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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended June 30, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _____________ to _____________

Commission File No. 0-20190

AUTHENTIDATE HOLDING CORP.


(Exact Name of Issuer as Specified in Its Charter)

 Delaware   14-1673067

 
 (State or other jurisdiction of  incorporation or organization)   (I.R.S. Employer Identification No.)
     
2165 Technology Drive Schenectady, N.Y.   12308

 
(Address of principal executive offices)   (Zip Code)
     
Issuer’s telephone number, including area code (518) 346-7799

Securities registered pursuant to Section 12(b) of the Exchange Act:

 Title of Each Class   Name of Each Exchange on Which Registered

 
 None  

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, par value $.001 per share

(Title of class)
 

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 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (1229.405 of this chapter) 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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (December 31, 2002): $58,901,483.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 20,477,741 as of September 12, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.

None


 

Table of Contents
 
PART I
 
        PAGE
       
  Business   1
  Properties   29
  Legal Proceedings   30
  Submission of Matters to a Vote of Security Holders   30
 
PART II
 
  Market For the Company’s Common Equity and Related Stockholder Matters   31
  Selected Financial Data   34
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   35
  Quantitative and Qualitative Disclosures About Market Risk   49
  Financial Statements and Supplemental Data   49
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   49
  Controls and Procedures   49
 
PART III
 
  Directors and Executive Officers of the Registrant   50
  Executive Compensation   58
  Security Ownership of Certain Beneficial Owners and Management   66
  Certain Relationships and Related Transactions   69
  Principal Accounting Fees and Services   70
 
PART IV
 
  Exhibits, Financial Statement Schedules and Reports on Form 8-K

71

 

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PART I

THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 (“BUSINESS”) AND ITEM 7 (“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”), CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS “BELIEVE,” “ANTICIPATE,” “THINK,” “INTEND,” “PLAN,” “WILL BE,” “EXPECT”, AND SIMILAR EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REGARDING FUTURE EVENTS AND/OR OUR FUTURE FINANCIAL PERFORMANCE ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS OR OUR ACTUAL FUTURE RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN FOR VARIOUS APPLICATIONS OF OUR TECHNOLOGIES, THE IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT RISKS AND UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY US OR ANY OTHER PERSON THAT OUR OBJECTIVES AND PLANS WILL BE ACHIEVED.

Item 1.
Description of Business
 
Introduction

Authentidate Holding Corp. (“AHC”), through its DocStar division and its subsidiaries DJS Marketing Group, Inc. (“DJS”), Authentidate, Inc., Authentidate International, AG and Trac Medical Solutions, Inc., are engaged in the following businesses:

 
the development, assembly and sale of document imaging software and systems;
     
 
the development and sale of authentication and security software products; and
     
 
the sale and integration of computer systems and related peripheral equipment, components, and accessories and the provision of network and internet services.

AHC was formerly known as Bitwise Designs, Inc. The name change was approved by our shareholders at our March 23, 2001 Annual Meeting.

 

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We established our DocStar division in 1996. Through our DocStar division, we develop document imaging software and market and sell the software products, either as a stand-alone product or integrated with hardware. Sales of our DocStar products are made through a national dealer network.

In March 1996, we acquired DJS (d.b.a Computer Professionals), a systems integrator and computer reseller in Albany, New York. DJS is an authorized sales and support provider for software products such as Microsoft Solutions and Lotus Notes and hardware items, including IBM and Compaq. DJS also provides information technology services in its market area of upstate New York.

We established our Authentidate subsidiary during the fiscal year ended June 30, 2000 to engage in the business of providing end users with a service providing for the storage, confirmation and authentication of electronic data and images. Authentidate is the process of selling its product to commercial and government customers.

On July 31, 2002, we entered into a strategic alliance agreement with the United States Postal Service to serve as the preferred provider of the USPS Electronic Postmark ® (EPM) service. Under the terms of the agreement, our subsidiary, AuthentiDate, Inc., provides the management, technology and support for the United States Postal Service’s EPM system. The USPS Electronic Postmark ® provides evidence that the content of a document or file existed at a specific date and time and is intended to protect the integrity of the document or file by ensuring that it cannot be altered without detection. The EPM uses our patent pending technology offering highly sophisticated encryption methodology ensuring document authenticity and is intended to be able to be added to any application regardless of the computing platform or operating system.

Subsequent to the formation of Authentidate, we established, with a German entity, Authentidate International, A.G., a German corporation, to market the Authentidate service in certain foreign countries, including the European marketplace. Authentidate International is based in the vicinity of Dusseldorf, Germany. In March 2002, Authentidate International became a wholly-owned subsidiary of AHC. Authentidate International is presently focused on selling its software solutions in Germany.

Our subsidiary, Trac Medical Solutions, Inc., has developed a business model applying the Authentidate technology to the medical supply industry relating to the automation and processing of Certificates of Medical Necessity (a “CMN”) and other medical forms. During the fiscal year ended June 30, 2003, Trac Medical Solutions was engaged in product and market development and began marketing and selling its service. In March 2003, we acquired all the outstanding stock of Trac Medical Solutions previously held by four other shareholders. Prior to the acquisition, we owned 85.8% of the oustanding stock of Trac Medical Solutions. As a result of the acquisition, we now own 100% of Trac Medical Solutions. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon our financial condition.

 

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We have been a 50% partner in a joint venture called Authentidate Sports, Inc., which was established during the fiscal year ended June 30, 2001. Our co-venturer was Internet Venture Capital, LLC, a partner experienced in the sports memorabilia industry. Through Authentidate Sports, we were developing a service to apply the Authentidate technology to the field of signature authentication as it relates to sports memorabilia and entertainment collectibles. During the fiscal year ended June 30, 2003, we ceased operations of Authentidate Sports due to its inability to generate meaningful sales. We may in the future revive the operations of Authentidate Sports if we are able to attract an industry partner.

AHC was organized in August 1985 and reincorporated under the laws of the state of Delaware in May 1992. Our executive offices are located at 2165 Technology Drive, Schenectady, New York 12308, and our telephone number is (518) 346-7799.

General Business Developments During the 2003 Fiscal Year
   
 
Repurchase of Outstanding Shares of Series A Preferred Stock

On June 20, 2003, we completed the repurchase of all of the outstanding shares of our Series A Preferred Stock, which shares were held by our Chairman and Chief Executive Officer, John T. Botti. Our outstanding shares of Series A Preferred Stock provided the holder with the ability to elect a majority of our Board of Directors. In consideration of our purchase of the shares of Series A Preferred Stock, we agreed on a total purchase price of $850,000. This final purchase price represents a discount as compared to the appraised value of the shares of Series A Preferred Stock of $1.1 million which was determined by an independent nationally recognized appraisal and valuation firm. As a condition of our repurchase of the shares of Series A Preferred Stock, Mr. Botti was required to repay all his outstanding loans to us from the proceeds realized from this transaction. As of the closing date, Mr. Botti had loans payable to us in the aggregate amount of approximately $485,000. We agreed with Mr. Botti to pay the balance of the purchase price as follows: an amount of $70,000 was paid on the closing date and we agreed to pay the remainder in monthly installments of $15,000, without interest, commencing in July 2003. The transaction was approved in April 2003 by the Audit Committee of our Board of Directors.

 
Consolidation of Authentidate Operations

On June 16, 2003, we announced that we will consolidate the sales, marketing, development and operations departments of two of our U.S. subsidiaries, AuthentiDate, Inc. and Trac Medical Solutions, Inc. as we believe these changes will reduce operating costs and increase the effectiveness of our marketing efforts. While AuthentiDate, Inc. will continue to focus on the development of the Electronic PostMark ® (EPM ® ) and Trac Medical Solutions will continue its marketing efforts in the healthcare industry, the management of these two subsidiaries has been streamlined. John T. Botti, our Chairman and Chief Executive Officer, will serve as the President of Authentidate, Inc. and Jeffrey Frankel will continue to serve as the President of Trac Medical Solutions. Richard Reichgut will serve as the Vice President, Marketing for both companies and Dennis Bunt will continue to serve as the Chief Financial Officer for both companies. In addition, we also announced that the employment contract of Robert Van Naarden, who served as the chief executive officer of Authentidate, Inc., will not be renewed so as to allow him to pursue other endeavors. Mr. Van Naarden’s employment contract expired in July 2003. Pursuant to the terms of his expired employment agreement, Mr. Van Naarden will receive a severance benefit equal to twelve months of his base salary.

 

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Sale of Debentures and Warrants in Private Placement

On May 29, 2003, we completed the sale of a private financing in the amount of $2,725,300 of our securities to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder. One investor in this financing serves as a non-executive member of our Board of Directors and a second investor is an affiliate of another non-executive member of our Board of Directors. We received net proceeds of approximately $2,600,000, after paying finders fees and expenses. We intend to use the proceeds primarily for working capital and general corporate purposes.

In the transaction, we sold $2,725,300 of convertible debentures and warrants to purchase an aggregate of 419,279 shares of common stock. The debentures are convertible into shares of our common stock at an initial conversion rate of $2.60 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At our option, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of five years from the date of issuance and fifty percent of such warrants are initially exercisable at $2.60 per share and the remaining warrants are initially exercisable at $2.86 per share. The conversion price of the debentures and exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization.

We also issued five year warrants to purchase an aggregate of 36,923 shares of our common stock to three consultants in payment of their fee for services rendered in connection with this transaction, of which fifty percent are exercisable at $2.60 per share and fifty percent are exercisable at $2.86 per shares. The consultants also received a cash fee of $96,000, equal to 6% of the gross proceeds we received from the issuance of debentures and warrants to certain of the investors. The warrants issued to the consultants are on terms substantially similar to the warrants issued to the investors.

The securities sold in this offering are restricted securities under the terms of Regulation D and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. We filed a registration statement with the Securities and Exchange Commission registering the shares of common stock underlying the debentures and the warrants in compliance with our obligations under a registration rights agreement entered into with the investors. This registration statement has been declared effective by the Commission.

 

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Acquisition of Trac Medical Solutions, Inc.

In March 2003, we acquired the remaining outstanding stock of our subsidiary, Trac Medical Solutions, Inc. previously held by four other shareholders. Prior to the acquisition, we owned 85.8% of the oustanding stock of Trac Medical Solutions. As a result of the acquisition, we now own 100% of Trac Medical Solutions. Pursuant to the Stock Purchase Agreement dated as of March 13, 2003, we issued an aggregate of 130,000 shares of our common stock to the sellers, and also issued 20,000 options to purchase shares of common stock at an exercise price equal to the closing price of our common stock as of the closing date of the transaction. In addition, the sellers may receive, up to an aggregate amount of 75,000 additional shares of our common stock in the event that Trac Medical Solutions achieves certain performance targets during this calendar year. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon our financial condition.

