already  significant  costs and expected time required to prosecute
our existing  infringement  actions.  We do not believe  that our existing  cash
resources  will be  sufficient  to enable us to  complete  our  appeal  and,  if
successful,  to complete the  prosecution  of our  lawsuits  against the alleged
infringers. Accordingly, to remain viable in the near term, it is likely that we
will be required  to raise  additional  capital  through the sale of debt and/or
equity securities or from licensing our patents.  We can give no assurance that,
in such event, we will be able to raise the resources  necessary to complete our
appeal.  We also can give no assurance  that, even if we are able to finance our
appeal to completion, such appeal will result in a favorable outcome. Even if we
are successful in pursuing our appeal to completion and a favorable outcome,  we
cannot  assure you that we will then have  sufficient  funding to  continue  our
underlying lawsuits or that such lawsuits would succeed in obtaining a favorable
outcome for us.

      In addition, we and our founder, Jeff Norris, were 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 claimed, among other
things,  that  Affinity  and Mr.  Norris  breached an agreement to give him a 1%
equity  interest in Affinity in  consideration  of services  Mr. Ligon claims to
have performed in 1993 and 1994 in  conjunction  with the formation of Affinity,
and sought monetary damages of $5,463,000.  This lawsuit initially resulted in a
jury verdict against us 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 us of $382,148.  In connection with the litigation and the
resulting  jury  verdict,  we filed  post-trial  motions with the trial court in
which, among other things, we claimed that the jury verdict should be set aside.
On July 23,  2004,  the trial  judge  granted  our  motions,  set aside the jury
verdict,  and ordered entry of a judgment in favor of us. The plaintiff appealed
the trial  judge's  ruling to the South  Carolina  Court of Appeals  (the "South
Carolina Appeals Court").  On October 30, 2006, the South Carolina Appeals Court
reversed the trial judge's decision and reinstated the jury verdict of $382,148.
Our petition to the South  Carolina  Appeals  Court for a rehearing of this case
was denied, and we petitioned the South Carolina Supreme Court to hear this case
and to grant us relief from this ruling.  In October 2007, we were notified that
the South  Carolina  Supreme  Court had denied our  petition  to hear this case.
Accordingly,  we have no further  legal  recourse and a judgment will be entered
against us of $382,148,  plus accrued interest. At this time, we do not have the
cash resources to pay this judgment. We will continue to evaluate our options to
resolve or postpone any  payments  related to this  matter;  however,  if we are
required  to pay more  than an  insignificant  amount  in  connection  with this
judgment  in the near  term,  we would be forced to  consider  alternatives  for
winding down our  business,  which may include  offering our patents for sale or
filing for bankruptcy protection.


                                       5



      To date,  we have  generated  substantial  operating  losses and have been
required to use a substantial  amount of cash resources to fund our  operations.
At December 31, 2007, we had cash and cash  equivalents of $50,217 and a working
capital  deficit of  $4,257,741.  We  generally  have been  unable to enter into
licensing  agreements with potential licensees upon terms that are acceptable to
us and, as discussed  above,  we have sought  recourse  through  litigation with
alleged infringers of our patents. Additionally and as also discussed above, our
lawsuits  against the alleged  infringers  have been  dismissed  by the Columbia
Federal Court,  and we have appealed to the Federal  Appeals  Court.  We are not
certain as to the length of time it will take to complete our appeal.  We do not
believe that our existing  cash  resources  will be  sufficient  to complete the
appeals  process and, if successful,  to allow us to complete the prosecution of
our lawsuits against the alleged  infringers.  Accordingly,  to remain viable in
the near term, it is likely that we will be required to raise additional capital
through the sale of debt and/or equity securities or from licensing our patents.
We can give no  assurances,  however,  that we will be able to raise  additional
capital or  generate  capital  from our patent  licensing  business at all or in
amounts sufficient to complete our appeal.  Unless we raise additional  capital,
we may have to consider  alternatives  for winding down our business,  which may
include offering our patents for sale or filing for bankruptcy protection.

      Patent Licensing Agent

      On May 27, 2003,  our  decisioning.com,  Inc.  subsidiary,  which owns our
patent portfolio,  entered into a legal representation  agreement with Withrow &
Terranova,  PLLC ("W&T"), pursuant to which decisioning.com appointed W&T as its
exclusive  representative  for the solicitation and negotiation of agreements to
license our patents.  (This  arrangement  replaced the former  patent  licensing
agent agreement between  decisioning.com and Information  Ventures LLC d/b/a LPS
Group, which was terminated on April 30, 2003.) Under the agreement,  W&T agreed
to promote,  market,  solicit,  and  negotiate the licensing of our patents with
third  parties and to represent  decisioning.com  as legal counsel in connection
with any patent  litigation  associated with the enforcement of our patents.  As
compensation for its services under the agreement, W&T was to receive 25% of all
revenues received by decisioning.com  under any patent agreements and 25% of all
amounts   paid  in   settlement   of  any   patent   litigation   commenced   by
decisioning.com.  The  term of the  agreement  is for the  life of the  patents,
subject to either  party's  right to  terminate  the  agreement  for "cause," as
specified in the agreement, and without cause following the third anniversary of
the agreement.  If the agreement is terminated by  decisioning.com,  W&T will be
entitled to continue to receive  compensation  attributable to patent agreements
negotiated  prior to  termination  and, if such  termination  is without  cause,
compensation for certain future patent agreements.

      In July 2006, we engaged McBride Law, PC (the "McBride Firm") to assist us
and W&T in connection with our patent licensing program and related  litigation.
In conjunction  with the engagement of the McBride Firm we amended our agreement
with W&T and agreed to pay W&T and the  McBride  Firm a fee equal to 19% and 6%,
respectively,  of all  amounts  received  from  parties  against  whom  we  have
commenced  litigation,  all other revenues received by us pursuant to any patent
agreements  (subject to reduction in certain  events),  and all amounts received
from the sale of our  patents.  We have also  agreed to pay W&T and the  McBride
Firm 50% of their billing rates for their services.  Otherwise, the terms of the
agreements  with W&T and McBride  Law are  consistent  with the terms  discussed
above.

      Competition

      The market for  technologies  that  enable  electronic  commerce is highly
competitive  and is  subject  to  rapid  innovation  and  technological  change,
shifting consumer  preferences,  new product  introductions and competition from
traditional  methods  having all or some of the same  features  as  technologies
enabling electronic  commerce.  Competitors in this market have frequently taken
different  strategic  approaches  and  have  launched  substantially   different
products or services in order to exploit the same perceived market  opportunity.
Until the market actually validates a strategy through widespread  acceptance of
a product or  service,  it is  difficult  to identify  all current or  potential
market participants.  There can be no assurance that the technologies covered by
our patents will be competitive technologically or otherwise.


                                       6



      Electronic commerce technologies in general, including the methods covered
by our  patents,  compete  with  traditional  methods for  processing  financial
transactions. The success of our patent licensing efforts will depend in part on
consumer  acceptance of electronic commerce and industry use of systems that are
covered by our patents.

      Intellectual Property

      We were  issued two  patents in 1999  covering  systems  and  methods  for
real-time loan  processing over a computer  network  without human  intervention
("System and Method for Real-time Loan Approval," U.S. Patent No. 5,870,721, and
"Closed-loop  Financial  Transaction  Method  and  Apparatus,"  U.S.  Patent No.
5,940,811). Both of our patents covering fully automated loan processing systems
expire in 2013 and have been subject to  reexamination by the PTO at the request
of third  parties who  challenged  the validity of the  patents.  On January 28,
2003, we received a Reexamination  Certificate  (U.S.  Patent No.  5,870,721 C1)
relating  to the  completion  of the PTO's  reexamination  of U. S.  Patent  No.
5,870,721.  On December 20, 2005, we received a Reexamination  Certificate (U.S.
Patent No.  5,940,811 C1) relating to the completion of the PTO's  reexamination
of U.S. Patent No. 5,940,811.

      In  August  2000,   we  were  issued  a  patent   covering  the  automated
establishment  of a financial  account  without human  intervention  ("Automatic
Financial Account Processing  System," U.S. Patent No.  6,105,007).  This patent
also expires in 2013.  On June 23, 2004, we were notified by the PTO that it had
granted a reexamination  request previously filed by Federated and Ameritrade to
reexamine  U. S.  Patent  No.  6,105,007.  On  July  25,  2006,  we  received  a
Reexamination  Certificate  (U.S.  Patent No.  6,105,007  C1) from the PTO which
formally  concluded the  reexamination  of U.S.  Patent No.  6,105,007 and which
indicated  that the  reexamination  resulted  in the full  allowance  of all the
claims of this patent.

      As  discussed  above,  we  had  lawsuits  pending  against  Federated  and
Ameritrade in the Columbia Federal Court involving our claim that both Federated
and  Ameritrade  infringed  U.  S.  Patent  No.  6,105,007  C1.  We had  similar
litigation  pending  against  Household   International,   Inc.   ("Household"),
involving our claim that Household  infringed U.S. Patent No.  5,870,721 C1, No.
5,940,811 C1 and No. 6,105,007 C1. As also explained above, the Columbia Federal
Court has  dismissed  those  lawsuits  and we are in the  process  of  appealing
certain Markman rulings made by the Columbia Federal Court which we believe were
the basis of the dismissal of our lawsuits.

      Other  parties may take actions to challenge  our patents.  We can make no
assurances  that we will  not  lose  all or some of the  claims  covered  by our
existing patents as the result of such challenges or other litigation, including
actions initiated by us, regarding our patents.

      Our success is completely dependent upon our ability to defend and license
our  patents.  There can be no  assurance  that we will be able to  protect  our
intellectual  property  rights  under  our  patents.  Moreover,  there can be no
assurance that new  technological  innovations  will not be developed and widely
accepted  by the market  which will  render  obsolete  the types of systems  and
methods over which we believe we have proprietary intellectual property rights.

      Employees

      At December 31, 2007 and 2006, we employed 2 full-time employees.  We have
no collective bargaining agreements.


                                       7



Item 1A. Risk Factors

      An investment in our common stock  involves  numerous types of risks and a
high degree of risk generally.  You should carefully consider the following risk
factors,  in addition to the other  information  contained  in this  report,  in
evaluating our Company and any potential  investment in our common stock. If any
of  the  following  risks  or  uncertainties  occurs,  our  business,  financial
condition and operating results could be materially and adversely affected,  the
trading price of our common stock could decline and you could lose all or a part
of your investment in our common stock. The risks and uncertainties described in
this section are not the only ones facing us. Additional risks and uncertainties
not  presently  known  to us or that  we  currently  deem  immaterial  may  also
materially and adversely  affect our business,  operating  results and financial
condition.

      We have limited capital  resources and have continued to incur significant
operating  losses,  all of which threaten and raise  substantial doubt about our
ability to continue as a going concern.

      We have generated net losses of  $73,422,095  since our inception and have
financed our operations  primarily  through net proceeds from our initial public
offering in May 1996 and cash  generated  from  operations  and other  financing
transactions. Net proceeds from our initial public offering were $60,088,516.

      Our  substantial  operating  losses have  required us to use a substantial
amount of cash  resources to fund our  operations.  Net cash used by  operations
during the year ended December 31, 2007, was $976,761, and at December 31, 2007,
we had a working capital  deficit of $4,257,741.  See Part 1, Item 1, "Business"
and  Part  II,  Item 7,  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of  Operations--Liquidity."  We generally have been unable
to enter into licensing  agreements with potential licensees upon terms that are
acceptable to us, and have pursued  litigation  against alleged  infringers,  as
described  further  in Part 1,  Item 1,  "Business."  To  pursue  an  appeal  of
unfavorable  rulings  issued  in  December  2006 in a  Markman  hearing,  and to
continue vigorously pursue these lawsuits generally,  we anticipate that we will
need to increase our operating  expenses due to, among other  things,  increased
litigation  costs and related  expenses.  Accordingly,  to remain viable through
2008, it is critical that we raise  additional  capital through the sale of debt
and/or equity  securities or from  licensing our patents.  No assurances  can be
given that we will be able to raise additional  capital or generate capital from
our patent licensing  business.  Unless we raise additional capital, we may have
to  consider  alternatives  for  winding  down our  business,  which may include
offering our patents for sale or filing for bankruptcy protection.

      The report of our  independent  registered  public  accounting firm on our
audited  financial  statements  included  with this report  contains a statement
noting that our recent  history of losses,  combined with other  factors,  raise
substantial doubt about our ability to continue as a going concern. Although our
plans to address these issues are  discussed in Note 1 to the audited  financial
statements included in this report and elsewhere in this report, these plans are
subject  to  numerous  risks and  contingencies,  many of which are  beyond  our
control,  and we can give no  assurance as to whether or how long we may be able
to succeed in addressing  these issues and  maintaining our viability as a going
concern.

      We have  incurred and continue to incur  significant  debt relative to our
revenues  and if we  are  unable  to  repay  this  debt  when  due,  as we  have
experienced in the past, our  operations and  flexibility  may be restricted and
the viability of our Company may be threatened.

      In 2002,  we  initiated a  convertible  note  program  under which we were
authorized  to issue up to  $1,500,000  principal  amount of our 8%  convertible
secured notes (the "notes").  In February 2006, the convertible note program was
amended  to allow us to issue up to  $3,000,000  of our  notes.  Prior to August
2006, we had issued an aggregate of $1,575,336  principal  amount of notes under
this program,  including  notes with an aggregate  principal  amount of $536,336
that have been converted into shares of our common stock.

      These notes bear interest at 8%, are convertible  into our common stock at
a  conversion  rate of $.20 per share (for notes  issued prior to the April 2006
amendment to the program) or $.50 per share (for notes issued in May 2006),  and
are secured by our equity  interest  in our  decisioning.com,  Inc.  subsidiary,
which owns our patent  portfolio.  Principal  and  interest  under  these  notes
generally becomes payable in full on the second anniversary of the date on which
these notes were issued.  However, under the terms of the notes, the full amount
of principal and interest  under all notes may be declared  immediately  due and
payable in certain events, including bankruptcy or similar proceedings involving
us, a default in the payment of  principal  and  interest  under any note,  or a
change in control of the Company.


                                       8



       From June 2004 through August 2006, we were in default  regarding payment
of principal and interest due under certain of the notes. Accordingly,  the full
amount of principal and interest  outstanding under all notes was payable at the
option of all  noteholders.  At December 31, 2005,  the amount of principal  and
accrued interest outstanding under all of the notes was $1,595,906.

      In August 2006, we and the holders of all  outstanding  notes entered into
an amended and restated note purchase  agreement under which such holders agreed
to extend the maturity  date of such notes by  exchanging  them  (including  all
interest  accrued  thereon)  for new  two-year  notes due in August  2008 in the
aggregate  principal  amount of  $1,268,027.  Under the  amended  note  purchase
agreement,  we may  issue  notes  in the  aggregate  principal  amount  of up to
$5,000,000  (including the notes issued to current noteholders,  as described in
the  preceding  sentence)  having an exercise  price  determined  by us and each
investor at the time of issuance.

      The new notes  issued in August  2006 have the same terms as the old notes
exchanged therefor, except that the new notes will mature in August 2008. Of the
new notes issued,  notes with a principal  amount of $1,115,068 are  convertible
into  shares of our common  stock at $.20 per share,  and notes with a principal
amount of $152,959 are  convertible  into shares of our common stock at $.50 per
share.  The new notes include a note in the principal  amount of $166,863 issued
to our Chief  Executive  Officer and a note in the principal  amount of $122,115
issued to a subsidiary of The South Financial  Group.  The South Financial Group
Foundation,  a non-profit  foundation  established by the South Financial Group,
owns approximately 10% of our outstanding capital stock.

      In September 2006, we sold additional  convertible  notes in the aggregate
principal  amount of  $1,905,000.  The terms of these  notes are the same as the
notes we previously  issued,  except that they may be converted  into our common
stock at a rate of $.42 per share.

      Although our  refinancing in August 2006 (due in August 2008) of the notes
under which we were  previously in default and our additional  issuance of notes
in September 2006 (due in September  2008) have afforded us additional  time and
resources to execute our  business  strategy,  we can give no assurance  that we
will be  successful in doing so or in  generating  revenues  sufficient to repay
this  indebtedness  when due. In such an event,  the  lenders  under these notes
would have the option to declare  all amounts  under the notes due and  payable,
and our resulting inability to pay could force us to liquidate or otherwise wind
down our  business  operations,  including  our possible  filing for  bankruptcy
protection and the potential loss of our patents  through sale or foreclosure by
the holders of the notes pursuant to their security interest in our patents.

      Our business  depends  exclusively on the success of our patent  licensing
program, which if unsuccessful, will threaten our survival.

      Due to capital  constraints,  we have suspended efforts to deploy our loan
processing  products and services.  Our business  activities  currently  consist
exclusively of attempting to license  certain of our patents.  Our prospects are
wholly  dependent  on our ability to finance and  execute a  sustainable  patent
licensing program.  Even though we believe there are companies that may be using
systems,  processes and methods covered by our patents,  it is not known whether
we will be able to enter into any new licensing agreements. Moreover, we may not
have the resources to sustain our patent licensing  program,  enforce our patent
rights,  finance  any  related  litigation,  or  successfully  negotiate  patent
licenses on terms that will generate meaningful future revenues.

      We are  further  subject  to the risk that  negotiations  to  license  our
patents may be lengthy and that it may be necessary for us to become involved in
additional litigation to assert and protect our intellectual property rights. To
date,  we generally  have been unable to enter into  licensing  agreements  with
potential  licensees upon terms that are acceptable to us. As a result,  we have
been forced to become involved in litigation with alleged infringers. Currently,
we are  involved  in the  appeal of  adverse  rulings  related  to three  patent
litigation actions. We believe that this appeal and, if successful,  the related
lawsuits,  may  take an  extended  period  of time to  complete.  We can give no
assurance that we will have the resources  necessary to complete our appeal and,
if successful, the related lawsuits or that we will be successful in obtaining a
favorable  outcome.  Prolonged  patent  litigation could have a material adverse
effect on our business, operating results and financial position.


                                       9



      Challenges  to our patents could  significantly  diminish or eliminate any
potential value these patents may have to us.

      All of our  patents  have been  subject to  reexamination  by the PTO as a
result of challenges  to such patents by third  parties.  Additionally,  we have
pursued lawsuits against alleged infringers of our patents. For more information
regarding these reexaminations and lawsuits,  see Part I, Item 1, "Business." In
conjunction with these lawsuits, a Markman hearing was held in December 2006, in
which the court  interpreted  certain of our  patent's  claim  terms in a manner
unacceptable  and  unfavorable  to us.  Unless  we can  obtain a more  favorable
interpretation of the claim terms,  through our appeal of the ruling,  which may
require substantial  resources and extended time to complete,  it is likely that
the scope of our patents would be significantly limited.

      Defendants in these  lawsuits have  challenged the validity of our patents
by requesting reexaminations and otherwise, and we expect that current or future
defendants  will  continue to  challenge  the validity of our patents and assert
non-infringement  as a defense. It is also possible that other third parties may
bring additional actions to contest all or some of our patents.  We may lose all
or some of the claims covered by our existing patents as a result of existing or
future  challenges.  The  loss  of all or some of our  claims  or a  significant
limitation of such claims could have a material adverse effect on our ability to
execute a  successful  patent  licensing  program.  Moreover,  if other  parties
request  reexaminations of or otherwise  challenge our patents in the future, we
are  subject  to the  risk  that  such  proceeding  may not be  resolved  to our
satisfaction  on a  timely  basis,  if at all.  Any such  proceeding  may have a
material  adverse  effect  on our  business,  operating  results  and  financial
position.  Further,  in the  event  a  challenge  to our  patents  results  in a
significant loss of all or some of our claims, our only remedy may be to contest
the  decision,  which  would  likely be a lengthy  process.  Due to our  limited
capital resources,  we do not believe that we could successfully  contest such a
decision without additional cash resources.

      If the  e-commerce  channels and processes on which our patents depend are
rendered  obsolete,  incompatible,  or undesirable due to changes in technology,
the  underlying  laws  governing  patents,   shifting  consumer  preferences  or
competition  from products and services  delivered by more  traditional or other
means,  our business and the potential  value of our patents would be materially
and adversely affected.

      Our patents are specific to the  e-commerce  businesses  of the  financial
services  industry and  generally  cover the automated  establishment  of loans,
financial  accounts  and  credit  accounts  using  specific  e-commerce  related
systems, processes and methods. The market for products and services that enable
e-commerce is subject to change and technological development, shifting consumer
preferences, new product introductions and competition from traditional products
and  services  having all or some of the same  features as products and services
which enable e-commerce. It is possible that new products or technologies may be
developed that may render obsolete the systems, processes and methods over which
we believe we have  intellectual  property  rights.  Moreover,  the  delivery of
products and services through  e-commerce  channels is not fully developed,  and
competition  from  traditional  channels  to  deliver  these same  products  and
services  is  intense.  Any  wide-scale  rejection  of  e-commerce  channels  by
consumers will have a material adverse effect on our business, operating results
and financial position.

      Because  of the  highly  technical  and  specialized  business  of  patent
licensing,  our success depends on the expertise and efforts of third parties we
engage at significant expense.

      Patent  licensing is a highly  technical and  specialized  business  which
requires  that we rely on the  services  of  third  parties.  We have  appointed
Withrow & Terranova, PLLC ("W&T") as our exclusive patent licensing agent. Under
the terms of the  agreement,  W&T has  agreed,  among other  things,  to perform
market  research,  initiate the sales of patent  license  agreements,  negotiate
patent  licensing  arrangements  with third  parties,  and represent us as legal
counsel in connection with the enforcement of our patents.  Accordingly,  we are
dependent  on the efforts of W&T to  successfully  execute our patent  licensing
program.  Additionally,  the agreement requires W&T to coordinate the engagement
of experts,  on terms  satisfactory  to us, if litigation  becomes  necessary to
enforce  our patent  rights.  Moreover,  experts  frequently  request and charge
significant fees. In addition,  because of the specialized knowledge required to
perform  these  duties,  we may not be able to  critically  evaluate the advice,
efforts,  judgments and recommendations of these experts and to know whether our
interests would be better served by additional or different advice or expertise.
To the extent the advice,  efforts,  judgments or  recommendations  of our third
party  experts  prove  inferior  to other  alternatives,  our  patent  licensing
program,  business  prospects  and financial  condition  may be  materially  and
adversely affected.


                                       10



      Our quarterly results tend to fluctuate significantly,  which could have a
material adverse effect on the price of our common stock.

      Since inception,  our quarterly  results have fluctuated and have not been
susceptible to meaningful  period-to-period  comparisons. We believe that we may
continue to  experience  significant  fluctuations  in our  quarterly  operating
results in the  foreseeable  future.  We  anticipate  that our  period-to-period
revenue and  operating  results will depend on numerous  factors,  including our
ability to successfully negotiate and enter into patent licensing agreements and
the timing, terms and the pricing attributes of any such agreements.

      We believe that period-to-period  comparisons of our operating results are
not  meaningful  and  should  not be  relied  upon as an  indication  of  future
performance.  The  uncertainty  regarding the extent and timing of our revenues,
coupled with the risk of  substantial  fluctuations  in our quarterly  operating
results may have a material adverse effect on the price of our common stock.

      The loss of the services of our Chairman,  President  and Chief  Executive
Officer  could have a material  adverse  effect on our business and our existing
financial  condition and adversely  affect our ability to recruit and retain key
employees and executives to further our business interests.

      We are highly  dependent on the services of our  Chairman,  President  and
Chief  Executive  Officer,  Joseph  A.  Boyle,  but do not  have  an  employment
agreement  with Mr. Boyle or "key man"  insurance on his life. The complete loss
of the  services  of Mr.  Boyle  could  have a  material  adverse  effect on our
business,  operating  results and  financial  condition.  Based on our  existing
financial condition,  we maintain a minimal staff and have not sought to recruit
new key  employees  and  executives  who possess the  experience,  knowledge and
skills to assist us in  furthering  our  business  interests  or  expanding  our
operations.  In any event,  we believe that it would be difficult to attract and
retain such employees in light of our existing financial condition.

      We  have  a  significant   number  of  securities   outstanding  that  are
convertible  into our common stock, and the conversion of these securities could
result in substantial dilution to existing stockholders.