 
Amendment of Certificate of Designation of Series B Preferred Stock

On October 30, 2002, we filed a Certificate of Amendment of the Certificate of Designations, Preferences and Rights and Number of Shares of Series B Preferred Stock with the Secretary of State of the State of Delaware. The Amendment provides that the conversion rate applicable to the outstanding shares of Series B Preferred Stock will be fixed at $1.40. The conversion rate was initially equal to the lower of $1.875 and the average of the closing bid and asked prices of our common stock for the immediately preceding ten consecutive trading days ending one day prior to the notice of conversion; provided, however, that the conversion rate would not be below $0.875. Prior to the amendment, the outstanding shares of Series B Preferred Stock were convertible into a maximum of 800,000 shares of our common stock. Due to the amendment, the outstanding 28,000 shares of Series B Preferred Stock are presently convertible into an aggregate of 500,000 shares of our common stock. In consideration of obtaining the consent of the holder of the outstanding shares of our Series B Preferred Stock, we agreed that our right to redeem those shares would be deferred for a period of two years.

 
Sale of Debentures and Warrants in Private Placement

On October 25, 2002, we completed the sale of $3,700,000 of our securities to certain accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder. We received net proceeds of approximately $3,400,000, after paying fees and expenses. We have used the proceeds for working capital and general corporate purposes.

In the transaction, we sold $3,700,000 of convertible debentures to three institutional investors and warrants to purchase an aggregate of 444,000 shares of our common stock. The debentures are convertible into shares of our common stock at an initial conversion price of $2.50 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At our option, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of four years from the date of issuance and are initially exercisable at $2.50 per share. The conversion price of the debentures and exercise price of the warrants are subject to adjustment in the event we issue common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition the conversion price of the debentures and exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization.

 

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The sale of the $3,700,000 of the securities constitutes the first tranche of a sale of such securities to the investors. The second tranche is expected to result in the sale of an additional $2,470,000 of the securities. The second tranche, however, will only be consummated if our common stock maintains a trading price at or above $3.00 per share for 15 consecutive trading days over the 12 months following the closing of the first tranche. Consummation of the second tranche is at our option. If there is a closing of the second tranche, the conversion price and exercise price of the Securities will be equal to $3.00 per share. As discussed below, we consummated the sale of the second tranche of securities on September 12, 2003.

We also issued to two consultants for services rendered in connection with this transaction five year warrants to purchase an aggregate of 86,863 shares of our common stock and a total cash fee of $222,000. The warrants issued to the consultants are exercisable at $2.50 per share and are on terms substantially similar to the warrants issued to the investors.

The securities sold in this offering are restricted securities under the terms of Regulation D and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. We have filed a registration statement with the Securities and Exchange Commission to register the shares of common stock underlying the debentures and the warrants within thirty days of the closing date, which was declared effective by the Commission.

 
U.S. Postal Service Contract

On August 6, 2002, we announced that we entered into a strategic alliance agreement with the United States Postal Service to serve as the preferred provider of the USPS Electronic Postmark ® (EPM) service. Under the terms of the agreement, our subsidiary, AuthentiDate, Inc., will provide the management, technology and support for the United States Postal Service’s EPM system.

The USPS Electronic Postmark ® provides evidence that the content of a document or file existed at a specific date and time and is intended to protect the integrity of the document or file by ensuring that it cannot be altered without detection. The EPM uses our patent pending technology offering highly sophisticated encryption methodology ensuring document authenticity and is intended to be able to be added to any application regardless of the computing platform or operating system.

The agreement, entered into on July 31, 2002, provides that Authentidate and USPS will agree within thirty days of the effective date of the Agreement for a plan for launching the EPM system. The agreement provides for revenue sharing between the parties based on gross revenue.

 

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The initial term of the agreement commences on the effective date and expires five years thereafter, unless terminated as provided therein. Upon mutual agreement of the parties, the agreement may be extended for three additional three-year terms, unless sooner terminated. The aggregate term of the agreement shall in no event exceed a total of fourteen years. The agreement may be terminated, among other reasons, by the mutual agreement of the parties, upon the material breach of the Agreement by either party or, subject to certain conditions, by either party at its convenience.

 
Zylab International Transaction

On January 9, 2002, we announced that we had entered into a letter of intent to acquire the assets of Zylab International, Inc., a privately owned company based in Germantown, Maryland for shares of AHC common stock. The letter of intent contemplated that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. Pursuant to the letter of intent, we loaned to Zylab an aggregate principle amount of $500,000, which loan was collateralized by all of the assets of Zylab, including its intellectual property. As of June 30, 2002, Zylab had defaulted on the notes. On September 23, 2002, we closed on a transaction pursuant to which our loan was repaid on the following terms. Zylab made payment to us of $350,000 in cash and $50,000 in prepaid license fees for a product DocStar licenses from Zylab. Accordingly, our planned acquisition of Zylab has been cancelled.

 
Private Placements of Units

In July and August, 2002 we consummated a private placement of our securities pursuant to Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 promulgated thereunder. We offered a maximum of 1,584,158 units in the private placement, each unit comprised of one share of common stock and one warrant to purchase .20 shares of common stock. The per unit purchase price was $3.03 per unit and the offering expired on August 31, 2002. The warrants are exercisable at $3.26 per share for a period of five years from the date of issuance. In these transactions we sold a total of 660,077 units of our securities and received an aggregate of $2,000,035 in gross proceeds.

We received approximately an aggregate of $1,950,000 in net proceeds after payment of expenses. The proceeds of these transactions have been used to increase the business development, marketing and sales efforts for the Authentidate services, along with our general working capital needs.

The securities issued in this offering are restricted securities and may not be sold or transferred except pursuant to registration under the Securities Act or an exemption therefrom. We filed a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock contained in the units, including the shares underlying the warrants, which was declared effective by the Commission.

 

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Subsequent Events
   
 
Sale of Convertible Debentures

On September 12, 2003, we completed the sale of $2,470,000 of our securities to certain accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D, promulgated thereunder. The sale of these securities constitutes the second tranche of a sale of such securities to these investors, the first tranche of which was completed in October 2002. We received net proceeds of approximately $2,300,000, after paying fees and expenses, and intend to use the proceeds for working capital and general corporate purposes.

In the transaction, we sold $2,470,000 of convertible debentures to the investors and warrants to purchase an aggregate of 247,000 shares of Common Stock. The debentures are convertible into shares of our common stock at an initial conversion price of $3.00 per share and the warrants are exercisable into shares of common stock at an initial price of $3.00 per share. The other terms and conditions of the debentures and warrants are the same as set forth in the debentures and warrants issued in the first tranche of this transaction in October 2002.

We also issued five year warrants to purchase an aggregate of 49,400 shares of our common stock to certain consultants for services rendered in connection with this transaction which are exercisable at $3.00 per share. The consultants also received a cash fee equal to 6% of the gross proceeds that we received.

The securities sold in this offering are restricted securities under the terms of Regulation D and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. We are obligated to file a registration statement with the Securities and Exchange Commission to register the shares of common stock underlying the debentures and the warrants within thirty days of the closing date. If the registration statement is not timely filed or is not declared effective within sixty days (or within 120 days in the event of a Commission review) following the closing date, then we shall pay to the investors penalties equal to 2% of the proceeds per each month that we are not in compliance with these registration covenants.

 
Private Sale of Common Stock

On September 22, 2003, subsequent to the sale of the $2,470,000 of debentures and warrants, we sold 166,667 shares of our common stock and issued warrants to purchase 50,000 shares of our common stock to an accredited investor for an aggregate purchase price of $500,000. The warrants are exercisable into shares of common stock at an initial price of $3.00 per share and all of the securities issued in this transaction are subject to a twelve month lock-up period during which the investor may not sell or otherwise transfer the securities. The securities sold in this offering are restricted securities pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D, promulgated thereunder and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. We agreed to file a registration statement with the Securities and Exchange Commission to register the shares of common stock issued in this transaction within thirty days of the closing date. If the registration statement is not timely filed or is not declared effective within sixty days (or within 120 days in the event of a Commission review) following the closing date, then we shall pay to the investors penalties equal to 2% of the proceeds per each month that we are not in compliance with these registration covenants. We also issued warrants to purchase an aggregate of 10,000 shares of our common stock to a consultant for services rendered in connection with this transaction which are exercisable at $3.00 per share. The consultant also received a cash fee equal to 6% of the gross proceeds that we received.

 

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INDUSTRY OVERVIEW

Along with our subsidiaries and our DocSTAR division, we offer the following suite of products and services:

 
document imaging software and systems;
     
 
authentication and security software services; and
     
 
the sale of personal computers, workstations and portable personal computers as well as microcomputer peripherals, networks, components accessories, Internet/Intranet development and Internet and network services.

While the market for our products and services is highly competitive and rapidly changing, these markets have experienced significant growth over the last decade, and we believe such growth will continue. The authentication software market is a relatively new market which is still developing. We currently face limited competition in this sector.

Document Imaging Software Systems

In January, 1996, we introduced our document imaging system on a national level under the trade name DocStar. We design, develop and assemble the DocStar system and related software which enables users to scan paper documents onto an optical disk, hard disk drive or other storage medium from which they can be retrieved in seconds. The DocStar product line is intended to provide a cost effective method of reducing the space necessary to store documents while granting a user the ability to instantly retrieve documents. We sell the DocStar software as a stand-alone product or as part of an integrated system along with hardware devices.

We believe that the document imaging software market will continue to be one of our primary businesses and a basis for growth during the next few years. This is an evolving market which is expected to experience significant growth in the future and we believe that this market can provide us with significant profits. However, there can be no assurance that our efforts in this market will result in profits, income or significant revenues to our business.

 

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Authentication Software

We organized our subsidiary, Authentidate, Inc., during the fiscal year ended June 30, 2000, to develop and market a software-based service to accept and store electronic files and date and time stamp those files with a secure clock to prove content, date and time authenticity. Authentidate has developed and released a software product designed to accept and store electronic files from around the world and from different operating systems via the Internet and to date and time stamp those files with a secure clock to prove content, date and time authenticity. The service allows users to also send authentic E-mail and we also expect that this service will be utilized for electronic bill presentment, financial services, health care and government applications.

In July 2003, we entered in to a strategic alliance agreement with the U.S. Postal Service to offer the USPS Electronic Postmark ® (EPM ® ), primarily through Microsoft Corporation’s Office ® products. In order to facilitate this product launch, we entered into development and promotional agreements with Microsoft Corporation and an affiliate of Microsoft in order to create the necessary software interfaces to Microsoft Office ® . We anticipate a general release of this product during the first half of the fiscal year ending June 30, 2004.

We have also established and operate the following subsidiaries to develop and sell software-based authentication services:

 
Authentidate International, A.G. – a wholly-owned subsidiary originally established as a joint venture during the fiscal year ended June 30, 2000, to market the Authentidate service in certain foreign countries; and
     
 
Trac Medical Solutions, Inc. – a wholly-owned subsidiary established during the fiscal year ended June 30, 2001 to develop a service based on the Authentidate technology designed to enable the electronic processing of Certificates of Medical Necessity and other medical forms.
 