      We have issued  notes that are  convertible  into  common  stock at $0.20,
$0.50 and $0.42 per share,  which conversion prices could be substantially  less
than the  market  price of the  common  stock  at the  time of  conversion.  The
issuance  of stock at a price that is less than the market  price  could have an
immediate  adverse effect on the market price of our common stock.  In addition,
we have issued options and warrants to acquire  shares of our common stock.  See
Notes 4 & 5 to our audited financial statements included in this report for more
information  regarding these  convertible  notes,  options and warrants.  We may
issue  additional  convertible  notes or warrants in connection  with  financing
arrangements  and may grant additional stock options that may further dilute our
common stock.  The exercise of such  securities  would have a dilutive effect on
our common stock.  Also, to the extent that persons who acquire shares under all
the foregoing  agreements sell those shares in the open market, the price of our
shares may decrease due to additional shares in the market.

      Our  common  stock is  subject to  significant  fluctuations  in price and
volume,  which  could  cause  rapid and  significant  losses in the value of our
common stock and subject us to litigation from stockholders.

      Our common stock price has been volatile and has  experienced  substantial
and  sudden  fluctuations  in  response  to a number of events and  factors.  In
addition,  the  stock  market  has  experienced  significant  price  and  volume
fluctuations  that  have  especially   affected  the  market  prices  of  equity
securities of many companies directly and indirectly  involved in the technology
sector, and that often have been unrelated to the operating  performance of such
companies.  These broad  market  fluctuations  have  adversely  affected and may
continue to adversely  affect the market price of our common stock. In the past,
following  periods of volatility in the market price of a company's  securities,
securities  class action  litigation  has often been  instituted  against such a
company.  The  institution  of  such  litigation  against  us  could  result  in
substantial costs and a diversion of management's attention and resources, which
would have a material  adverse  effect on our  business,  operating  results and
financial condition.


                                       11



      Our  common  stock is  considered  a penny  stock  and is not  traded on a
regulated  market such as NASDAQ or a major  stock  exchange.  Accordingly,  our
common stock may be more difficult to trade,  and investors may lose the benefit
of certain  rules and  regulations  that govern  securities  traded in regulated
markets.

      Our common stock is traded on the OTC Bulletin  Board.  Securities  in the
OTC  market  are  generally  more  difficult  to trade  than those on the NASDAQ
National  Market,  the NASDAQ SmallCap Market or the major stock  exchanges.  In
addition, accurate price quotations are also more difficult to obtain.

      The  trading  market  for our  common  stock is also  subject  to  special
regulations  governing  the sale of penny stock.  A "penny  stock" is defined by
regulations of the Securities and Exchange Commission as an equity security with
a market  price of less than $5.00 per share.  If you buy or sell a penny  stock
from a broker or dealer,  these regulations  require that you receive,  prior to
the transaction,  a disclosure  explaining the penny stock market and associated
risks.  Furthermore,  trading in our common stock is  generally  subject to Rule
15g-9 of the Exchange  Act.  Under this rule,  broker-dealers  who recommend our
securities to persons other than established  customers and accredited investors
must make a special  written  suitability  determination  for the  purchaser and
receive the purchaser's written agreement to a transaction prior to sale.

      Penny stock  regulations  tend to reduce  market  liquidity  of our common
stock,  because  they  limit  the  broker-dealers'   ability  to  trade,  and  a
purchaser's  ability to sell the stock in the secondary market. The low price of
our common  stock will have a negative  effect on the amount and  percentage  of
transaction costs paid by individual  shareholders.  The low price of our common
stock  may also  limit  our  ability  to raise  additional  capital  by  issuing
additional shares.

      In  addition,  companies  whose  securities  are listed on NASDAQ or other
major stock exchanges are required to comply with certain  corporate  governance
and  disclosure  requirements  that are  designed to protect  investors in those
stocks. Because our common stock is not so regulated,  our observance of many of
these requirements and practices is not mandated, and to the extent we determine
not  to  observe  such  practices  or  are  unable  to do  so  because  of  cost
constraints,  investors  in our common  stock will not have the benefit of these
protections,  and the price of our common stock may be materially  and adversely
affected.

      Certain  provisions  of Delaware  law and our  governing  documents  could
prevent or delay a change in control of our Company,  and could adversely affect
the value of our common stock.

      Certain  provisions  of  Delaware  law and the  Company's  Certificate  of
Incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire,  or of  discouraging  a third party from  attempting  to
acquire,  control of the  Company.  Such  provisions  could limit the price that
certain investors might be willing to pay in the future for shares of our common
stock. These provisions of Delaware law and our Certificate of Incorporation and
bylaws may also have the effect of discouraging  or preventing  certain types of
transactions  involving an actual or threatened change of control of the Company
(including  unsolicited  takeover attempts),  even though such a transaction may
offer our  stockholders the opportunity to sell their stock at a price above the
prevailing market price. Certain of these provisions allow us to issue preferred
stock with  rights  senior to those of the common  stock and other  rights  that
could  adversely  affect the  interests of holders of common  stock  without any
further vote or action by our stockholders. The issuance of preferred stock, for
example,  could  decrease  the  amount  of  earnings  or  assets  available  for
distribution to the holders of common stock or could adversely affect the rights
and powers,  including  voting  rights,  of the holders of the common stock.  In
certain  circumstances,  such issuance  could have the effect of decreasing  the
market price of the common stock,  as well as having the  anti-takeover  effects
discussed above.


                                       12



Item 1B.  Unresolved Staff Comments

      Not applicable.

Item 2.  Properties

      Our  principal  executive  offices are located at 1310 Lady Street,  Suite
601, in Columbia,  South Carolina.  Such office space encompasses  approximately
900 square  feet and is  currently  under a prepaid  two-year  lease  which will
expire in December  2008.  We also lease  warehouse  space  located in Columbia,
South Carolina, which encompasses approximately 4,000 square feet. Such space is
under a month-to-month lease.

Item 3.  Legal Proceedings

      The  information  above in Part I,  Item 1,  "Business--Patents  and Legal
Matters," is incorporated herein by reference in response to this Item 3.

Item 4.  Submission of Matters to a Vote of Security Holders

      Not applicable.

Item 4A.  Executive Officers

      The  information  regarding our executive  officers set forth in Part III,
Item  10  of  this  report  under  "Directors  and  Executive  Officers  of  the
Registrant" is incorporated herein in response to this Item 4A.


                                       13



Part II

Item 5. Market for Registrant's  Common Equity,  Related  Stockholder  Matters
and Issuer Purchases of Equity Securities

(a)   Since  February  12,  2001,  our  common  stock  has  traded  on the OTC
         Bulletin  Board under the symbol  "AFFI." Our common  stock traded on
         the Nasdaq  SmallCap  Market  from  March 27,  2000 to  February  12,
         2001.  Prior to March  27,  2000,  the  Company's  common  stock  was
         traded on the Nasdaq  National  Market.  The following table presents
         the high and low sales  prices of our  Common  Stock for the  periods
         indicated  during  2007  and  2006 as  reported  by the OTC  Bulletin
         Board. The quotations  reflect  inter-dealer  prices,  without retail
         mark-up,  mark-down  or  commissions  and  may not  represent  actual
         transactions.  As of March 13,  2008,  there were  approximately  415
         stockholders of record of our Common Stock.

                                                   Sales Price Per
                                                   ---------------
                                                        Share
                                                        -----
                                                     High        Low
                                                     ----        ---
                     2007
                     First Quarter                   0.20       0.07
                     Second Quarter                  0.16       0.06
                     Third Quarter                   0.10       0.07
                     Fourth Quarter                  0.19       0.07
                     2006
                     First Quarter                   0.85       0.08
                     Second Quarter                  0.82       0.16
                     Third Quarter                   0.60       0.15
                     Fourth Quarter                  0.50       0.15

         On March 13, 2008, the high and low sales prices of our common stock on
         the OTC Bulletin Board were $ 0.14 and $ 0.13, respectively.

         We have never paid dividends on our capital stock.  We intend to retain
         earnings,  if any, for use in our business and do not anticipate paying
         any cash dividends in the foreseeable future.

         On November 22, 2007, The Company issued 1,875,000 shares of its common
         stock to Withrow and Terranova, PLLC ("W&T), the Company's patent agent
         and counsel in consideration of $150,000 in legal services  provided in
         connection  with our appeal to the Federal Appeals Court of the adverse
         rulings of the Columbia  Federal Court as described  under Part I, Item
         I, "Business - Patents and Legal Matters." These securities were issued
         in an exempt private  transaction  not involving any public offering in
         reliance on  exemptions  under  Section 4(2) of the  Securities  Act of
         1933.

(b)   Not applicable

(c)   Not applicable


                                       14



Item 6.  Selected Financial Data

      The following  table presents  selected  financial data of the Company for
the  periods  indicated.   The  following  financial  data  should  be  read  in
conjunction  with the information set forth under  "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations,"  our  Consolidated
Financial  Statements and Notes thereto and other information included elsewhere
in this report.

Year Ended December 31, 2007 2006 2005 2004 2003 ------------- -------------- -------------- -------------- -------------- Statement of Operations Data: Revenues $ 33,333 $ 33,333 $ 20,261 $ 287,298 $ 517,647 ------------- -------------- -------------- -------------- -------------- Cost and expenses: Cost of revenues 3,333 3,333 2,026 64,265 1,765 General and administrative expenses 1,271,864 2,606,386 486,607 732,285 996,711 ------------- -------------- -------------- -------------- -------------- Total costs and expenses 1,275,197 2,609,719 488,633 796,550 998,476 ------------- -------------- -------------- -------------- -------------- Operating loss (1,241,864) (2,576,386) (468,372) (509,252) (480,829) Interest income 14,964 17,907 182 1,967 694 Interest expense (251,254) (141,043) (98,197) (95,990) (80,373) Litigation accrual reversal - - - 386,148 - ------------- -------------- -------------- -------------- -------------- Net loss $(1,478,154) $ (2,699,522) $ (566,387) $ (217,127) $ (560,508) ============= ============== ============== ============== ============== Loss per share - basic and diluted $ (0.03) $ (0.06) $ (0.01) $ (0.01) $ (0.01) ============= ============== ============== ============== ============== Shares used in computing net loss per share 45,467,740 44,194,562 42,207,884 41,926,272 41,512,897 ============= ============== ============== ============== ==============
December 31, 2007 2006 2005 2004 2003 ----------------- -------------- -------------- ----------------- -------------------- Balance Sheet Data: Cash and cash equivalents $ 50,217 $ 1,026,978 $ 13,776 $ 62,756 $ 578,398 Working capital (4,257,741) (34,451) (1,992,056) (1,524,772) (909,356) Total assets 133,712 1,112,246 152,311 121,240 618,002 Convertible notes and accrued interest 3,476,342 (2) 3,225,089 1,595,906 (2) 1,383,149 (2) 1,291,841 (1) Stockholder's deficiency (4,251,364) (3,279,752) (2,048,371) (1,513,523) (1,329,579)
-------------------------------- (1) Of the amount outstanding under the convertible notes as of December 31, 2003, $756,336 was classified as a current liability and, accordingly, is included in the working capital of the Company at December 31, 2003, set forth above. (2) All amounts outstanding under the convertible notes as of December 31, 2007, 2005 and 2004, were classified as a current liability and, accordingly, are included in the working capital of the Company at December 31, 2007, 2005 and 2004, set forth above. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Affinity was formed in 1994 to develop and market technologies that enable financial institutions and other businesses to provide consumer financial services electronically with reduced or no human intervention. Due to capital constraints, we have suspended efforts to deploy products and services that use our loan processing system, DeciSys/RT, in order to focus our efforts exclusively on attempting to license certain of our patents. Currently, our business activities consist exclusively of attempting to enter into license agreements with third parties to license our rights under certain of our patents and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patents. Accordingly, our prospects are wholly dependent on these efforts to finance and execute a sustainable patent licensing program. As more fully described above in Part I, Item 1, "Business--Patents and Legal Matters" in conjunction with our product development activities, we applied for and obtained three patents, two of which cover fully-automated loan processing systems and one of which covers the fully-automated establishment of a financial account, including credit accounts.. All of these patents have been subject to reexamination by the U.S. Patent and Trademark Office ("PTO") as a result of third party challenges. It is possible that third parties may bring additional actions to contest all or some of our patents, and we can give no assurance that we will not lose all or some of the claims covered by our existing patents. In addition, as described more fully above in Part I, Item 1, "Business--Patents and Legal Matters," we have been involved in lawsuits to determine whether our patents are being infringed. In December 2006, a "Markman Hearing" was held in connection with these infringement actions. Markman hearings are proceedings under U.S. patent law in which plaintiffs and defendants present their arguments to the court as to how they believe the patent claims - which define the scope of the patent holder's rights under the patent - should be interpreted for purposes of determining at trial whether the patents have been infringed. For purposes of the Markman hearing, the Federated, TD Ameritrade and HSBC cases were consolidated into one hearing and held by the United States District Court for the State of South Carolina (the "Columbia Federal Court"). As a result of the Markman proceedings, the Columbia Federal Court interpreted and construed the meaning of numerous claim terms which bear on the scope of the patents. Although most claim terms were construed in a manner we believe are favorable, the trial judge interpreted and construed certain claim terms, most notably those related to the term "remote interface" as claimed in our second loan processing patent (U.S. Patent No. 5,940,811 C1) and our financial account patent (U.S. Patent No. 6,105,007 C1), in a manner unacceptable and unfavorable to us. In these patents, the Court interpreted and construed "remote interface" to mean computer equipment, including personal computer equipment, that is not owned by a consumer. The Court applied no such limitation in construing the term "remote interface" under our first loan processing patent (U.S. Patent No. 5,870,721 C1). We appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Appeals Court") and have requested the Federal Appeals Court to reverse certain of the Markman rulings made by the Columbia Federal Court and grant to us more favorable interpretations and definitions related to certain of the claim terms in our patents. Additionally, the defendants have requested the Federal Appeals Court to reverse certain Markman rulings that we believe were favorable to us. Oral arguments in our cases were heard by the Federal Appeals Court on December 3, 2007. Unless we can obtain a more favorable interpretation of certain claim terms and maintain the favorable rulings we obtained during the Markman hearing, it is possible the scope of our patents could be significantly limited. Furthermore, we believe it is unlikely that the U.S. Supreme Court, the only further appeals body beyond the Federal Appeals Court, will review or reconsider their rulings and, therefore, we believe that the Federal Appeals Court's rulings will be dispositive and will probably determine the outcome of our business. Moreover, we believe that the rulings made by the Columbia Federal Court, including the Markman rulings that necessitated our appeal to the Federal Appeals Court, has and will continue to hinder our ability to license our patents. Further, our appeal will likely require substantial resources and may require an extended period of time to complete, which will in turn likely increase the already significant costs and expected time required to prosecute our existing infringement actions. We do not believe that our existing cash resources will be sufficient to enable us to complete our appeal and, if successful, to complete the prosecution of our lawsuits against the alleged infringers. Accordingly, to remain viable in the near term, it is likely that the Company will be required to raise additional capital through the sale of debt and/or equity securities or from licensing our patents. We can give no assurance that, in such event, we will be able to raise the resources necessary to complete our appeal. We also can give no assurance that, even if we are able to finance our appeal to completion, such appeal will result in a favorable outcome. Even if we are successful in pursuing our appeal to completion and a favorable outcome, we cannot assure you that we will then have sufficient funding to continue our underlying lawsuits or that such lawsuits would succeed in obtaining a favorable outcome for us. 16 In addition, we and our founder, Jeff Norris, were 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 claimed, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us 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 us of $382,148. In connection with the litigation and the resulting jury verdict, we filed post-trial motions with the trial court in which, among other things, we claimed that the jury verdict should be set aside. On July 23, 2004, the trial judge granted our motions, set aside the jury verdict, and ordered entry of a judgment in favor of us. The plaintiff appealed the trial judge's ruling to the South Carolina Court of Appeals (the "South Carolina Appeals Court"). On October 30, 2006, the South Carolina Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. Our petition to the South Carolina Appeals Court for a rehearing of this case was denied, and we petitioned the South Carolina Supreme Court to hear this case and to grant us relief from this ruling. In October 2007, we were notified that the South Carolina Supreme Court had denied our petition to hear this case. Accordingly, we have no further legal recourse and a judgment will be entered against us of $382,148, plus accrued interest. At this time, we do not have the cash resources to pay this judgment. We will continue to evaluate our options to resolve or postpone any payments related to this matter; however, if we are required to pay more than an insignificant amount in connection with this judgment in the near term, we would be forced to consider alternatives for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. To date, we have generated substantial operating losses and have been required to use a substantial amount of cash resources to fund our operations. At December 31, 2007, we had cash and cash equivalents of $50,217 and a working capital deficit of $4,257,741. We generally have been unable to enter into licensing agreements with potential licensees upon terms that are acceptable to us and, as discussed above, we have sought recourse through litigation with alleged infringers of our patents. Additionally and as also discussed above, our lawsuits against the alleged infringers have been dismissed by the Columbia Federal Court, and we have initiated an appeal to the Federal Appeals Court. We are not certain as to the length of time it will take to complete our appeal. We do not believe that our existing cash resources will be sufficient to complete the appeals process and, if successful, to allow us to complete the prosecution of our lawsuits against the alleged infringers. Accordingly, to remain viable in the near term, it is likely that we will be required to raise additional capital through the sale of debt and/or equity securities or from licensing our patents. We can give no assurances, however, that we will be able to raise additional capital or generate capital from our patent licensing business at all or in amounts sufficient to complete our appeal. Unless we raise additional capital, we may have to consider alternatives for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. The report of our independent registered public accounting firm on our audited financial statements included with this report contains a statement noting that our recent history of losses, combined with other factors, raise substantial doubt about our ability to continue as a going concern. Although our plans to address these issues are discussed in Note 1 to the audited financial statements included in this report and elsewhere in this report, these plans are subject to numerous risks and contingencies, many of which are beyond our control, and we can give no assurance as to whether or how long we may be able to succeed in addressing these issues and maintaining our viability as a going concern. Critical Accounting Policies We apply certain accounting policies which are important in understanding our results of operations and the information presented in the 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 and include the valuation reserve on net deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that we estimate is more likely than not to be realized. As of December 31, 2007, we recorded a valuation allowance that reduced our deferred tax assets to zero. 17 Results of Operations Revenues. Our revenues from continuing operations were $33,333, $33,333 and $20,261 for the years ended December 31, 2007, 2006 and 2005, respectively. The types of revenue we recognized are as follows:
Years ended December 31, 2007 2006 2005 ----------------------- ---------------------- --------------------------- Amount % of Amount % of Amount % of Total Total Total -------------- -------- ------------ --------- ------------- ------------- Patent license revenue $ 33,333 100.0 $ 33,333 100.0 $ 20,261 100.0
Patent license revenue. We recognized patent licensing revenue of $33,333, $33,333 and $20,261 in 2007, 2006 and 2005, respectively. In 2007, 2006 and 2005, we recognized patent licensing revenue associated with the annual fee from one patent license agreement executed in 1999. Costs and Expenses Costs of Revenues. Costs of revenues for the years ended December 31, 2007, 2006 and 2005 were $3,333 $3,333 and $2,026, respectively. Cost of revenues consists of commissions paid to our patent licensing agents. General and Administrative Expenses. General and administrative ("G&A") expenses for the year ended December 31, 2007 were $1,271,864, compared to $2,606,386 and $486,607 for the years ended December 31, 2006 and 2005, respectively. G&A expenses have fluctuated significantly over the past three years and depend to a great extent on the level of our business activities and particularly, the level of litigation in which we are involved in a period. The components of G&A expenses incurred in 2007, 2006 and 2005 are as follows:
Years ended December 31, 2007 2006 2005 ---------------------------- ---------------------- ----------------------- Amount % of Amount % of Amount % of Total Total Total ------------- -------------- -------------- ------- ----------- ----------- Salaries and benefits $ 400,846 31.5 $268,381 10.3 $ 248,415 51.1 Stock-based compensation 356,542 28.0 874,081 33.5 - - Professional fees 416,583 32.8 971,773 37.3 138,768 28.5 Litigation accrual - - 382,148 14.7 - - Insurance 47,530 3.7 47,078 1.8 54,251 11.1 Rent 29,184 2.3 20,518 0.8 25,820 5.3 Other 21,179 1.7 42,407 1.6 19,353 4.0 ------------- -------------- -------------- ------- ----------- ----------- $ 1,271,864 100.0 $2,606,386 100.0 $ 486,607 100.0 ============= ============== ============== ======= =========== ===========