Computer Products/Services
   
 
Computer Products and Integration Services

Our subsidiary, DJS, purchases personal computers and peripheral computer products from many different suppliers. Peripheral computer products are products that operate in conjunction with computers, including but not limited to, printers, monitors, scanners, modems and software. DJS, a systems integrator, configures various computer hardware and peripheral products such as software together, to satisfy a customer’s individual needs. We believe the market for personal computers and computer integration services will continue to grow the next several years. However, DJS continues to focus on the services aspect of its business, which generates higher profit margins.

 

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Network Services

DJS also designs and installs network systems which involves the installation of network software on a fileserver computer with less powerful computers sharing information from the fileserver. Applications that the network system provides include E-mail, accounting systems, word processing, communication and any other applications that require the sharing of information. Although management believes that designing and installing network systems may be an area of growth for DJS, there can be no assurance that growth in the network market will continue.

 
Internet/Intranet Development Services

The Internet/Intranet is a computer based communication system, with international applicability, which provides customers with the ability to advertise products, provide news and stock market products, provide educational data bases, as well as one on one and group communications. Through DJS, we provide customer Internet installation services, including installation of web pages.

AUTHENTIDATE HOLDING CORP.
DocSTAR DOCUMENT IMAGING SYSTEMS

Products
 
DocSTAR Document Imaging Systems

In January 1996, we introduced our document imaging management system under the tradename DocStar on a national level. Our DocStar system enables users to scan paper documents onto an optical disk, hard drive or other storage medium from which they can be retrieved in seconds. This system allows users to eliminate or significantly reduce paper filing systems. We believe that a broad spectrum of businesses and governmental agencies experience the problem of storage, management and security of paper documents. The DocStar product line is intended to provide a cost effective method of reducing the space necessary to store documents while granting a user the ability to instantly retrieve documents. We believe that ease of use is a key ingredient of the DocStar software.

Our DocStar product line consists of our proprietary software and may include a personal computer or other hardware devices to create an integrated product. This system can be utilized as a “stand-alone” system or as part of a network installation. We consider our DocStar division to be a software business. While, we will sell the hardware in order provide the customer with a “turn-key” system, if requested by a customer, we believe that it is the software employed in the DocStar system which differentiates us from our competitors. During the 2003 fiscal year, we released a new version of the DocStar software, as well as additional modules.

 

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The operation of a document management system is similar to the operation of a facsimile machine. Documents are fed into an optical scanner that reads the documents and stores the information on one of several alternative mass storage devices. Documents can also be transmitted from or to the system via facsimile machine or over the Internet. Documents can be retrieved almost instantaneously for viewing, printing or faxing thereby offering a significant time-saving tool to the modern office.

We design and assemble the DocStar product line, the main components of which are a proprietary software package and, in the event the end user desires an integrated hardware/software solution, a personal computer or other hardware devices. The DocStar software controls scanning, indexing, storage and reproduction. We purchase hardware devices, such as scanners and laser printers, from unaffiliated third parties and assemble the integrated system. The software utilized in DocStar consists of various versions of existing software from other developers, as well as software we have developed. We offer the DocStar System in several models, which offer different storage options and processing speeds. We also sell optional software modules to enhance an end user’s document imaging system and additional software upgrades and licenses which involve no hardware or computer parts.

We market our DocStar products through a national dealer network of approximately 100 dealers and anticipate the addition of several new dealers in future fiscal quarters to expand into markets not currently served. While we have entered into relationships with new dealers during the past fiscal year, the overall number of dealers in our network has remained relatively constant due to our termination of under-performing dealers. We own and manage one dealership in the Albany, New York region, which also serves as a test market for new applications and software.

Backlog

We normally ship products within 5 days after receipt of an order and typically have no more than two weeks of sales in backlog at any time. The amount of backlog fluctuates but usually is not material.

Research and Development

The market for our products is characterized by rapid technological change involving the application of a number of advanced technologies, including those relating to computer hardware and software, mass storage devices, and other peripheral components. We believe that software upgrades and enhancements are keys to our success. Our ability to be competitive depends upon our ability to anticipate and effectively react to technological change, as well as the application requirements of our customers.

 

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Since inception, we have devoted efforts to research and development activities in an effort to improve our current software and introduce new modules and products. Current development efforts are directed toward improving ease of use, adding system enhancements and increasing performance. Product development expense for document imaging was $239,603, $88,027 and $92,754 for fiscal years 2003, 2002 and 2001, respectively. We will continue to improve our document imaging software in an effort to satisfy the needs of a dynamic marketplace.

Quality Control and Service
   
 
For Software-Only Sales:

We copy the software on to blank disks purchased from third party vendors from our master disk, which is fully-tested. Disks are packaged with software documentation and shipped to our dealers. Our master disks are continuously tested and updated by our research and development department.

 
For Integrated Software/Hardware Systems:

We administer quality control at each of the three levels of the assembly process. First, components considered for use in standard systems are tested for compatibility by the research staff. Second, incoming components receive a physical damage inspection on receipt and again at the start of the production process. Each memory module is electronically tested prior to assembly. Each complete unit is then functionally tested at the end of the assembly process to demonstrate that all components are engaged and fully operational.

Third, each complete unit is “burned-in” from eight to twelve hours. This process involves running a component test program which sequentially tests each memory bit, processor circuit, and drive memory track to verify correct operation in a temperature-controlled chamber. This test is repeated continuously over the burn-in period. Since electronic components have their greatest failure risk during the first few hours of active operation, management believes that the burn-in process reveals most faulty components before they reach the end user.

Our dealers provide service to the end users. All dealers receive service training from our national service staff. We provide the dealer with replacement parts free of charge for 13 months after date of shipment. Our vendors provide a similar warranty for failed components. We offer telephone support service to our dealers.

Assembly and Suppliers

Our products have been designed to enable a variety of system configurations to be assembled from a few basic modules. Our assembly operations consist primarily of the assembly, test and quality control of all parts, components, subassemblies and systems.

 

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We use standard parts and components in our existing product lines which we purchase from unaffiliated third party suppliers. We do not, however, have any contractual arrangements with our current suppliers. Although we have never experienced material delays in deliveries from our suppliers, shortages of component parts could occur and delay or interrupt our manufacture and delivery of products and adversely affect our operating results. We believe adequate alternative suppliers are available to mitigate the potentially adverse effect of supply interruptions, but there can be no assurance that such components will be available as and when needed.

All peripheral computer products available through us, such as monitors and scanner/printer units, are manufactured by third parties. If requested by customers, we will assemble the computer for the DocStar system.

Patents and Trademarks

We have, along with our Authentidate subsidiary, four patents pending concerning the technology and one patent pending for business processes underlying the Authentidate product line and have registered the logos “DocStar” and “Authentidate” as trademarks. No assurance can be given that registration will be effective to protect our trademarks. We believe our tradename and patents are material to our business.

Sales and Marketing

Our products are primarily being distributed through an international dealer network and through a dealership we own in our local market area. We believe that we have achieved a national sales presence through national advertising, favorable reviews in industry publications, newspapers, magazines, press releases and other periodicals utilized by the document imaging industry. Moreover, we periodically offer direct mail and tele-marketing services to selected qualified dealers in their market area. Management intends to increase the number of dealer locations during the current fiscal year, although there can be no assurance we will be successful in such efforts.

Our products are usually sold on credit terms or through a floor planning finance company (to qualified accounts), and are warranted against defects in materials and workmanship for a period of 13 months from purchase. We currently employ six regional sales managers to cover the significant markets of the country, a national sales director and a new dealer recruiter. No customer or distributor accounted for more than 10% of our total consolidated net sales in the fiscal years ended June 30, 2003, 2002 or 2001, except that one customer accounted for more than 10% of DocSTAR’s total net sales during the fiscal year ended June 30, 2003.

Competition

The market for our products is rapidly changing and highly competitive. The competition is direct (i.e., companies that make similar products) and indirect (i.e., companies that participate in the market, but are not our direct competitors). We compete with major document imaging companies such as Laserfiche, Docuware and Alchemy. Many of our current and prospective competitors may have significantly greater financial, technical, manufacturing and marketing resources, as well as a larger installed base, than us.

 

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Employees

We employ 39 full-time employees including our executive officers. No employees are covered by a collective bargaining agreement, and we believe our employee relations are satisfactory.

Government Regulation

Compliance with federal, state, local, and foreign laws enacted for the protection of the environment has to date had no material effect upon our capital expenditures, earnings, or competitive position. Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the thrust of such laws, no assurance can be given such laws, or any future laws enacted for the protection of the environment, will not have a material adverse effect on our business.

AUTHENTIDATE BUSINESS LINES

Authentidate, Inc.

During the fiscal year ended June 30, 2000, we established a majority owned subsidiary named Authentidate, Inc., to engage in a new business line of providing end users with a software-based service which will:

 
accept and store electronic images from networks and personal computers throughout the world and from different operating systems via the Internet;
     
 
indelibly date and time stamp all electronic images received using a secure clock;
     
 
allow users to transmit only the “secure codes” to Authentidate fileservers while maintaining the original within the customers “firewall”; and
     
 
allow users to prove authenticity of time, date and content of stored electronic documents.

At our annual meeting of shareholders, held on March 23, 2001, our shareholders approved a proposal to acquire the outstanding minority interests of our Authentidate, Inc. subsidiary in exchange for securities of our company on a 1.5249:1 basis. Pursuant to this exchange offer, we presently own approximately 98% of the outstanding capital stock of Authetnidate.

 

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Authentidate International, AG

We formed a joint venture in March, 2000, known as Authentidate International, AG, with a German company to develop the Authentidate software in foreign languages and to market that product outside the Americas, Japan, Australia, New Zealand and India. This company is generating sales in the German maket. On March 15, 2002, we consummated the acquisition of the outstanding capital stock of Authentidate International not owned by us and presently own all of the capital stock of this company.

Trac Medical Solutions, Inc.

We established Trac Medical Solutions, Inc. as WebCMN, Inc., in March, 2001 in order to develop a service to facilitate the processing of Certificates of Medical Necessity and other medical forms for the medical equipment supplier industry. WebCMN changed its corporate name to Trac Medical Solutions, Inc., in connection with its acquisition of various intellectual property and other assets in October, 2001, including the trademark “Trac Medical” and a patent application related to the business model it is developing. Through Trac Medical Solutions, we are developing a service offering which incorporates our proprietary Authentidate software that is designed to enable users to accurately and efficiently process Certificates of Medical Necessity, which are required to be submitted by suppliers of medical devices in order to obtain insurance reimbursement from Medicare and other third party payors for such products. This service is intended to reduce the time period for reimbursement currently experienced by medical device suppliers. During the fiscal year ended June 30, 2003, Trac Medical Solutions was primarily engaged in the market and product development stage. Minor sales were realized in the 2003 fiscal year and significant sales growth is expected during the current fiscal year. Trac Medical Solutions markets its service under the trademark CareCert™.