G&A expenses decreased by $1,334,522 in 2007 compared to 2006. The overall decrease was primarily attributable to decreases in stock-based compensation, professional fees and a nonrecurring litigation accrual which was recognized in 2006 and explained further below. The overall decrease was offset by an increase of $132,465 in salaries and benefits expenses in 2007 compared to 2006. This increase was due to the full-time employment of our Chief Executive Officer in 2007 (compared to part-time employment in 2006) and higher rates of pay for our employees in 2007 compared to 2006. Professional fees decreased in 2007 as a result of lower levels of activity associated with our patent litigation in 2007 compared to 2006. In 2007, stock-based compensation consisted solely of the recognition of expenses associated with stock options issued in periods prior to 2007. As more fully explained below, we issued a substantive number of stock options and warrants in 2006. 18 G&A expenses increased $2,119,779 in 2006 compared to 2005. As indicated in the above table, G&A expenses increased $2,089,234 as a result of an increase in stock compensation, professional fees and a litigation accrual. In 2006, we issued options to our executives and directors in conjunction with a non-qualified option plan adopted by our Board of Directors. We also issued warrants to our investment advisor for services associated with the investment advisor's assistance in raising capital and other advisory services. As a result of the option and warrant grants, we recognized non-cash stock-based compensation expense of $874,081. Professional fees increased $833,005 in 2006 compared to 2005, most of which was related to our patent infringement lawsuits. In March 2006, we were notified by the PTO that the reexamination of our U.S. Patent No. 6,105,007 had been concluded. The conclusion of the reexamination resulted in the lifting of the stays of our patent infringement lawsuits with Federated, TD Ameritrade and HSBC. The lawsuits proceeded during the remainder of 2006 with a corresponding increase in legal and other professional fees. We also accrued $382,148 to reflect the reinstatement by the South Carolina Court of Appeals of a jury verdict previously set aside by the trial judge in 2004. Interest Income Interest income was $14,964, $17,907 and $182 in 2007, 2006 and 2005, respectively, and primarily reflects interest income attributable to our cash balances. The decrease in interest income in 2007 compared to 2006 is related to lower average cash balances in 2007. The increase in interest income in 2006 over 2005, is related to the interest earned on cash balances associated with the sale of our convertible notes in September 2006 in the aggregate principal amount of $1,905,000. Interest Expense Interest expense was $251,254, $141,043 and $98,197 in 2007, 2006 and 2005, respectively. Interest expense is primarily associated with the interest on $3,480,336 aggregate principal amount of convertible notes issued in installments in June 2002 ($830,336), March 2003 ($200,000), August 2003 ($25,000), November 2003 ($150,000), December 2003 ($50,000), January 2004 ($25,000), May 2005 ($75,000), August 2005 ($45,000) and December 2005 ($25,000), May 2006 ($150,000) and September 2006 ($1,905,000). Of the aggregate note principal issued, aggregate principal in the amount of $568,697 has been converted into shares of our common stock. Additionally, in August 2006, and in accordance with the issuance of new notes in satisfaction of our then outstanding notes, $229,027 of accrued interest was converted into note principal. The increase in interest expense in 2007 compared to 2006 and 2006 compared to 2005 is attributable to the increase in the average amounts of the convertible notes outstanding. Litigation Accrual Reversal We have been a defendant in a lawsuit which resulted in a jury verdict against us in January 2004. We had recorded a reserve in 2003 for the estimated loss in this litigation of $386,148 as a result of the jury verdict. In July 2004, the trial judge ruled on post-trial motions submitted by us and set aside the jury verdict, and accordingly, in the third quarter of 2004, the Company reversed the $386,148 accrual and recognized a like amount as other income. As discussed above under the caption "General and Administrative Expenses," the South Carolina Court of Appeals reinstated the jury verdict in 2006. Income Taxes We have recorded a valuation allowance for the full amount of our net deferred income tax assets as of December 31, 2007, 2006, and 2005, based on management's evaluation of the recognition criteria as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." 19 Liquidity and Capital Resources We have generated net losses of $73,422,095 since our inception and have financed our operations primarily through net proceeds from our initial public offering in May 1996 and cash generated from operations and other financing transactions. Net proceeds from our initial public offering were $60,088,516. Net cash used by operations during the year ended December 31, 2007, was $976,761, compared to $1,058,217 and $194,285 used by operations in 2006 and 2005, respectively. The decrease in cash used by operations in 2007 compared to 2006 was primarily the result of a decrease in professional fees associated with our patent litigation, offset by an increase in employee compensation expense. Our patent lawsuits were stayed in 2004 and during 2005 pending the conclusion of the reexamination of U.S. Patent No. 6,105,007, our patent covering the automated establishment of financial accounts. As discussed in Part 1, Item 1, "Business--Patents and Legal Matters," the reexamination was concluded in 2006, the stay of the lawsuits was lifted and the lawsuits proceeded. As further discussed in Part 1, Item 1, "Business--Patents and Legal Matters," we received an adverse Markman ruling in December 2006 which led to less legal activity in 2007. At December 31, 2007, cash and liquid investments were $50,217, as compared to $1,026,978 at December 31, 2006. At December 31, 2007, working capital was a deficit of $4,257,741 as compared to a deficit of $34,451 at December 31, 2006. For purposes of determining working capital at December 31, 2007, $3,476,342 of principal and accrued interest under our convertible notes are included as current liabilities. At December 31, 2006 such amounts were classified as non-current liabilities. To date, we have generated substantial operating losses and have been required to use a substantial amount of cash resources to fund our operations. At December 31, 2007, we had cash and cash equivalents of $50,217 and a working capital deficit of $4,257,741. We generally have been unable to enter into licensing agreements with potential licensees upon terms that are acceptable to us and, as discussed above, we have sought recourse through litigation with alleged infringers of our patents. Additionally and as also discussed above, our lawsuits against the alleged infringers have been dismissed by the Columbia Federal Court, and we have appealed to the Federal Appeals Court. We are not certain as to the length of time it will take to complete our appeal. We do not believe that our existing cash resources will be sufficient to complete the appeals process and, if successful, to allow us to complete the prosecution of our lawsuits against the alleged infringers. Accordingly, to remain viable in the near term, it is likely that we will be required to raise additional capital through the sale of debt and/or equity securities or from licensing our patents. We can give no assurances, however, that we will be able to raise additional capital or generate capital from our patent licensing business at all or in amounts sufficient to complete our appeal. Unless we raise additional capital, we may have to consider alternatives for winding down our business, which may include offering our patents for sale or filing for bankruptcy protection. The report of our independent registered public accounting firm on our audited financial statements included with this report contains a statement noting that our recent history of losses, combined with other factors, raise substantial doubt about our ability to continue as a going concern. Although our plans to address these issues are discussed in Note 1 to the audited financial statements included in this report and elsewhere in this report, these plans are subject to numerous risks and contingencies, many of which are beyond our control, and we can give no assurance as to whether or how long we may be able to succeed in addressing these issues and maintaining our viability as a going concern. In 2002, we initiated a convertible note program under which we were authorized to issue up to $1,500,000 principal amount of our 8% convertible secured notes (the "notes"). In February 2006, the convertible note program was amended to allow us to issue up to $3,000,000 of our notes. Prior to August 2006, we had issued an aggregate of $1,575,336 principal amount of notes under this program, including notes with an aggregate principal amount of $536,336 that have been converted into shares of our common stock. These notes bear interest at 8%, are convertible into our common stock at a conversion rate of $.20 per share (for notes issued prior to the April 2006 amendment to the program) or $.50 per share (for notes issued in May 2006), and are secured by our equity interest in our decisioning.com, Inc. subsidiary, which owns our patent portfolio. Principal and interest under these notes generally becomes payable in full on the second anniversary of the date on which these notes were issued. However, under the terms of the notes, the full amount of principal and interest under all notes may be declared immediately due and payable in certain events, including bankruptcy or similar proceedings involving us, a default in the payment of principal and interest under any note, or a change in control of the Company. 20 From June 2004 through August 2006, we were in default regarding payment of principal and interest due under certain of the notes. Accordingly, the full amount of principal and interest outstanding under all notes was payable at the option of all noteholders. At December 31, 2005, the amount of principal and accrued interest outstanding under all of the notes was $1,595,906. In August 2006, we and the holders of all outstanding notes entered into an amended and restated note purchase agreement under which such holders agreed to extend the maturity date of such notes by exchanging them (including all interest accrued thereon) for new two-year notes due in August 2008 in the aggregate principal amount of $1,268,027. Under the amended note purchase agreement, we may issue notes in the aggregate principal amount of up to $5,000,000 (including the notes issued to current noteholders, as described in the preceding sentence) having an exercise price determined by us and each investor at the time of issuance. The new notes issued in August 2006 have the same terms as the old notes for which they were exchanged, except that the new notes will mature in August 2008. Of the new notes issued, notes with a principal amount of $1,115,068 are convertible into shares of our common stock at $.20 per share, and notes with a principal amount of $152,959 are convertible into shares of our common stock at $.50 per share. The new notes include a note in the principal amount of $166,863 issued to our Chief Executive Officer and a note in the principal amount of $122,115 issued to a subsidiary of The South Financial Group. The South Financial Group Foundation, a non-profit foundation established by the South Financial Group, owns approximately 10% of the Company's outstanding capital stock. In September 2006, we sold additional convertible notes in the aggregate principal amount of $1,905,000. The terms of these notes are the same as the notes previously issued by us, except that they may be converted into our common stock at a rate of $.42 per share. Contractual Obligations The following table sets forth our long-term debt and other obligations at December 31, 2007.
Payment Due By Period ------------------------------------------------ Total Less than 1 1-3 3-5 years More than year years 5 years -------------- --------------- ------------ --------- --------- Convertible Notes (1) $ 3,476,342 $ 3,476,342 - $ - $ - Operating Lease Obligations 1,200 1,200 - - - -------------- --------------- ------------ --------- --------- Total $ 3,477,542 $ 3,477,542 $ - $ - $ - ============== =============== ============ ========= =========
(1) Convertible notes consist of the Company's convertible notes, including accrued interest. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The report of Independent Registered Public Accounting Firm and consolidated financial statements are set forth below (see item 15(a) for list of financial statements): 21 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Affinity Technology Group, Inc. Columbia, South Carolina We have audited the accompanying consolidated balance sheets of Affinity Technology Group, Inc. and subsidiaries (collectively, the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders' equity (deficiency), and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We were not engaged to examine management's assertion about the effectiveness of Affinity Technology Group, Inc.'s internal control over financial reporting as of December 31, 2007 included in the accompanying Form 10-K and, accordingly, we do not express an opinion thereon. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has limited capital resources, has incurred recurring operating losses and has an accumulated deficit. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ SCOTT McELVEEN, L.L.P. Columbia, South Carolina March 26, 2008 22
Affinity Technology Group, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2007 2006 ----------------------------------- Assets Current assets: Cash and cash equivalents $ 50,217 $ 1,026,978 Prepaid expenses 77,118 77,702 ----------------------------------- Total current assets 127,335 1,104,680 Property and equipment, net 6,377 7,566 ----------------------------------- Total assets $ 133,712 $ 1,112,246 =================================== Liabilities and stockholders' deficiency Current liabilities: Accounts payable $ 19,681 $ 248,834 Accrued expenses 786,046 445,284 Accrued compensation and related benefits 410,905 411,680 Convertible notes 3,140,666 - Current portion of deferred revenue 27,778 33,333 ----------------------------------- Total current liabilities 4,385,076 1,139,131 Non-current liabilities: Convertible notes - 3,140,666 Accrued interest - 84,423 Deferred revenue - 27,778 ----------------------------------- Total non-current liabilities - 3,252,867 ----------------------------------- Total liabilities 4,385,076 4,391,998 ----------------------------------- Commitments and contingent liabilities Stockholders' deficiency: Common stock, par value $0.0001; authorized 100,000,000 shares, issued 49,310,406 shares in 2007 and 47,435,406 shares in 2006 4,931 4,744 Additional paid-in capital 72,671,087 72,164,732 Treasury stock, at cost (2,168,008 shares at December 31, 2007 and 2006) (3,505,287) (3,505,287) Accumulated deficit (73,422,095) (71,943,941) ----------------------------------- Total stockholders' deficiency (4,251,364) (3,279,752) ----------------------------------- Total liabilities and stockholders' deficiency $ 133,712 $ 1,112,246 ===================================
See accompanying notes. 23 Affinity Technology Group, Inc. and Subsidiaries Consolidated Statements of Operations
Years ended December 31, 2007 2006 2005 ------------------ ----------------- ----------------- Revenues: Patent license revenue $ 33,333 $ 33,333 $ 20,261 Costs and expenses: Cost of revenues 3,333 3,333 2,026 General and administrative expenses 1,271,864 2,606,386 486,607 ------------------ ----------------- ----------------- 1,275,197 2,609,719 488,633 ------------------ ----------------- ----------------- Operating loss (1,241,864) (2,576,386) (468,372) Other income (expenses): Interest income 14,964 17,907 182 Interest expense (251,254) (141,043) (98,197) ------------------ ----------------- ----------------- Net loss $ (1,478,154) $ (2,699,522) $ (566,387) ================== ================= ================= Net loss per share - basic and diluted $ (0.03) $ (0.06) $ (0.01) ================== ================= ================= Shares used in computing net loss per share 45,467,740 44,194,562 42,207,884 ================== ================= =================
See accompanying notes. 24 Affinity Technology Group, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Deficiency)
Common Stock -------------------------- Shares Amount Additional Paid- Treasury Stock Accumulated Total in Capital Deficit Stockholders' Equity (Deficiency) -------------- ----------- ---------------- --------------- ---------------- ----------------- Balance at December 31, 2004 44,230,910 $ 4,423 $ 70,665,373 $ (3,505,287) $ (68,678,032) $ (1,513,523) Note payable conversion to common stock 152,194 15 30,424 - - 30,439 Issuance of common stock as finder's fees 10,000 1 1,099 - - 1,100 Net loss - - - - (566,387) (566,387) -------------- ----------- ---------------- --------------- ---------------- ----------------- Balance at December 31, 2005 44,393,104 4,439 70,696,896 (3,505,287) (69,244,419) (2,048,371) Note payable conversion to common stock 2,834,302 284 566,576 - - 566,860 Issuance of common stock as finder's fees 8,000 1 3,199 - - 3,200 Stock option exercise 200,000 20 23,980 - - 24,000 Amortization of stock options - - 674,081 - - 674,081 Amortization of warrants - - 200,000 - - 200,000 Net loss - - - - (2,699,522) (2,699,522) -------------------------- ---------------- --------------- ---------------- ----------------- Balance at December 31, 2006 47,435,406 4,744 72,164,732 (3,505,287) (71,943,941) (3,279,752) Amortization of stock options - - 356,542 - - 356,542 Issuance of common stock as legal fees 1,875,000 187 149,813 - - 150,000 Net loss - - - - (1,478,154) (1,478,154) -------------------------- ---------------- --------------- ---------------- ----------------- Balance at December 31, 2007 49,310,406 $ 4,931 $ 72,671,087 $ (3,505,287) $ (73,422,095) $ (4,251,364) ============== =========== ================ =============== ================ =================