In March 2003, we acquired all the outstanding stock of our subsidiary, Trac Medical Solutions, Inc. previously held by four other shareholders. Prior to the acquisition, we owned 85.8% of the oustanding stock of Trac Medical Solutions. As a result of the acquisition, we now own 100% of Trac Medical Solutions. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon our financial condition.

Products

The Authentidate product, marketed as the Enterprise Edition, was released for sale in May, 2001. We contemplate that product integration development work will be necessary for many applications or customers. We realized minor revenue during fiscal year ended June 30, 2003. In August 2002, we announced that we entered into an agreement with the United State Postal Service to market the USPS Electronic Postmark Service ® (“EPM ® ”). The EPM employs our patent pending technology to ensure document authenticity. We also entered into development and promotional agreements with Microsoft Corporation and a Microsoft affiliate during the 2003 fiscal year in order to create the interfaces between the EPM and Microsoft software products, including Microsoft Office. We expect that the integrated product will be released during the first or second quarter of the 2004 fiscal year. We anticipate generating revenue from this arrangement during the 2004 fiscal year.

 

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Authentidate International has marketed the Authentidate technology in the European marketplace and during the fiscal year ended June 30, 2003, entered into revenue generating agreements for its technology solutions. Currently, Authentidate International has entered into over twenty revenue-generating agreements with its customers.

Trac Medical Solutions commenced marketing its service, CareCert™, during the fiscal year ended June 30, 2003. Trac Medical entered into its first commercial agreements with medical device suppliers and realized revenue from these relationships during the 2003 fiscal year. Trac Medical expects to enter into similar agreements with other suppliers during the 2004 fiscal year.

Research and Development

The Internet market is characterized by rapid technological change involving software, hardware and communication technologies. Our ability to be competitive depends upon our ability to anticipate and effectively react to technological change on the Internet as well as constantly changing market conditions for the evolving Internet market place. Current development efforts are directed to enhancing the current product and integrating this product into customer applications. We have a policy of capitalizing product development expenses and amortizing those expenses over the anticipated useful life. We have expensed $2,295,174, $2,082,146 and $1,128,885 as product development expenses related to our Authentidate technology in the years ended June 30, 2003, 2002 and 2001, respectively.

Development and Suppliers

We have engaged AT&T, Inc., to provide and maintain a secure hosting center at a facility in New York State from where the Authentidate product line and the EPM service offering will operate. Trac Medical has retained a hosting center in Raleigh, North Carolina to maintain its secure hosting center. Authentidate International has retained a hosting center in Europe to maintain its secure data center. We believe that there are sufficient alternative suppliers of these services. We initially retained third party consulting firms to program and develop both the Authentidate Enterprise Edition and CareCert software products. Currently, we have employed our own staff of software developers, augmented by third party consultants, to complete the development and design improvements to both of these products. Our software products incorporate products and services which we license from unaffiliated third parties. We believe that adequate alternative suppliers of these products and services exist on commercially reasonable terms so as to mitigate any adverse impacts caused by the termination of any of our existing relationships.

Patent and Trademarks

Along with AHC, Authentidate has four patents pending concerning the technology and one patent pending regarding business processes, underlying the Authentidate product line and has registered the trademark “Authentidate” and have sought to register three additional trademarks. Further, the mark “Authentidate” has also been registered in Germany and Europe. In addition, in connection with our Trac Medical business line, we have two patents pending, have registered the trademark “Trac Medical” and have sought to register six additional trademarks, including the mark CareCert. No assurances can be given that the registration will be effective to protect our trademarks.

 

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Other companies operating within our business segment may independently develop substantially equivalent proprietary information or otherwise obtain access to our know-how. In addition, there can be no assurance that we will be able to afford the expense of any litigation which may be necessary to enforce our rights under any patent. Although we believe that the products we sell do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible that such infringement or violation has or may occur. We are aware of a patent issued in May 2002 to an agency of the Federal government which may conflict with our patent applications. We are continuing to investigate the possible conflict and will seek the advice of patent counsel to determine our proper course of action. In the event that products we sell are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products. There can be no assurance that, in such an event, we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are deemed to infringe upon the patents or proprietary rights of others, we could, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business.

Sales and Marketing

Authentidate and Authentidate International market the service directly to corporate and government accounts using a combination of direct sales and indirect sales. Authentidate also plans to market the USPS EPM product to corporate and government accounts. Authentidate and Authentidate International expect to use a combination of terms, usage fees, flat fees and license fees to generate revenue. Trac Medical Solutions markets its service offering to medical home care suppliers and uses a fee structure similar to Authentidate to generate revenues.

Competition

Our Authentidate and CareCert product concepts are new and competition is currently limited. Authentidate and the related business lines may, however, experience competition from much larger Internet and software companies that have greater financial, technological and marketing resources than it does. Trac Medical Solutions competes with E-Click, Inc. in providing web-based processing of medical forms.

 

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Employees

Currently, Authentidate has 12 employees, Authentidate International has 18 employees and Trac Medical Solutions has 7 employees. None of these employees are represented by a collective bargaining agreement. We believe that our employee relations are satisfactory.

Government Regulation

Compliance with federal, state, local, and foreign laws enacted for the protection of the environment has to date had no material effect upon our capital expenditures, earnings, or competitive position. Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the thrust of such laws, no assurance can be given such laws, or any future laws enacted for the protection of the environment, will not have a material adverse effect on our business.

DJS MARKETING GROUP, INC.

DJS (d/b/a “Computer Professionals”) is a network and systems integrator of computer and peripheral products for a variety of customers, including corporations, schools, government agencies, manufacturers and distributors. DJS is a prominent systems integrator in the Albany, New York region.

DJS provides network integration, Internet/Intranet development, accounting solutions, service, consultation, document management and video conferences. DJS also services the products it sells by employing factory trained computer technicians and network engineers.

Products and Services
 
Computer Products and Integration Services

DJS purchases personal computers and peripheral computer products from many different suppliers. Peripheral computer products are products that operate in conjunction with computers, including but not limited to, printers, monitors, scanners, modems and software. DJS configures various computer hardware and peripheral products such as software together, to satisfy a customer’s individual needs.

System Integration Services

DJS focuses its integration services on three general practice areas: enterprise security, enterprise storage and remote access. DJS’s network integration group designs, implements, installs, manages and supports enterprise networks with products from Novell, Microsoft, Citrix, Compaq, Cisco and others. Applications that the network system provides include security, remote access storage, E-mail, accounting systems, word processing, communication and any other applications that require the sharing of information. DJS designs customized solutions for its clients with precise objectives and its engineers analyze hardware, software, and cabling to ensure effective and affordable solutions.

 

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Service and Consultation

DJS’s service department is authorized to repair and maintain all major brand products sold by DJS, including warranty and post-warranty equipment. DJS generally guarantees a four (4) hour response time for all service calls, with an average resolution time of next day.

DJS’s engineers also provide complete system configuration services, which includes installation of all hardware, including memory, disk drives, network or communication adapters, as well as any associated software or driver. All units are thoroughly tested after configuration and all malfunctioning units are eliminated.

Document Management Services

DJS also offers document imaging services which it believes is an efficient and financially attainable alternative to conventional, costly paper trails. Management believes digital documents can be stored, searched, retrieved and edited in a fraction of the time with complete access to the network and quality control features. Among other product lines, DJS offers customers our DocStar line.

Sales and Marketing

DJS markets its products and services throughout New York State, parts of Vermont and Massachusetts. DJS intends to expand its national and international sales and marketing departments. Clients include corporations, small office/home office owners, schools, government agencies, manufacturers and distributors. One customer, Booz-Allen & Company, represented approximately 73% of DJS’ sales for the fiscal year ended June 30, 2003. Sales to this customer represented approximately 50% of our consolidated net sales during the 2003 fiscal year. Sales to this customer primarily consisted of low-margin hardware and software products. The gross profits realized by DJS from sales to this customer were approximately $625,000 out of a total consolidated gross profit of $6.1 million, for the fiscal year ended June 30, 2003.

Competition

DJS is one of the oldest and largest network and systems integrators in the Capital District of Albany, New York, and works on many diverse platforms. While management believes that no other computer company in the Albany, New York region offers the extensive services that DJS offers, DJS faces competition in computer sales, service and support in its market from companies such as include P&J Computers, ATEC Group and IP Logic. Some of our competitors may have significantly greater financial, technical and other resources than us.

 

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Employees

DJS has 22 full-time staff members, including one executive officer. None of the employees of DJS are represented by a collective bargaining agreement. DJS believes that its employee relations are satisfactory.

Government Regulation

Compliance with federal, state, local, and foreign laws enacted for the protection of the environment has to date had no material effect upon our capital expenditures, earnings, or competitive position. Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the thrust of such laws, no assurance can be given such laws, or any future laws enacted for the protection of the environment, will not have a material adverse effect on our business.

RISK FACTORS

As provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution stockholders and investors that the following important factors, among others discussed throughout this Report on Form 10-K, in some cases have affected and in some cases could affect our actual results of operations and cause such results to differ materially from those anticipated in forward looking statements made herein.

If we continue to face uncertainties in marketing our products, we will continue to lose money.

We incurred losses of $9,839,309, $9,951,402 and $9,340,103 for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. We have incurred significant costs developing our Authentidate related services and will continue to incur these costs in the future as we attempt to increase market awareness and sales. We have also incurred significant costs to date in establishing and maintaining the distribution channels for our DocStar products and will continue to incur such costs in the future. In the event we determine to expand our distribution channels, these costs would be expected to increase. Our prospects should be considered in light of the difficulties frequently encountered in connection with the establishment of a new business line and the competitive environment in which we operate. There can be no assurance that we will be able to achieve profitable operations in future operating periods.

We have limited working capital and may need additional funds to finance future operations.

Our capital requirements have been and will continue to be significant. We have been substantially dependent upon public offerings and private placements of our securities and on short-term and long-term loans from lending institutions to fund such requirements. We are expending significant amounts of capital to promote and market the Authentidate product line, including the offerings of our Trac Medical Solutions subsidiary and to continue to promote our DocStar products. Due to these expenditures, we have incurred significant losses to date. For the fiscal years ended June 30, 2003, June 30, 2002 and June 30, 2001, we used $5,189,117, $6,056,427 and $1,391,651 in cash from operating activities, respectively. If the revenue generated from our Authentidate-related products is less than anticipated, the carrying value of the goodwill costs may be impaired and require an impairment charge in the future.

 

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During the fiscal year ended June 30, 2003, we consummated three separate private placements of our securities and received a net aggregate amount of approximately $8,100,000 from such transactions. In July, 2002, we commenced a private placement of units of our securities, each unit consisting of one share of common stock and warrants to purchase 0.20 shares of common stock. The offering expired on August 31, 2002 and we received an aggregate amount of gross proceeds $2,000,035 in this offering. On October 25, 2002 we sold an aggregate principal amount of $3,700,000 of convertible debentures and issued 444,000 common stock purchase warrants to the investors. In May, 2003 we sold an additional aggregate principal amount of $2,725,300 of convertible debentures and issued an aggregate of 419,279 common stock purchase warrants to the investors. Subsequent to June 30, 2003, we completed the sale of an additional $2,470,000 of convertible debentures and 247,000 warrants to the same investor group who purchased the $3,700,000 of debentures in October 2002 and thereafter sold $500,000 of common stock and 50,000 warrants to an additional investor.

We expect the net proceeds received from these offerings, along with revenues derived from our forecasted operations for fiscal 2004, to satisfy our cash needs for a period of twelve months from the most recent fiscal year end (June 30, 2003). If we are unable to attain projected sales levels for Authentidate, Authentidate International and Trac Medical, it may be necessary to raise additional capital to fund operations to meet our obligations. No assurance can be given that such funds will be available or, if available, will be on commercially reasonable terms satisfactory to us. In the event such funds are not available, we will be forced to implement cost reduction strategies during fiscal 2004, including the reduction of corporate expenses such as salaries, marketing and professional fees and other costs and the possible shutdown or reduction of operations at Trac Medical Solutions, Authentidate or Authentidate International.

If the United States Postal Service cancels our agreement, we will not generate significant revenue from our Authentidate business and will need to incur additional costs in our efforts to successfully commercialize this product.

We entered into the strategic alliance agreement with the United States Postal Service to incorporate our Authentidate service into their Electronic Postmark ® Service. The Postal Service has the right to cancel the contract in the event we are unable to perform our obligations and, after six months from the effective date of the agreement, the Postal Service may terminate the agreement at its convenience. If the Postal Service terminates the agreement, we will not generate any meaningful revenue from the relationship and will not recoup valuable time and resources expended in negotiating and consummating the agreement. Further, if we are unable to commence realizing revenue from our Authentidate service, we will incur additional costs in developing our product and exploring alternative avenues in which to successfully market this product. This would further strain our cash resources and may force us to reduce current and proposed operations in an effort to conserve our cash resources.

 

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We have incurred significant additional costs concerning our international operations and may incur additional costs in the future.

On March 15, 2002, we consummated a transaction to acquire all of the outstanding capital shares of Authentidate International, AG held by our co-venturers. Pursuant to the Stock Purchase Agreement, we repurchased all of the outstanding shares of Authentidate International in exchange for an aggregate of 1,425,875 shares of our common stock and warrants to purchase 100,000 shares of our common stock. In connection with this transaction, certain of the sellers also surrendered to us for cancellation an aggregate of 250,000 warrants to purchase shares of our common stock which were previously issued to them. There can be no assurances, however, that Authentidate International will achieve profitability. As the sole owner of Authentidate International, we may incur additional expenses in operating Authentidate International. During the fiscal year ended June 30, 2003, we advanced approximately $1,700,000 to this subsidiary. Further, we entered into an employment agreement with Mr. Jan C.E. Wendenburg, pursuant to which Mr. Wendenburg will serve as the Chief Executive Officer of Authentidate International, AG, for a three year term. In consideration of his services, Mr. Wendenburg received an initial base salary of US$200,000 and was granted options to purchase 184,000 shares of our common stock. We have also issued additional stock options to other employees of Authentidate International, AG.

We may acquire additional companies which may result in adverse effects on our earnings and which may adversely affect our management and operating systems.

As described above, we have consummated the transaction to acquire Authentidate International, AG and recently acquired the outstanding minority interest of Trac Medical Solutions, Inc. Due to the resources devoted to these transactions and that we may devote to other acquisitions that we may consummate, such events may have an adverse effect on our liquidity and earnings and may be dilutive to our earnings. Further, in the event that we consummate an acquisition or obtain additional capital through the sale of debt or equity to finance an acquisition, our shareholders may experience dilution in their shareholders’ equity. Additionally, by growing through acquiring other companies, significant demands are being made on our management, operations and resources, including working capital. If we are not able to effectively manage our growth, our business and operations will be materially harmed. To manage growth effectively, we will be required to continue to improve our operational, financial and managerial systems, procedures and controls, hire and train new employees while managing our current operations and employees.

The grant we received in connection with the construction of our headquarters requires us to meet certain thresholds, the attainment of which may significantly increase our operating costs.

 

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In June 1999, we completed construction of a new office and production facility in Schenectady, New York for approximately $2,300,000, which was financed with a $1,000,000 grant from the Empire State Development Corporation (an agency of New York state) and a mortgage loan from a local financial institution. The grant stipulates that we are obligated to achieve certain annual employment levels between January 2002 and January 2005. While we have not currently achieved the agreed upon employment levels, we expect to achieve such levels by 2005. In order to achieve the employment levels required by the grant, we would incur substantial additional operating costs in connection with the salaries and benefits to be received by the additional employees. In the event we do not achieve the stipulated employment levels, some or all of the grant will have to be repaid. In the event some or all of the grant will be required to be repaid, we will either seek refinancing from a financial institution, sell the building or pay the amounts due out of our cash reserves. We are currently in negotiations with the relevant state agency to restructure the grant terms to provide for a lower employment threshold. We expect to repay a percentage of the grant to the agency in consideration for this modification.

Our software security products may not be accepted by consumers, which would seriously harm our business.

We recently introduced our Authentidate product line, including the CareCert medical forms processing service. Demand and market acceptance for the our software security offerings remain subject to a high level of uncertainty. Achieving widespread acceptance of these products and maintaining market acceptance of DocStar will continue to require substantial marketing efforts and the expenditure of significant funds to create and maintain brand recognition and customer demand for such products. There can be no assurance that adequate marketing arrangements will be made and continued for such products and there can be no assurance that any of these products will ever achieve or maintain widespread market acceptance or that the sale of such products will be profitable.

If we cannot continuously enhance our products in response to rapid changes in the market, our business will be harmed.

The software-based services industry and computer industry in general are characterized by extensive research and development efforts which result in the frequent introduction of new products which render existing products obsolete. Our ability to compete successfully in the future will depend in large part on our ability to maintain a technically competent research and development staff and our ability to adapt to technological changes in the industry and enhance and improve existing products and successfully develop and market new products that meet the changing needs of our customers. Although we are dedicated to continued research and development of our products with a view towards offering products with the most advanced capabilities, there can be no assurance that we will be able to continue to develop new products on a regular basis which will be competitive with products offered by other manufacturers. At the present time, we do not have a targeted level of expenditures for research and development. We will evaluate all opportunities but believe the majority of our research and development will be devoted to enhancements of our existing products.

Technological improvements in new products that we and our competitors offer, which, among other things, results in the rapid decline of the value of inventories, as well as the general decline in the economy and other factors, have resulted in recent declines in retail prices for computer products. As competitive pressures have increased, many companies have ceased operation and liquidated inventories, further increasing downward pricing pressure. Such declines have, in the past, and may in the future, reduce our profit margins.

 

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We do not have patents on all the technology we use which could harm our competitive position.

We do not currently hold any patents and the technology embodied in some of our current products cannot be patented. We have four patents pending for the innovative technology underlying the Authentidate business plan that can verify the authenticity of digital images by employing a secure clock to stamp the date and time on each image captured and have one patent pending concerning the associated business process. We also have an additional patent application pending related to our Trac Medical Solutions, Inc., business model. We have also registered as trademarks the logos “DocStar” and “Authentidate” and acquired the registered trademark “Trac Medical”. We rely on confidentiality agreements with our key employees to the extent we deem it to be necessary. We further intend to file a patent application for any new products we may develop, to the extent any technology included in such products is patentable, if any. There can be no assurance that any patents in fact, will be issued or that such patents will be effective to protect our products from duplication by other manufacturers. In addition, there can be no assurance that any patents that may be issued will be effective to protect our products from duplication by other developers.

Other companies operating within our business segment may independently develop substantially equivalent proprietary information or otherwise obtain access to our know-how. In addition, there can be no assurance that we will be able to afford the expense of any litigation which may be necessary to enforce our rights under any patent. Although we believe that the products we sell do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible that such infringement or violation has or may occur. We are aware of a patent issued in May 2002 to an agency of the Federal government which may conflict with our patent applications. We are continuing to investigate the possible conflict and will seek the advice of patent counsel to determine our proper course of action. In the event that products we sell are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products. There can be no assurance that, in such an event, we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are deemed to infringe upon the patents or proprietary rights of others, we could, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business.

If our products are not competitive, our business will suffer.

Authentidate Holding Corp. and its subsidiaries are engaged in the highly competitive businesses of assembling and distributing document imaging systems, software-based authentication products, computer hardware and software as well as technical support services for such businesses. The document imaging business is competitive and we compete with major manufacturers. Many of these companies have substantially more experience, greater sales, as well as greater financial and distribution resources than do we. The most significant aspects of competition are the quality of products, including advanced capabilities, and price. There can be no assurance that we can effectively continue to compete in the future.

 

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Our Authentidate business, including the product offered by Trac Medical Solutions, is a new business line and the level of competition across the product line is unknown at this point in time. There can be no assurances, however, that any of the Authentidate products, including the USPS EPM, will achieve market acceptance.

Our DJS subsidiary is engaged in the highly competitive business of systems integration, computer services and computer reselling. DJS competes with many small and local companies which provide similar technical services to those offered by DJS. Additionally, DJS must compete with other computer resellers, many of whom have greater financial and technical resources. There can be no assurance that DJS will be able to compete successfully with these competitors.

If we lose our President, our business will be harmed.

Our success is largely dependent upon the services of our Chairman of the Board and President, John T. Botti. The loss of his services would have a material adverse affect on our business and prospects. We have entered into a three-year employment agreement with Mr. Botti, which was renewed in January 2003 for a one-year renewal term and which will expire in January, 2004. We are currently negotiating the terms of a new employment agreement with Mr. Botti, the terms of which have not yet been finalized. We have obtained, for our benefit, “key man” life insurance in the amount of $1,000,000 on Mr. Botti’s life.

Since we have not paid dividends on our common stock, you may not receive income from an investment in our common stock.

We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Earnings, if any, will be used to finance the development and expansion of our business.

If our common stock is delisted from Nasdaq, liquidity in our common stock may be affected.

Our Common Stock is listed for trading on the Nasdaq National Market. In order to continue to be listed on Nasdaq, however, we must meet certain criteria, including one of the following:

 
maintaining stockholders’ equity of $10,000,000, a minimum bid price of $1.00 per share and a market value of its public float of $5,000,000; or
     
 
having a market capitalization of at least $50,000,000, a minimum bid price of $1.00 per share and a market value of its public float of $15,000,000.