See accompanying notes. 25 Affinity Technology Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Years ended December 31, 2007 2006 2005 ----------------- ------------------ ------------------ Operating activities Net loss $ (1,478,154) $ (2,699,522) $ (566,387) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,189 4,360 6,453 Common stock issued for legal services 150,000 - - Amortization of stock compensation 356,542 874,081 - Deferred revenue (33,333) (33,333) 79,738 Other - 3,651 796 Changes in current assets and liabilities: Accounts receivable - 100,000 (100,000) Prepaid expenses 584 (43,963) 13,496 Accounts payable (229,153) 129,066 98,266 Accrued expenses 256,339 518,880 90,127 Accrued compensation and related benefits (775) 88,563 183,226 ----------------- ------------------ ------------------ Net cash used in operating activities (976,761) (1,058,217) (194,285) ----------------- ------------------ ------------------ Investing activities Purchases of property and equipment - (7,581) - Proceeds from sale of property and equipment - - 305 ----------------- ------------------ ------------------ Net cash (used in) provided by investing activities - (7,581) 305 ----------------- ------------------ ------------------ Financing activities Proceeds from convertible notes - 2,055,000 145,000 Exercise of stock options - 24,000 - ----------------- ------------------ ------------------ Net cash provided by financing activities - 2,079,000 145,000 ----------------- ------------------ ------------------ Net increase (decrease) in cash (976,761) 1,013,202 (48,980) Cash and cash equivalents at beginning of year 1,026,978 13,776 62,756 ----------------- ------------------ ------------------ Cash and cash equivalents at end of year $ 50,217 $ 1,026,978 $ 13,776 ================= ================== ==================
See accompanying notes. 26 Affinity Technology Group, Inc. and Subsidiaries Notes to 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 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, 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 and in pursuing the patent litigation in an effort to protect this intellectual property and obtain recourse against alleged infringement of these 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 December 31, 2007, the Company had cash and cash equivalents of $50,217 and a working capital deficit of $4,257,741. The Company generally has been unable to enter into licensing agreements with potential licensees upon terms that are acceptable to it and has sought recourse through litigation with alleged infringers of its patents. The Company's lawsuits against the alleged infringers have been dismissed by the United States District Court in Columbia, South Carolina, and the Company has appealed to United States Court of Appeals for the Federal Circuit (the "Federal Court of Appeals"). The Company is not certain as to the length of time it will take to complete its appeal. The Company does not believe that its existing cash resources will be sufficient to complete the appeals process and, if successful, to allow it to complete the prosecution of its lawsuits against the alleged infringers. Accordingly, to remain viable in the near term, it is likely that the Company will be required to raise additional capital through the sale of debt and/or equity securities or from licensing its patents. The Company can give no assurances, however, that it will be able to raise additional capital or generate capital from its patent licensing business at all or in amounts sufficient to complete its appeal. Unless it raises additional capital, the Company may have to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. In addition, the Company and its founder, Jeff Norris, were 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 claimed, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us 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 us 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 appealed the trial judge's ruling to the South Carolina Court of Appeals (the "South Carolina Appeals Court"). On October 30, 2006, the South Carolina Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. The Company's petition to the South Carolina Appeals Court for a rehearing of this case was denied, and it petitioned the South Carolina Supreme Court to hear this case and to grant it relief from this ruling. In October 2007, the Company was notified that the South Carolina Supreme Court had denied its petition to hear this case. Accordingly, the Company has no further legal recourse and a judgment will be entered against it of $382,148, plus accrued interest. At this time, the Company does not have the cash resources to pay this judgment. The Company will continue to evaluate its options to resolve or postpone any payments related to this matter; however, if it is required to pay more than an insignificant amount in connection with this judgment in the near term, it would be forced to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 27 Management's plans with respect to addressing the matters discussed above are to continue to pursue its appeal through the Federal Court of Appeals, and if successful, to continue its patent infringement lawsuits. The Company's currently limited capital resources will not be sufficient to enable the Company to complete its appeal and, if successful, to complete its prosecution of its infringement lawsuits. In the event the Company's current capital resources are not sufficient, management intends to attempt to raise additional capital to continue the prosecution of its appeal and patent infringement lawsuits. No assurance can be given that management will be successful in raising additional capital if needed to continue the operations of the Company. 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. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Affinity Technology Group, Inc. and its subsidiaries, Affinity Bank Technology Corporation, Affinity Clearinghouse Corporation, Affinity Credit Corporation, Affinity Processing Corporation, Affinity Mortgage Technology, Inc., decisioning.com, Inc. ("decisioning.com"), and Multi Financial Services, Inc. All significant inter-company balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts payable and notes payable approximate their fair values. 28 Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from five to ten years for office furniture and fixtures and three to five years for all other depreciable assets. Depreciation expense was approximately $1,000, $4,000 and $6,000 during 2007, 2006 and 2005, respectively. Revenue Recognition Patent licensing - The Company recognizes revenue from patent licensing activities pursuant to the provisions of each license agreement which specify the periods to which the related license and corresponding revenue applies. Deferred revenues - Deferred revenues relate to unearned revenue associated with cash received for patent licenses. Such revenue is recognized in the period the patent license entitles the licensee to use technology covered by the Company's patents. Cost of Revenues Cost of revenues consists solely of commissions paid to the Company's patent licensing agents. Commissions paid or accrued by the Company totaled $3,333, $3,333 and $2,026 for the years ended December 31, 2007, 2006, and 2005, respectively. Stock Based Compensation The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payments" ("SFAS 123R"), on January 1, 2006. This statement requires the Company to recognize the cost of employee and director services received in exchange for the stock options it has awarded. Under SFAS 123R the Company is required to recognize compensation expense over an award's vesting period based on the award's fair value at the date of grant. The Company has elected to adopt SFAS 123R on a modified prospective basis; accordingly, the financial statements for the periods prior to January 1, 2006 do not include stock based compensation under the fair value method. The Company uses the Black-Scholes option pricing model to value its stock option grants. Prior to January 1, 2006, the Company applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement and recognition of stock based transactions with its employees and directors. If the Company had recognized compensation expense for its stock based transactions based on the fair value method prescribed by SFAS 123R, net loss and net loss per share for the year ended December 31, 2005 would have been as follows: 2005 --------------------- Net loss: As reported $ (566,387) 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 (6,543) --------------------- Pro forma net loss $ (572,930) ===================== Net loss per common share: As reported: Basic and diluted $ (0.01) ===================== Pro forma: Basic and diluted $ (0.01) ===================== 29 See Note 5 for more information regarding the Company's stock compensation plans and the assumptions used to prepare the pro forma information presented above. Net Loss Per Share of Common Stock All net loss per share of Common Stock amounts presented have been computed based on the weighted average number of shares of Common Stock outstanding in accordance with SFAS 128. Stock warrants and stock options are not included in the calculation of dilutive loss per common share because the Company has experienced operating losses in all periods presented and, therefore, the effect would be antidilutive. 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 September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement," effective for our fiscal year beginning January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements, but simplifies and codifies related guidance within GAAP. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Company does not expect this pronouncement to have a material impact on its financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which gives companies the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impacts, if any, of adopting this pronouncement. 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. Income Taxes Deferred income taxes are calculated using the liability method prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Concentrations of Credit Risk The Company is not exposed to any concentration of credit risk. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 30 Reclassification Certain amounts in 2005 and 2006 have been reclassified to conform to 2007 presentations for comparability. These reclassifications have no effect on previously reported stockholders' equity (deficiency) or net loss. 3. Property and Equipment Property and equipment consists of the following:
December 31, 2007 2006 ------------------------------------- Data processing equipment $ 22,032 $ 22,032 Office furniture and fixtures 19,087 19,087 Other equipment 11,038 11,038 Purchased software 3,770 3,770 ------------------------------------- 55,927 55,927 Less accumulated depreciation and amortization (49,550) (48,361) ------------------------------------- $ 6,377 $ 7,566 =====================================
4. Convertible Notes The contractual maturities of the principal outstanding related to the Company's convertible notes at December 31, 2007 are as follows: Contractual Maturity Date Principal Outstanding ------------------------- ------------------------ August 2008 $ 1,235,666 September 2008 1,905,000 ----------------------- Total $ 3,140,666 ======================= In 2002, the Company initiated a convertible note program under which it was authorized to issue up to $1,500,000 principal amount of its 8% convertible secured notes (the "notes"). In February 2006, the convertible note program was amended to allow the Company to issue up to $3,000,000 of its notes. Prior to August 2006, the Company had issued an aggregate of $1,575,336 principal amount of notes under this program, including notes with an aggregate principal amount of $536,336 that have been converted into shares of the Company's common stock. These notes bear interest at 8%, are convertible into the Company's common stock at a conversion rate of $.20 per share (for notes issued prior to the April 2006 amendment to the program) or $.50 per share (for notes issued in May 2006), and are secured by the Company's equity interest in its decisioning.com, Inc. subsidiary, which owns the Company's patent portfolio. Principal and interest under these notes generally becomes payable in full on the second anniversary of the date on which these notes were issued. However, under the terms of the notes, the full amount of principal and interest under all notes may be declared 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. From June 2004 through August 2006, the Company was in default regarding payment of principal and interest due under certain of the notes. Accordingly, the full amount of principal and interest outstanding under all notes was payable at the option of all noteholders. 31 In August 2006, the Company and the holders of all outstanding notes entered into an amended and restated note purchase agreement under which such holders agreed to extend the maturity date of such notes by exchanging them (including all interest accrued thereon) for new two-year notes due in August 2008 in the aggregate principal amount of $1,268,027. Under the amended note purchase agreement, the Company may issue notes in the aggregate principal amount of up to $5,000,000 (including the notes issued to current noteholders, as described in the preceding sentence) having an exercise price determined by the Company and each investor at the time of issuance. The new notes issued in August 2006 have the same terms as the old notes for which they were exchanged, except that the new notes will mature in August 2008. Of the new notes issued, notes with a principal amount of $1,115,068 are convertible into shares of the Company's common stock at $.20 per share, and notes with a principal amount of $152,959 are convertible into shares of the Company's common stock at $.50 per share. The new notes include a note in the principal amount of $166,863 issued to the Company's Chief Executive Officer and a note in the principal amount of $122,115 issued to a subsidiary of The South Financial Group. The South Financial Group Foundation, a non-profit foundation established by the South Financial Group, owns approximately 10% of the Company's outstanding capital stock. In September 2006, The Company sold additional convertible notes in the aggregate principal amount of $1,905,000. The terms of these notes are the same as the notes previously issued by the Company, except that they may be converted into the Company's common stock at a rate of $.42 per share. 5. Stockholders' Deficiency Preferred Stock Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations, or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. At December 31, 2007 and 2006 there are no shares of preferred stock issued or outstanding. Stock Option Plans During 2007, the Company had one stockholder-approved stock option plan, the 1996 Incentive Stock Option Plan. Prior to 2007, the Company additionally had the 1995 Stock Option Plan. Under the 1995 Stock Option Plan the Company granted incentive stock options and nonqualified stock options to employees, directors, consultants and independent contractors. This plan closed in April 1996. In 2006, all outstanding and unexercised stock options granted under the plan expired. Accordingly, at December 31, 2006, there were no outstanding options under the 1995 Stock Option Plan. In April 1996, the Company adopted the 1996 Incentive Stock Option Plan. This plan closed in April 2006. Under the terms of the plan, incentive options were issued at an exercise price not less than the estimated fair market value on the date of grant. Generally, options granted vest ratably over a 60 month term. The 1996 Incentive Stock Option Plan was amended and restated effective May 28, 1999, to increase the number of shares of common stock available for issuance from 1,900,000 to 2,900,000 and to permit non-employee directors to participate in the 1996 Stock Option Plan. Under the Company's director compensation program in effect from April 1999 to March 2002, non-employee directors received options under the 1996 Incentive Stock Option Plan to purchase 5,000 shares of common stock of the Company on the 5th business day after each annual shareholder meeting. In March 2002, the Company adopted a new director compensation program as a component of the 1996 Incentive Stock Option Plan under which all non-employee directors received a one-time grant of options to purchase 100,000 shares of the Company's stock at the closing sales price of the Company's common stock on the business day immediately prior to the date of grant. Such options vested ratably over a two-year period. Under the program, all non-employee directors on the Board were granted options to purchase 100,000 shares on March 20, 2002. 32 Additionally, on July 14, 2006, the Board of Directors granted to executives of the Company and to its non-employee directors an additional 4,350,000 options to purchase the Company's common stock ("The 2006 Stock Option Grant"). Included in the 2006 Stock Option Grant were options granted to executive officers to purchase 3,350,000 shares of the Company's common stock at an exercise price of $0.50. One-third of the options granted to the executive officers vested at the date of grant and the remainder vest in two annual installments on the first and second anniversaries of the date of grant. The 2006 Stock Option Grant also included options granted to non-employee directors to purchase 1,000,000 shares of the Company's common stock. Of these options, 500,000 options are exercisable at $0.35 per share and vested at the grant date. The remaining 500,000 options granted to non-employee directors are exercisable at $0.50, and vest in two equal installments on the first and second anniversaries of the grant date. The closing price of the Company's common stock was $0.35 on the day immediately preceding the date of the 2006 Stock Option Grant. All the options granted pursuant to the 2006 Stock Option Grant have a contractual term of 10 years and a remaining contractual term of 8.5 years at December 31, 2007. During 2007, none of the options were exercised or forfeited. At the grant date and at December 31, 2007, the weighted-average exercise price was $0.48. At December 31, 2006, the weighted-average exercise price of the 2,983,332 options exercisable pursuant to the 2006 Stock Option Grant was $0.47. At the date of grant, the options granted had a weighted-average fair value of $0.26 and total compensation cost was $1,136,000. Of the total compensation costs related to the 2006 Stock Option Grant, the Company recognized compensation expense of $671,556 and $355,333 in 2006 and 2007, respectively, and will recognize $109,111 in 2008. At December 31, 2007, the closing price of the Company's common stock was less than the weighted-average exercise price of options which were outstanding and which were exercisable; accordingly, there was no intrinsic value associated with such options. A summary of activity under the 1996 Option Plans is as follows: Options Outstanding ----------------- -------------- Shares Weighted Available Number Average Price For Grant of Shares Per Share ---------------- ----------------- -------------- 1996 Incentive Stock Option Plan Balance at December 31, 2004 594,750 2,133,320 $ 0.50 Options granted - - $ 0.00 Options cancelled/forfeited 99,620 (99,620) $ 0.34 ---------------- ----------------- -------------- Balance at December 31, 2005 694,370 2,033,700 $ 0.51 Plan Closed (694,370) - - Options exercised - (200,000) $ 0.12 Options cancelled/forfeited - (100,000) $ 1.47 ---------------- ----------------- -------------- Balance at December 31, 2006 - 1,733,700 $ 0.50 Options cancelled/forfeited - (70,000) $ 3.75 ---------------- ----------------- -------------- Balance at December 31, 2007 - 1,663,700 $ 0.37 ================ ================= ============== 33 A summary of stock options exercisable and stock options outstanding under the 1996 Incentive Stock Option Plan is as follows:
1996 Incentive Stock Option Plan ------------------------------------------------------------------------------------------------------ Options Exercisable Options Outstanding at December 31, 2007 At December 31, 2007 ================================== ==================================================== Weighted Weighted Weighted Average Range of Average Average Remaining Exercise Number Price Number Price Contractual Prices Exercisable Per Share Outstanding Per Share Life (years) -------------- ---------------- ----------------- ---------------- ---------------- ------------------ $0.09 - $0.94 1,415,000 $ 0.20 1,440,000 $ 0.20 3.6 $1.06 - $3.75 223,700 $ 1.43 223,700 $ 1.43 2.2 ---------------- ----------------- ---------------- ---------------- ------------------ $0.09 - $3.75 1,638,700 $ 0.37 1,663,700 $ 0.37 3.4 ================ ================= ================ ================ ==================
At December 31, 2007, the closing price of the Company's common stock was less than the weighted-average exercise price of options granted in accordance with the 1996 Stock Option Plan which were outstanding and which were exercisable; accordingly, there was no intrinsic value associated with such options. In 2007, the Company recognized $1,208 of compensation expense associated with options granted under this plan and additional compensation cost of $350 will be recognized in 2008. The fair value of each option award is estimated using the Black-Scholes option-pricing at the date of grant. The following table sets forth the assumptions used by the Company to estimate the fair value of options granted in 2006. Expected volatility is based on historical monthly stock prices starting on April 26, 1996. Historical data and other factors that could affect the Company and its options programs are used to estimate the expected option life. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. 2006 --------------- Dividend yield - Expected volatility 138% Risk-free rate of return 4.82% Expected option life, years 3 For purposes of preparing its pro forma stock-based compensation disclosures as set forth in Note 2, the Company estimated the fair value at the date of grant for the options issued prior to 2006 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. Stock Warrants In July 2006, the Company engaged Morgan Keegan & Company ("Morgan Keegan") to act as its exclusive financial advisor to assist the Company in raising capital and with the Company's patent licensing program and strategic and financial alternatives. Under the terms of the engagement, the Company issued to Morgan Keegan, as an advisory fee, a warrant with a five-year term to purchase 2,500,000 shares of the Company's common stock for $0.50 per share. The warrant was exercisable at the date of issuance and the Company recognized the estimated fair value of the warrant as an expense of $200,000. The Company estimated the fair value of the warrant in a manner consistent with its method for estimating the fair value of its stock options as discussed above. 34 6. Employee Benefit Plans The Company has an employee savings plan (the Savings Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. 7. Leases The Company has a prepaid two-year lease on its principal office space. The lease expires in December 2008. Additionally, the Company has a month-to-month operating lease for the rental of its warehouse. Future minimum lease payments under these leases at December 31, 2007 are approximately $1,200, all of which is payable in 2008. In 2007, 2006, and 2005 the Company incurred rent expense, including rent associated with cancelable rental agreements, of approximately $29,000, $21,000 and $24,000, respectively. 8. Income Taxes As of December 31, 2007, the Company had federal and state tax net operating loss carryforwards of approximately $71,411,000. The net operating loss carryforwards will begin to expire in 2009, if not utilized. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following: December 31, 2007 2006 ------------------- ------------------- Deferred tax assets: Net operating loss carryforwards $ 26,636,000 $ 26,091,000 Accrued expenses 43,000 37,000 Other - - ------------------- ------------------- Total deferred tax assets 26,679,000 26,128,000 ------------------- ------------------- Deferred tax liabilities: Other - - ------------------- ------------------- Total deferred tax liabilities - - ------------------- ------------------- Less: Valuation allowance (26,679,000) (26,128,000) ------------------- ------------------- Total net deferred taxes $ - $ - =================== =================== The Company has recorded a valuation allowance for the full amount of its net deferred tax assets as of December 31, 2007 and 2006, based on management's evaluation of the evidential recognition requirements under the criteria of SFAS 109. The main component of the evidential recognition requirements was the Company's cumulative pretax losses since inception. The provision for income taxes at the Company's effective rate did not differ from the provision for income taxes at the statutory rate for 2007, 2006, and 2005. 9. 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. Single entities accounted for 100% of revenues in 2007, 2006, and 2005. 35 10. Related Party Transactions In December 2003, the Company sold a two year convertible note in the principal amount of $100,000 to a subsidiary of The South Financial Group, which at that time owned approximately 12% of the Company's outstanding common stock. In June 2002, the Company sold a two year convertible secured note to its Chairman, President and Chief Executive Officer in the principal amount of $125,000. These notes bear interest at 8%, and principal and accrued interest were due in December 2005 and June 2004, respectively. As discussed more fully in Note 4, in August 2006 the Company exchanged its outstanding convertible notes for new convertible notes. In accordance with the exchange the Company issued new convertible notes to a subsidiary of The South Financial Group, Inc. and to the Company's Chief Executive Officer in the principal amounts of $122,115 and $166,863, respectively. In 2006 and 2005 the Company leased office space from a holder of a portion of its convertible notes. The lease was on a month-to-month basis and was terminated in January 2007. Rental expense for the office space was $6,000 and $9,250 in 2006 and 2005, respectively. 11. Commitments and Contingent Liabilities The Company and its founder, Jeff Norris, were 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 claimed, among other things, that Affinity and Mr. Norris breached an agreement to give him a 1% equity interest in Affinity in consideration of services Mr. Ligon claims to have performed in 1993 and 1994 in conjunction with the formation of Affinity, and sought monetary damages of $5,463,000. This lawsuit initially resulted in a jury verdict against us 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 us 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 appealed the trial judge's ruling to the South Carolina Court of Appeals (the "South Carolina Appeals Court"). On October 30, 2006, the South Carolina Appeals Court reversed the trial judge's decision and reinstated the jury verdict of $382,148. The Company's petition to the South Carolina Appeals Court for a rehearing of this case was denied, and it petitioned the South Carolina Supreme Court to hear this case and to grant it relief from this ruling. In October 2007, the Company was notified that the South Carolina Supreme Court had denied its petition to hear this case. Accordingly, the Company has no further legal recourse and a judgment will be entered against it of $382,148, plus accrued interest. At this time, the Company does not have the cash resources to pay this judgment. The Company will continue to evaluate its options to resolve or postpone any payments related to this matter; however, if it is required to pay more than an insignificant amount in connection with this judgment in the near term, it would be forced to consider alternatives for winding down its business, which may include offering its patents for sale or filing for bankruptcy protection. 36 12. Quarterly Results of Operations (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ---------------- ----------------- --------------- Year ended December 31, 2007 Revenue $ 8,333 $ 8,334 $ 8,333 $ 8,333 Gross profit 7,500 7,500 7,500 7,500 Net loss (442,691) (476,016) (309,876) (249,571) Net loss per share - basic and diluted (0.01) (0.01) (0.01) (0.01) Year ended December 31, 2006 Revenue $ 8,333 $ 8,334 $ 8,333 $ 8,333 Gross profit 7,500 7,500 7,500 7,500 Net loss (89,946) (219,965) (1,610,054) (779,557) Net loss per share - basic and diluted (0.00) (0.00) (0.04) (0.02) The sum of certain net loss per share amounts differs from the annual reported total due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable Item 9A. Controls and Procedures Disclosure 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 December 31, 2007, 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 control 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 control over financial reporting. Management's Annual Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Management has assessed the effectiveness of internal control over financial reporting using the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements. 37 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the testing performed using the criteria established in Internal Control-Integrated Framework issued by the COSO, management of the Company believes that the Company's internal control over financial reporting was effective as of December 31, 2007. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report is not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules by the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. This report of management on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liabilities of that section. Item 9B. Other Information Not applicable 38 Part III Item 10. Directors, Executive Officers and Corporate Governance Executive Officers and Directors of the Registrant Name Age Position with the Company ---- --- ------------------------- Joseph A. Boyle 54 Chairman, President, Chief Executive Officer, and Chief Financial Officer S. Sean Douglas 39 Executive Vice President and Chief Operating Officer Robert M. Price 77 Director Peter R. Wilson 55 Director Joseph A. Boyle became President and Chief Executive Officer of the Company in January 2000 and Chairman in March 2001. Mr. Boyle has also served as Chief Financial Officer of the Company since September 1996. Mr. Boyle also held the title of Senior Vice President from September 1996 to January 2000. Mr. Boyle has previously served as Secretary and Treasurer of the Company. To conserve the Company's limited financial resources, Mr. Boyle has from time to time reduced his time commitment to and compensation received from the Company. From January 2005 until June 2006, Mr. Boyle performed consulting services for a local financial institution. From April 2003 to August 2004, Mr. Boyle also was a partner of Elliott Davis, LLC, a South Carolina public accounting firm. Prior to joining the Company, Mr. Boyle served as Price Waterhouse, LLP's engagement partner for most of its Kansas City, Missouri, financial services clients and was a member of the firm's Mortgage Banking Group. Mr. Boyle was employed by Price Waterhouse, LLP from June 1982 to August 1996. Mr. Boyle is a director of UCI Medical Affiliates, Inc. and serves as the chairman of its Audit Committee. S. Sean Douglas became Executive Vice President and Chief Operating Officer of the Company in March 2003. Mr. Douglas also held the title of Senior Vice President of Finance, Operations and Administration of the Company from March 2002 to March 2003. From January 2000 to March 2002, Mr. Douglas held the title of Vice President and Controller of the Company. From November 1995 to January 2000, Mr. Douglas was the Company's accounting manager. Robert M. Price has served as a director of the Company since November 1994. He has been President of PSV, Inc., a technology consulting business located in Burnsville, Minnesota, since 1990. Between 1961 and 1990, Mr. Price served in various executive positions, including Chairman and Chief Executive Officer, with Control Data Corporation, a mainframe computer manufacturer and business services provider. Mr. Price is a graduate of Duke University, and earned a master's degree at the Georgia Institute of Technology. Mr. Price is a director of PNM Resources and Datalink Corporation. Dr. Peter R. Wilson has been a director of the Company since March 1994. Dr. Wilson served as Secretary of the Company from March 1994 until February 1996 and has been an Associate Professor at the Fuqua School of Business at Duke University since September 1991. He was an Assistant Professor at New York University's Stern School of Business between January 1983 and August 1991. Dr. Wilson teaches in the areas of financial accounting, financial reporting, financial statement analysis and strategic cost management. He earned a bachelor's degree and a Ph.D. in accounting at the University of North Carolina. Board of Directors The business and affairs of the Company are managed by or under the direction of the Board of Directors, as provided by Delaware law and our By-Laws. The directors establish overall policies and standards for the Company and review the performance of management. The directors are kept informed of our operations at meetings of the Board, through reports and analyses and through discussions with management. 