 

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On June 30, 2003, our closing bid price was $3.51. The dilution to our shareholders which could be caused by the widespread conversion of the Series B and Series C Preferred Stock as well as our outstanding convertible debentures could cause the per share value of our common stock to drop below the minimum bid of $1.00 required for continued listing. As of June 30, 2003, we had stockholders’ equity of $13,868,650 and as of June 30, 2003 the market value of our public float was approximately $68,619,489.

In the future, if we should fail to meet Nasdaq maintenance criteria, our Common Stock may be delisted from Nasdaq, and trading, if any, in our securities would thereafter be conducted in the non-Nasdaq over-the-counter market. As a result of such delisting, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our securities.

Although we anticipate that our common stock will continue to be listed for trading on Nasdaq, if the common stock were to become delisted from trading on Nasdaq and the trading price of the common stock was below $5.00 per share on the date the common stock was delisted, trading in such securities would also be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of such securities and the ability of purchasers to sell their securities in the secondary market.

Our Series B Preferred Stock financing may result in dilution to our common shareholders.

Dilution of the per share value of our common shares could result from the conversion of most or all of the Series B Preferred Stock we sold in a private placement in October 1999. There are currently outstanding 28,000 shares of our Series B Preferred Stock. The holders of our outstanding shares of Series B Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to $1.40. As of October 29, 2002, we obtained the consent of this holder to amend the Certificate of Designations, Preferences and Rights and Number of Shares of Series B Preferred Stock in order to fix the conversion rate at $1.40. Prior to this amendment, the conversion rate was equal to the lower of $1.875 and the average of the closing bid and asked prices of our common stock for the immediately preceding ten consecutive trading days ending one day prior to the notice of conversion; provided, however, that the conversion rate would not be below $0.875. Accordingly, the outstanding 28,000 shares of Series B Preferred Stock are presently convertible into an aggregate of 500,000 shares of our common stock. Prior to the amendment, the outstanding shares of Series B Preferred Stock were convertible into a maximum of 800,000 shares of our common stock. In consideration of obtaining the consent of the holder of the outstanding shares of our Series B Preferred Stock, we agreed that our right to redeem those shares would be deferred for a period of two years.

 

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Even though our ability to fix the conversion price will ameliorate the otherwise negative dilutive effect of widespread conversion of the shares of Series B Preferred Stock, holders of our common stock could still experience substantial dilution form the conversion of the Series B Preferred Stock. In the event the conversion price is lower than the actual trading price on the day of conversion, the holder could immediately sell all of its converted common shares, which would have a dilutive effect on the value of the outstanding common shares. Furthermore, the significant downward pressure on the trading price of our common stock as Series B Preferred Stock holders converted these securities and sell the common shares received on conversion could encourage short sales by the holders of Series B Preferred Stock or other shareholders. This would place further downward pressure on the trading price of our common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the Series B Preferred Stock could lead to a decline in the trading price of our common stock.

Our Series C Preferred Stock financings may result in dilution to our common shareholders.

Dilution of the per share value of our common shares could result from the conversion of most or all of the Series C Preferred Stock we sold in two transactions pursuant to Regulation S to non-U.S. entities in May, 2001. Holders of our Series C Preferred Stock may convert these shares into shares of our common stock at a fixed conversion price of $4.845 beginning at the earlier of one year after the issuance of the Series C Preferred Stock or upon the effectiveness of a registration statement covering such shares. In addition, the purchasers in these transactions received warrants to purchase such number of shares of our common stock as equals 10% of the number of shares issuable upon conversion of the Series C Preferred Stock, rounded up to the nearest 1,000 shares. We initially issued 5,500 shares of Series C Preferred Stock which are convertible into an aggregate of 1,135,191 shares of Common Stock and 114,000 warrants. As of June 30, 2003, there were outstanding 3,600 shares of Series C Preferred Stock which are convertible into an aggregate of 743,034 shares of Common Stock and 114,000 warrants.

We have sold restricted shares which may depress our stock price when they are sellable under Rule 144.

As of June 30, 2003, there were 1,953,416 shares of common stock outstanding which may be deemed “restricted securities” as that term is defined under the Securities Act of 1933 (the “Act”), and in the future, may be sold pursuant to a registration under the Act, in compliance with Rule 144 under the Act, or pursuant to another exemption therefrom. Rule 144 provides, that, in general, a person holding restricted securities for a period of one year may, every three months thereafter, sell in brokerage transactions an amount of shares which does not exceed the greater of one percent of our then outstanding Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity limitations by a person who is not an affiliate of ours and was not an affiliate at any time during the 90 day period prior to sale and who has satisfied a two year holding period. Sales of our Common Stock by certain present stockholders under Rule 144 may, in the future, have a depressive effect on the market price of our securities. In addition, the sale of shares by officers and directors and other affiliated shareholders, may also have a depressive effect on the market for our securities.

 

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The exercise of our outstanding options, warrants and convertible debentures may depress our stock price.

As of June 30, 2003, there were outstanding the following options, warrants and convertible debentures:

 
Stock options to purchase an aggregate of 5,003,117 shares of common stock at exercise prices ranging from $0.01 to $9.125 per share, not all of which are immediately exercisable. The weighted average exercise price of the outstanding stock options is $4.38.
     
 
Immediately exercisable warrants to purchase an aggregate of 3,968,539 shares of common stock at exercise prices ranging from $1.00 to $11.00 per share. The weighted average exercise price of the outstanding warrants is $3.37.
     
 
Convertible debentures in the aggregate principal amount of $6,425,300, which are initially convertible into 2,528,192 shares of common stock.

To the extent that outstanding stock options and warrants are exercised or the convertible debentures are converted, dilution to our shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities.

If we cannot offset future taxable income our tax liabilities will increase.

At June 30, 2003, the date of our most recent fiscal year end, we had net operating loss carryforwards (“NOLS”) for federal income tax purposes of approximately $45,000,000 available to offset future taxable income. Under Section 382 of the Internal Revenue Code of 1986, as amended, utilization of prior NOLS is limited after an ownership change, as defined in Section 382, to an annual amount equal to the value of the corporation’s outstanding stock immediately before the date of the ownership change multiplied by the federal long-term exempt tax rate. Use of our NOLS could also be limited as a result of grants of stock options under stock option plans and other events. In the event we achieve profitable operations, any significant limitation on the utilization of NOLS would have the effect of increasing our current tax liability.

Item 2.
Description of Properties

Our executive offices and production facilities are located at 2165 Technology Drive, Schenectady, New York 12308. We own the 26,000 square foot building, subject to a mortgage in the amount of $1,282,000.

A New York State agency awarded us a $1,000,000 grant to build this facility. The grant includes several requirements concerning our business and the number of individuals employed. If these requirements are not fulfilled, we may be required to repay a portion of the grant to New York State. We are currently in negotiations with the relevant state agency to restructure the grant terms to provide for a lower employment threshold. We expect to repay a percentage of the grant to the agency in consideration for this modification.

 

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The executive offices of our Authentidate subsidiary are located at 2 World Financial Center, 43rd Floor, New York, New York 10281. Authentidate leases approximately 5,870 square feet pursuant to an underlease entered into in October, 2000. The lease term expires on March 29, 2006. Authentidate pays an annual rent of $278,825 for the first 33 months of the lease term and will pay an annual rent of $308,175 for the balance of the lease term.

Item 3.
Legal Proceedings

We are the defendant in a third party complaint filed by Shore Venture Group, LLC in Federal District Court in Pennsylvania. The third party complaint was filed against us on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim for breach of contract and seeks indemnification. A trial was held in October, 2002 and we are currently awaiting the verdict of the judge. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flows.

We have also been advised of a claim by Shore Venture Group concerning additional shares of the Common Stock of our subsidiary, Authentidate, Inc. We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the parties. Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of our claims with Shore Venture will not have a materially adverse effect on our financial condition, results of operations or cash flows.

We are engaged in no other litigation the effect of which would be anticipated to have a material adverse impact on our financial condition or results of operations.

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

Not Applicable

 

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PART II

Item 5.
Market for Common Equity and Related Stockholder Matters

Upon the effectiveness of our public offering on May 13, 1992, our common stock commenced trading in the over-the-counter market and was listed on the SmallCap Market of the Nasdaq Stock Market under the symbol “BTWS.” On August 11, 1994, our common stock commenced trading on the Boston Stock Exchange under the symbol “BTW.” On June 25, 1996, we withdrew our listing on the Boston Stock Exchange. On April 24, 1996, our common stock commenced trading on the Pacific Stock Exchange. In April, 2000 we commenced trading on the Nasdaq National Market. On February 2, 2001, we withdrew our listing on the Pacific Stock Exchange. Our common stock currently trades under the symbol “ADAT.”

The following is the range of high and low closing prices for our common stock on the Nasdaq National Market for the periods indicated below:

  High   Low  
 


 


 
Common Stock
               
                 
Fiscal Year 2003
               
1st Quarter
$   4.10   $   1.40  
2nd Quarter
$   4.47   $   1.15  
3rd Quarter
$   4.05   $   1.80  
4th Quarter
$   3.80   $   1.83  
                 
Fiscal Year 2002
               
1st Quarter
$   5.30   $   2.30  
2nd Quarter
$   4.98   $   3.50  
3rd Quarter
$   5.24   $   1.90  
4th Quarter
$   5.85   $   3.12  
                 
Fiscal Year 2001
               
1st Quarter
$   6.688   $   3.875  
2nd Quarter
$   6.0625   $   3.25  
3rd Quarter
$   5.375   $   2.938  
4th Quarter
$   6.31   $   3.93  

The above quotations represent prices between dealers and do not include retail mark-ups, mark-downs, or commissions, and do not necessarily represent actual transactions.

As of September 8, 2003, there were approximately 546 holders of record of our Common Stock. We believe there are more than 500 beneficial holders of our Common Stock.

 

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Dividend Policy

We have not paid any dividends upon our common stock since our inception. We do not expect to pay any dividends upon our common stock in the foreseeable future and plan to retain earnings, if any, to finance the development and expansion of our business. Further, our Certificate of Incorporation authorizes our Board of Directors to issue Preferred Stock with a preferential right to dividends. We are obligated to pay dividends on certain of our outstanding shares of preferred stock as follows:

 
28,000 presently outstanding shares of our Series B Preferred Stock which have the right to receive dividends equal to an annual rate of 10% of the issue price payable on a semi-annual basis; and
     
 
3,100 presently outstanding shares of our Series C Preferred Stock which have the right to receive dividends equal to 4% of the issue price on an annual basis payable in either cash or shares of our Common Stock, at our discretion.
 
Sales of Unregistered Securities
   
 
Sale of Debentures and Warrants in May 2003

On May 29, 2003, we completed the sale of a private financing in the amount of $2,725,300 of our securities to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder. One investor in this financing serves as a non-executive member of our Board of Directors and a second investor is an affiliate of another non-executive member of our Board of Directors. We received net proceeds of approximately $2,600,000, after paying finders fees and expenses. The proceeds received from this transaction are being used for working capital and general corporate purposes.

In the transaction, we sold $2,725,300 of convertible debentures and warrants to purchase an aggregate of 419,279 shares of common stock. The debentures are convertible into shares of our common stock at an initial conversion rate of $2.60 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At our option, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of five years from the date of issuance and fifty percent of such warrants are initially exercisable at $2.60 per share and the remaining warrants are initially exercisable at $2.86 per share.

 

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We also issued five year warrants to purchase an aggregate of 36,923 shares of our common stock to three consultants for services rendered in connection with this transaction, of which fifty percent are exercisable at $2.60 per share and fifty percent are exercisable at $2.86 per shares. The consultants also received a cash fee of $96,000, equal to 6% of the gross proceeds we received from the issuance of debentures and warrants to certain of the investors. The warrants issued to the consultants are on terms substantially similar to the warrants issued to the investors.

 
Acquisition of Trac Medical Solutions, Inc.

As reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, we issued an aggregate of 130,000 shares of our common stock and 20,000 options to purchase shares of common stock in connection with our acquisition of the outstanding minority interest of this subsidiary. In addition, the sellers may receive, up to an aggregate amount of 75,000 additional shares of our common stock in the event that Trac Medical Solutions achieves certain performance targets during the 2003 calendar year.

 
Private Placements

As reported in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, on October 25, 2002, we sold $3,700,000 of convertible debentures to three institutional investors and warrants to purchase an aggregate of 444,000 shares of our common stock. We also issued to consultants for services rendered in connection with this transaction five year warrants to purchase an aggregate of 86,863 shares of our common stock and a total cash fee of $222,000. This offering was made to certain accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder.

As reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, in August, 2002 we sold a consummated a private placement of our securities pursuant to Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 promulgated thereunder. In this offering we sold a total of 660,077 units of our securities and received an aggregate of $2,000,035 in gross proceeds. Each unit consisted of one share of common stock and one warrant to purchase .20 shares of common stock.

 
Warrants to Consultants

During the fiscal year ended June 30, 2003 we issued warrants to purchase shares of our common stock to consultants as follows. In connection with a consulting agreement entered into with Wolfe Axelrod & Weinberger Associates, LLC, we issued warrants to purchase 200,000 shares of our common stock. These warrants are exercisable at a per share price of $3.10 until September 30, 2006. In connection with a consulting agreement entered into with John A. Stiles & Associates, LLC, we issued warrants to purchase 10,000 shares of our common stock. These warrants are exercisable at a per share price of $3.77 until October 23, 2005.

 

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Item 6.
Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and “Managements’s Discussion and Analysis of Financial Condition and Results of Operations.”

  Year Ended June 30,  
 
 
  2003   2002   2001   2000   1999  
 

 

 

 

 

 
Statement of Operations Data:
                             
Net Sales
$ 25,286,471   $ 16,642,904   $ 17,860,544   $ 15,289,738   $ 17,094,765  
Gross Profit
  6,116,635     4,552,369     3,677,098     2,879,320     5,500,777  
Net (Loss)/Net Income
  (9,839,309 )   (9,951,402 )   (9,340,103 )   (5,274,043 )   (3,166,488)  
Basic and Diluted Net(Loss)/Net Income Per Common Share
  (0.50 )   (0.69 )   (0.63 )   (0.49 )   (0.43)  
                               
Balance Sheet Data:
                             
Current Assets
  7,367,295     7,320,024     13,524,429     15,232,894     9,857,681  
Current Liabilities
  5,443,690     5,727,588     4,004,905     1,809,264     6,225,966  
Working Capital
  1,923,605     1,592,436     9,519,524     13,423,630     3,631,715  
Total Assets
  25,045,840     26,051,986     25,867,905     21,128,335     14,484,984  
Total Long Term Liabilities
  5,733,500 (2)   2,379,064     2,325,168     2,351,253     5,327,901 (1)
Stockholders’ Equity
  13,868,650     17,945,334     19,537,832     16,967,818     3,335,705  

 
(1)
Long-term liabilities excluding discount of $404,588.
(2)
Long-term liabilities excluding discount of $3,108,485.

 

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Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
Overview

We are involved in the development of security software technology, document imaging software products and systems integration services and products. Our products include DocStar document imaging software products, the Authentidate authentication and security software products and system integration services and products through our DJS subsidiary. We also offer, through our Trac Medical Solutions subsidiary, the CareCert™ Internet-based medical forms processing service. Authentidate products are sold by Authentidate, Inc., Trac Medical Solutions, Inc., and Authentidate International, AG. Approximately $1.4 million in revenues during the fiscal year ended June 30, 2003 were generated from our Authentidate-related businesses. The balance of our revenues generated during the 2003 fiscal year were derived from our DocStar and DJS segments.

DJS is an authorized sales and support provider for software products such as Microsoft Solutions and Lotus Notes. DJS sells computer hardware and provides software and integration services to businesses to meet their data management needs.

We established our Authentidate subsidiary during the fiscal year ended June 30, 2000 to engage in the business of providing end users with a software-based security service designed to accept and store a digital code through the Internet which enables users to prove the authenticity of the date, time and the content of any electronic document. The Authentidate product was released for sale in May, 2001. We contemplate that product integration development work will be necessary for each application or customer. We are in the process of selling this product and began to record revenue during the fiscal year ended June 30, 2002. We currently own approximately 98% of Authentidate, Inc.

On July 31, 2002, we entered into a strategic alliance agreement with the United States Postal Service to serve as the preferred provider of the USPS Electronic Postmark ® (EPM) service. Under the terms of the agreement, our subsidiary, AuthentiDate, Inc., provides the management, technology and support for the United States Postal Service’s EPM system. The USPS Electronic Postmark ® provides evidence that the content of a document or file existed at a specific date and time and is intended to protect the integrity of the document or file by ensuring that it cannot be altered without detection. The EPM uses our patent pending technology offering highly sophisticated encryption methodology ensuring document authenticity and is intended to be able to be added to any application regardless of the computing platform or operating system. In order to facilitate this product launch, we entered into development and promotional agreements with Microsoft Corporation and an affiliate of Microsoft in order to create the necessary software interfaces to Microsoft Office ® . We anticipate a general release of this product during the first half of the fiscal year ending June 30, 2004.

 

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In March 2002, we acquired all the outstanding capital stock of Authentidate International, AG. We previously owned 39% of the Authentidate International. Authentidate International sells the Authentidate product in the European marketplace and is currently focusing on the German market. Authentidate International entered into revenue generating agreements during the 2003 fiscal year through which it expects to realize revenue from a combination of installation and transactions fees.

We also organized Trac Medical Solutions during the fiscal year ended June 30, 2001 in order to develop a business model to apply the Authentidate technology to the medical supply business relating to the automation and processing of Certificates of Medical Necessity. During the fiscal year ended June 30, 2002, Trac Medical developed its CareCert™ service and entered into its first revenue-generating agreements during the 2003 fiscal year. In March 2003, we acquired the outstanding minority interest of Trac Medical Solutions (approximately 14%) and now own 100% of Trac Medical Solutions.

During our the fiscal year ended June 30, 2001, we established a joint venture, Authentidate Sports, Inc. to develop an application of our Authentidate technology to the field of signature authentication relating to sports memorabilia and entertainment collectibles. During the fiscal year ended June 30, 2003, we ceased the operations of the venture. Authentidate Sports was structured as a 50/50 non-consolidated joint venture between us and another co-venturer and was accounted for on the equity basis.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to new product launches, bad debts, inventory obsolescence, recoverability of equity investments, intangible assets, software capitalization and deferred tax assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results for which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions.

We believe the following critical accounting policies require significant judgments and estimates used in the preparation of our consolidated financial statements. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

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We loaned $500,000 to an unrelated company in a planned acquisition, Zylab International, Inc. Our loan to Zylab was collateralized by all of Zylab’s assets, including all of its intellectual property. As of June 30, 2002, Zylab had defaulted on the notes. On September 23, 2002, we closed on a transaction pursuant to which our loan was repaid on the following terms. Zylab made payment to us of $350,000 in cash and $50,000 in prepaid license fees for a product DocStar licenses from Zylab. The remaining $100,000, which was reserved for in fiscal 2002, was written off during the fiscal year ended June 30, 2003. As of June 30, 2003, we have fully utilized the prepaid licenses.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write downs may be required.

We hold an interest in a non-consolidated joint venture having operations or technology in areas within our strategic focus, none of which are publicly traded. We monitor the financial condition and results of such company; however, future adverse changes in market conditions or poor operating results of the underlying investments could result in losses or an inability to recover the carrying value, thereby possibly requiring an impairment charge in the future. We ceased operations of this entity during the fiscal year ended June 30, 2003 and recorded a loss of $515,000.

We have capitalized goodwill related to our acquisitions of Authentidate International AG and Trac Medical Solutions, Inc., for which the recoverability of such capitalized goodwill is highly dependent on the future success of the marketing and sales of such product. If the product is not well received by the market place and our future forecasted revenue and profitability from such product launch is less than anticipated, the carrying value of goodwill may be impaired and require an impairment charge in the future.

We record a full valuation against our deferred tax assets when we believe it is more likely than not that such deferred tax assets will not be realized.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes contained elsewhere in this Form 10-K.

Results of Operations
 
Fiscal Year 2003 Compared to Fiscal Year 2002

We realized a consolidated net loss of $9,839,309 ($.50 per share) and $9,951,402 ($.69 per share) for the fiscal years ended June 30, 2003 and 2002, respectively.

As reported in Footnote 17 (Segment Information) to the Consolidated Financial Statements appearing in this Form 10-K, the net loss is the result of losses incurred primarily by our Authentidate segment. Our Authentidate segment has incurred significant sales, marketing, development and general administrative expenses this year and last in an effort to complete the product development efforts and generate sales.

 

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The consolidated net loss is $112,093 less in 2003 as compared to 2002. DocStar reported an increase in segment profit from $287,859 in 2002 to $796,866 in 2003 and DJS realized an increase in segment profit from $96,801 in 2002 to $146,917 in 2003. The Authentidate segment, which includes Authentidate, Authentidate International and Trac Medical Solutions reported an increase in segment losses from $5,723,055 in 2002 to $5,974,728 in 2003.