39 Meetings of the Board The Board of Directors met five times during the year ended December 31, 2007. All directors participated in at least 100% of all meetings of the Board of Directors and the committees of the Board of Directors on which they served during 2007. Committees of the Board The Board of Directors has established an Audit Committee and a Compensation Committee. There is no nominating committee of the Board of Directors. The Audit Committee, established in 1996, has the authority to appoint and remove our independent public accounting firm, with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, the accounting principles used by us in financial reporting and the adequacy of our internal control procedures. The members of the Audit Committee, which met once during the year ended December 31, 2007, are Dr. Peter R. Wilson (Chairman) and Robert M. Price. The Compensation Committee has the authority, among other things, to: (i) determine the cash and non-cash compensation of each of our executive officers and any other employee with an annual salary in excess of $100,000; (ii) consider and recommend to the Board such general and specific employee equity and other incentives as it may from time to time deem advisable; and (iii) administer our stock option plans. The members of the Compensation Committee, which met one time during the year ended December 31, 2007, are Robert M. Price (Chairman) and Dr. Peter R. Wilson. The Board of Directors has not established a nominating committee primarily because it believes that the current composition and size of the Board permit candid and open discussion regarding potential new candidates for director. The entire Board of Directors currently operates as our nominating committee, and all directors participate in the consideration of director nominees. Of the three directors currently serving on the Board, we believe that Dr. Peter R. Wilson and Robert M. Price are independent directors within the meaning of the NASDAQ Marketplace Rules applicable to directors and audit, compensation and nominating committee members of companies listed on the NASDAQ Global Market. The Company does not believe that Messrs. Wilson or Price are parties to other transactions, relationships or arrangements not otherwise disclosed in this report that affect their independence. There is no formal process or policy that governs the manner in which we identify potential candidates for director, and the Board of Directors has not adopted any specific, minimum qualifications that must be met to be nominated to serve as a director. Historically, however, the Board of Directors has considered several factors in evaluating candidates for nomination to the Board, including the candidate's knowledge of our business, the candidate's business experience and credentials, and whether the candidate would represent the interests of all our stockholders as opposed to a specific group of stockholders. We do not have a formal policy with respect to our consideration of director nominees recommended by our stockholders because the Board of Directors believes that it has been able to give appropriate consideration to candidates recommended by stockholders in prior years on a case-by-case basis. Audit Committee Financial Expert The Board of Directors has determined that Dr. Peter R. Wilson is an "audit committee financial expert" for purposes of the rules and regulations of the Securities and Exchange Commission adopted pursuant to the Sarbanes-Oxley Act of 2002. Mr. Wilson also is an independent director within the meaning of the NASDAQ Marketplace Rules applicable to audit committee members of companies listed on the NASDAQ Global Market. Additional information required by this Item will be contained in the Registrant's definitive proxy statement relating to its 2008 Annual Meeting of Stockholders under the captions "Board of Directors - Code of Ethics," "Board of Directors--Nominees for Director," and "Section 16(a) Beneficial Ownership Reporting Compliance," which are incorporated by reference herein. 40 Item 11. Executive Compensation The information required by Item 11 is incorporated by reference to information in the registrant's proxy statement relating to its 2008 Annual Meeting of Shareholders under the caption "Executive Compensation." Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain information required by this Item will be contained in the Registrant's definitive proxy statement relating to its 2008 Annual Meeting of Stockholders under the caption "Security Ownership of Management and Certain Beneficial Owners," which is incorporated by reference herein.
Number of securities Number of securities Weighted-average remaining available to be issued upon exercise price of for future issuance exercise of outstanding options, under equity Plan Category outstanding options, warrants and rights compensation plans warrants and rights (excluding securities reflected in column (a)) -------------------- --------------------- --------------------- --------------------- (a) (b) (c) -------------------- --------------------- --------------------- --------------------- Equity compensation plans approved by security holders 1,663,700 $0.37 - -------------------- --------------------- --------------------- --------------------- Equity compensation plans not approved by security holders 6,850,000 $0.49 - -------------------- --------------------- --------------------- --------------------- Total 8,513,700 $0.47 - -------------------- --------------------- --------------------- ---------------------
The table set forth above does not include any information with respect to shares of common stock that may be issued upon the conversion of convertible notes that have been issued by the Company. At December 31, 2007, there was $3,476,342 of principal and accrued interest outstanding under these notes, which could be converted into an aggregate of 11,364,171 shares of the Company's common stock at a conversion price of $0.20 ($1,203,466 principal and accrued interest), $0.42 ($2,102,859 principal and accrued interest) or $0.50 ($170,017 principal and accrued interest) per share. As set forth in the above table, we issued stock options and warrants exercisable into 6,850,000 of shares of our common stock. Of such amount, 4,350,000 were stock options granted to employees and non-employee directors. The grant of these stock options will be discussed in detail in Part III, Item 11., "Executive Compensation," and Note 5 to our consolidated financial statements included herein also discusses these stock options and warrants to purchase 2,500,000 shares of our common stock issued to Morgan Keegan & Company for advisory and other services. Item 13. Certain Relationships, Related Transactions and Director Independence Related Transactions Since June 2002, we have primarily financed our operations from the proceeds received through the issuance of convertible notes. In June 2002, our Chief Executive Officer purchased a convertible note in the principal amount of $125,000. Additionally, in December 2003, we sold a two-year convertible note in the principal amount of $100,000 to a subsidiary of The South Financial Group ("TSFG"), which at the time owned approximately 12%of our common stock. In June 2004, all of our then outstanding convertible notes, including the note issued to our Chief Executive Officer and the subsidiary of TFSG, went into default. In August 2006, we reached an agreement with the holders of our notes outstanding at that time (the "existing notes"), under which we exchanged the existing notes, all of which were in default, for new notes. The principal of the new notes included the original principal of the existing notes plus the accrued interest on the existing notes and matured in August 2008. In accordance with the exchange, we issued to our Chief Executive Officer and the subsidiary of TSFG new notes in the amount of $166,863 and $122,115, respectively. Additional information regarding our convertible notes and this transaction with our Chief Executive Officer is discussed in Part II, Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and in Note 4 to our consolidated financial statements included herein. 41 Director Independence Information regarding the independence of our outside directors is contained in Part III, Item 10., "Directors and Executive Officers of the Registrant - Board of Directors." Item 14. Principal Accountant Fees and Services Information required by this item is incorporated by reference to information in the Registrant's definitive proxy statement relating to its 2008 Annual Meeting of Stockholders, under the caption "Accounting Fees." 42 Part IV Item 15. Exhibits, Financial Statement Schedules (a) (1) The following consolidated financial statements of Affinity Technology Group, Inc. and subsidiaries included in this Annual Report on Form 10-K are included in Item 8. i. Consolidated Balance Sheets as of December 31, 2007 and 2006. ii. Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005. iii. Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 2007, 2006, and 2005. iv. Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005. v. Notes to Consolidated Financial Statements. (2) Exhibits: Documents incorporated by reference to exhibits that have been filed with the Company's reports or proxy statements under the Securities Exchange Act of 1934 are available to the public over the Internet from the SEC's web site at http://www.sec.gov. You may also read and copy any such document at the SEC's public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549 under the Company's SEC file number (0-28152). 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 Certificate of Amendment to Certificate of Incorporation of the Company, which is hereby incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 3.3 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). 4.1 Specimen Certificate of Common Stock, which is hereby incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 4.2 Sections 4, 7 and 8 of the Certificate of Incorporation of Affinity Technology Group, Inc., as amended, and Article II, Sections 3, 9 and 10 of the Bylaws of Affinity Technology Group, Inc., as amended, which are incorporated by reference to Exhibits 3.1 and 3.2, respectively, to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333- 1170). 4.3 Convertible Note Purchase Agreement, dated June 3, 2002, between Affinity Technology Group, Inc., and certain investors, which is incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2002. 4.4 Amended and Restated Convertible Note Purchase Agreement, dated August 9, 2006, among the Company and the investors named therein, which is hereby incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. 4.5 Form of 8% Convertible Secured Note, which is hereby incorporated by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. 4.6 Amended and Restated Security Agreement, dated August 9, 2006, among the Company and the investors named therein, which is hereby incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. 43 4.7 Letter Agreement, dated as of September 12, 2006, among Affinity Technology Group, Inc. and certain purchasers of convertible notes under the Amended and Restated Convertible Note Purchase Agreement, dated as of August 9, 2006, among the Company and the investors named therein, which is hereby incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on September 20, 2006. 10.1* Form of Stock Option Agreement (1995 Stock Option Plan), which is hereby incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 10.2* Form of Stock Option Agreement (1996 Stock Option Plan), which is hereby incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333- 1170). 10.3* Form of Stock Option Agreement (Directors' Stock Option Plan), which is hereby incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 10.4* 1995 Stock Option Plan of Affinity Technology Group, Inc., which is hereby incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 10.5* Amended and Restated 1996 Stock Option Plan of Affinity Technology Group, Inc., which is hereby incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.6* Non-Employee Directors' Stock Option Plan of Affinity Technology Group, Inc., which is hereby incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 10.7 Stock Rights Agreement, dated October 20, 1995, between Affinity Technology Group, Inc., and certain investors, which is hereby incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of Affinity Technology Group, Inc. (File No. 333-1170). 10.8* Declaration of First Amendment to 1996 Stock Option Plan of Affinity Technology Group, Inc., and 1995 Stock Option Plan of Affinity Technology Group, Inc., which is incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 10.9* Restricted Stock Agreement between Affinity Technology Group, Inc., and Joseph A. Boyle, which is incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 10.10* Stock Agreement between Affinity Technology Group, Inc., and Wade H. Britt, III, which is incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. 10.13 Legal Representation Agreement, dated May 27, 2003, between decisioning.com, Inc., and Withrow & Terranova, PLLC, which is incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. 10.14 Letter Agreement, effective as of April 17, 2006, between Affinity Technology Group, Inc. (the "Company") and the holders of the 8% convertible secured notes issued under the Convertible Note Purchase Agreement, dated as of June 3, 2002, among the Company and the investors named there in, which is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 17, 2006. 10.15 Letter Agreement, dated July 10, 2006, between the Company and Morgan Keegan & Company, which is hereby incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 14, 2006. 10.16 Amended and Restated Legal Representation Agreement, dated July 10, 2006, among the Company, decisioning.com, Inc. and Withrow & Terranova, PLLC, which is hereby incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 14, 2006. 10.17 Engagement Agreement, dated July 10, 2006, among the Company, decisioning.com, Inc. and McBride Law, PC, which is hereby incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on July 14, 2006. 44 14 Code of Ethics, which is incorporated by reference to Exhibit 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 21 Subsidiaries of Affinity Technology Group, Inc. 23.1 Consent of Scott McElveen, L.L.P. 31 Rule 13a-14(a)/15d-14(a) Certification. 32 Section 1350 Certification. * Denotes a management contract or compensatory plan or arrangement. (b) Exhibits The exhibits required by Item 601 of Regulation S-K are filed herewith and incorporated by reference herein. The response to this portion of Item 15 is submitted under Item 15(a) (2). 45 Signatures Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 31, 2008 By: /s/ Joseph A. Boyle --------------------------------------- Joseph A. Boyle President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date --------------------------- ------------------------------------------ ----------------- /s/ Joseph A. Boyle March 31, 2008 --------------------------- Joseph A. Boyle Chairman, President, Chief Executive Officer and Chief Financial Officer and Director (principal executive and financial officer) /s/ Robert M. Price, Jr. March 31, 2008 --------------------------- Robert M. Price, Jr. Director /s/ Peter R. Wilson, Ph.D. March 31, 2008 --------------------------- Peter R. Wilson, Ph.D. Director /s/ S. Sean Douglas March 31, 2008 --------------------------- S. Sean Douglas Executive Vice President and Chief Operating Officer (principal accounting officer)
46 Exhibit Index Exhibit Number Description --------------- ---------------------------------------------------------------- 21 Subsidiaries of Affinity Technology Group, Inc. 23.1 Consent of Independent Registered Public Accounting Firm 31 Rule 13a-14(a)/15d-14(a) Certifications 32 Section 1350 Certifications 47

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Affinity Technology Group Inc provided additional information to their SEC Filing as exhibits

CIK: 1007508
Form Type: 10-K Annual Report
Accession Number: 0001157523-08-002632
Submitted to the SEC: Mon Mar 31 2008 4:18:19 PM EST
Accepted by the SEC: Mon Mar 31 2008
Period: Monday, December 31, 2007
Industry: Patent Owners And Lessors

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