Consolidated net sales were $25,286,471 and $16,642,904 for the fiscal years ended June 30, 2003 and 2002, respectively. As reported in Footnote 17 to our Consolidated Financial Statements, most of the increase is due to an increase in sales realized by DJS as a result of its shift in the product mix of sales. The increase in DJS sales from $9.9 million to $17.1 million was primarily the result of an increase in direct computer hardware sales this year compared to last year. During the fiscal year ended June 30, 2002, DJS had a significant amount of indirect sales. In an indirect sale DJS passes the hardware sale on to a national distributor or manufacturer and realizes a fee from the distributor and DJS records this fee as a sale. The fee is generally a percentage of the total sale. In a direct sale DJS would purchase the hardware from the distributor or manufacturer and resell it to its customer and would record the entire hardware sale. In a direct sale, the sales revenue is much higher than an indirect sale and so is the cost of sale. However, in either scenario the gross profit dollars are about the same. The DJS sales mix of direct sales to indirect sales is dictated by market conditions and is determined by the customer and/or vendor. One company represented approximately 73% of DJS’s net sales for fiscal 2003 as compared to 22% for fiscal 2002. Sales also increased in the Authentidate segment for the fiscal year ended June 30, 2003 by $1.3 million (of which approximately $0.8 million related to Authentidate International) as a result of increased customer acceptance of Authentidate software services. DocStar sales increased slightly for the fiscal year ended June 30, 2003 as compared to the prior fiscal year.

Consolidated gross profit for the fiscal years ended June 30, 2003 and 2002 were $6,116,635 and $4,552,369, respectively. This increase is due to the decrease in the cost of sales experienced by our DocStar division. The Authentidate segment also realized a smaller gross loss in fiscal 2003 as compared to fiscal 2002 due to an increase in sales, as mentioned above.

Our consolidated gross profit margin was 24.2% and 27.4% for the years ended June 30, 2003 and 2002, respectively. DJS realized a decrease in profit margins compared to last year due to the shift in product mix discussed above, as direct sales have a lower gross profit margin than indirect sales. In addition, the DJS profit margins have been negatively affected by competitive pressure in the current economy. DJS realized a gross profit margin of 11.8% in 2003 compared to 20.8% in 2002 Offsetting the reduced profit margins of DJS was an increase in gross profit margins for DocStar. DocStar’s gross profit margin increased from 54.2% to 64.2% from 2002 to 2003. This increase is due to reduced direct material costs due to better purchasing and a general reduction in component parts throughout the computer industry and because of a strategic shift in the business away from hardware and into software-only sales. The Authentidate segment realized a gross loss of $269,592 in 2003 compared to $1,175,669 in 2002. Gross profit margin is defined as gross profit as a percentage of sales.

 

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Selling, general and administrative expenses (S,G&A) consist of all our other expenses except product development costs and interest. S,G&A expenses amounted to $12,600,901 and $11,470,073 for the years ended June 30, 2003 and 2002, respectively. This increase in S,G&A expenses is primarily the result of our consolidation of the financial statements of Authentidate International for the entire 2003 fiscal year. During the fiscal year ended June 30, 2002, Authentidate International was treated as an unconsolidated affiliate until we acquired 100% of the capital stock of Authentidate International in March 2002, at which time it became a fully consolidated subsidiary.

As a percentage of sales, S,G&A costs were 49.8% and 68.9% for the years ended June 30, 2003 and 2002, respectively. This percentage decrease is primarily due to the increase in consolidated sales as discussed above.

Interest expense was $871,856 and $124,824 for the years ended June 30, 2003 and 2002, respectively. The increase is primarily due to interest accrued on $6.4 million of convertible debentures which were issued during October 2002 and May 2003. We recorded non-cash interest expense of approximately $489,000, during the year ended June 30, 2003, relative to the amortization of debt discount on the convertible debentures, which is more fully explained in Footnote 18 to the Consolidated Financial Statements in this Form 10-K. In addition, we are required to pay interest on the convertible debentures in the amount of 7% per annum which resulted in interest expense of approximately $171,000 for the year ended June 30, 2003. Finally, we incurred minor additional interest expense during the fiscal year ended June 30, 2003 as a result of new equipment and software leases entered into by the Authentidate segment and by DJS from borrowings on its line of credit. The current balance on this line of credit is approximately $878,000.

During the fiscal year ended June 30, 2003, interest and other income increased to $572,000 as compared to $180,000 for the fiscal year ended June 30, 2002. This $392,000 increase was primarily due to amounts we received as compensatory payments from various funding sources due to the events of September 11, 2001 as our subsidiary, Authentidate, Inc., maintains its headquarters in lower Manhattan.

Product development expenses, excluding capitalized costs, primarily relate to software development for the Authentidate Segment. These costs were $2,534,777 and $2,170,173 for the years ended June 30, 2003 and 2002, respectively. We have a policy of capitalizing qualified software development costs after technical feasibility has been established and amortizing those costs over three years as cost of sales. The amortization expense of software development costs amounted to approximately $1.1 million for each of the years ended June 30, 2003 and 2002.

 

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Fiscal Year 2002 Compared to Fiscal Year 2001

We realized a consolidated net loss of $9,951,402 ($.69 per share) and $9,340,103 ($.63 per share) for the fiscal years ended June 30, 2002 and 2001, respectively. Consolidated net sales totaled $16,642,904 and $17,860,544 for the fiscal years ended June 30, 2002 and 2001, respectively.

The sales decrease is due to a decrease in sales from our DJS Marketing, Inc. (DJS) subsidiary, where sales decreased from $11,620,407 to $9,871,923 during the fiscal year ended June 30, 2002. Offsetting this decrease was improved sales in our DocStar Division, where sales increased from $6,239,579 to $6,719,803. Our Authentidate subsidiaries, including Trac Medical and Authentidate International, had sales of $51,178 through June 2002.

Sales declined in DJS for two reasons. The primary reason is a change in business strategy as DJS sold a greater volume of hardware on an indirect sales model, where the sale is passed on to the manufacturer and DJS receives a fee. The gross margin is essentially the same as with a direct sales approach, but DJS can reduce inventory levels and has lower bad debt risks. The second reason for the decrease in sales by DJS is the recessionary pressures confronting the technology industry in DJS’ market area. We cannot quantify the exact effect these pressures have contributed to the sales decline. DocStar sales increased due to increased demand for its document imaging products, as well as due to the release of a new version of the software which operates the DocStar unit, Version 3.0.

The consolidated net loss increase is mainly attributable to losses incurred by our Authentidate and Trac Medical subsidiaries. Please see footnote 17, “Segment Reporting” in the consolidated financial statements. The segment profit for DJS was $96,801 and the segment profit for DocStar was $287,859. The Authentidate business line, which includes Authentidate, Inc., Authentidate International AG and Trac Medical Solutions, Inc., incurred significant selling, general and administrative expenses in the process of building a team of experienced managers and professionals and developing a market for their products. Major expenses include compensation and benefits, professional fees, public relations, amortization, rent, advertising and marketing. Authentidate International revenue is only included subsequent to March 15, 2002, the date our acquisition was consummated. The Authentidate segment loss was $5,723,055. Corporate expenses also increased due to a reduction in interest income.

Consolidated gross profit for the fiscal years ending June 30 , 2002 and 2001 was $4,552,369 and $3,677,098, respectively. This increase is due to the sales increase of DocStar discussed above. The consolidated profit margin was 27% and 21% for the years ending June 30, 2002 and 2001, respectively. Gross profit margin is defined as gross profit as a percentage of sales. The increase in gross profit margin is due to DocStar which realized a gross profit margin of 54% for the current fiscal year compared to 37% last year. The increase is due to sales volume increases, component cost reductions and increased efficiencies in assembly.

 

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Selling, general and administrative expenses (S,G&A) consist of all other of our expenses except product development expenses and interest. S,G&A expenses amounted to $11,470,073 and $11,950,719 for the twelve months ended June 30, 2002 and 2001, respectively. The decrease is mainly due to the Authentidate businesses which have been controlling costs in an effort to reduce the cash flow burn rate. DJS S,G&A expenses decreased slightly during the same period. DocStar S,G&A expenses increased by approximately $600,000 during the fiscal year ended June 30, 2002. The parent company also incurred a corporate non-cash expense of $518,000 for stock compensation expense as a result of the stock conversion to Authentidate Holding Corp. As a percentage of sales, S,G&A costs were 69% and 67% for the years ended June 30, 2002 and 2001, respectively.

Interest expense was $124, 824 and $124,816 for the years ended June 30, 2002 and 2001, respectively. Our borrowing levels remained relatively constant during these periods and interest rates remained unchanged on our long term debt.

Product development expenses, excluding capitalized costs, relate to software development for our Authentidate businesses and for DocStar. These costs totaled $2,170,173 and $1,221,639 for the years ended June 30, 2002 and 2001, respectively. The increase is due to product development of the Authentidate business segments. We have a policy of capitalizing qualified software development costs after technical feasibility has been established and amortizing those costs over three years as cost of sales.

Liquidity and Capital Resources

Our primary sources of funds to date have been the issuance of equity securities and the incurrence of third party debt. The principal balance of long-term debt at June 30, 2003 totaled $1,549,940, of which $1,281,700 relates to a mortgage loan on our principle office located in Schenectady, New York and $268,240 relates to a note payable to our Chief Executive Officer in connection with the purchase of 100 shares of Series A Preferred Stock. We also have long-term convertible debentures in the aggregate principal amount of $6,425,300, net of debt discount of $3,108,485 at June 30, 2003.

Our DJS subsidiary has a $2.5 Million revolving line of credit with a financial institution which is collateralized by all assets of DJS and which we agreed to guarantee. The agreement restricts DJS from making cash advances to AHC without obtaining a waiver from the financial institution. The interest rate is prime plus 1.75% with a minimum prime rate of 7%. DJS may borrow on this line based on a formula of qualified accounts receivable and inventory. The outstanding balance on this line of credit was $877,863 at June 30, 2003.

Property, plant and equipment expenditures totaled $283,903 and capitalized software development expenditures totaled $296,197 for the year ended June 30, 2003, respectively. There are no significant purchase commitments outstanding.

 

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In June 1999, we completed construction of a new office and production facility in Schenectady, New York for approximately $2,300,000 which was financed with a $1,000,000 grant from the Empire State Development Corporation (an agency of New York state) and a mortgage loan from a local financial institution. The grant stipulates that we are obligated to achieve certain annual employment levels between January 2002 and January 2005 or some or all of the grant will have to be repaid. We have not achieved the agreed upon employment levels to date and are currently in negotiations with the state agency to modify grant to lower the required employment levels. We expect to repay a percentage of the grant to the agency in consideration for this modification. No assurances can be given that we will either attain the currently required employment levels or obtain the state agency’s agreement to lower these levels. In the event some or all of the grant will be required to be repaid, we will either seek refinancing from a financial institution, sell the building or pay the grant off out of cash reserves.

During the fiscal year ended June 30, 2003, we incurred a net loss of $9,839,309. Cash used in operating activities totaled $5,189,117 for the year ended June 30, 2003 compared to $6,056,427 used in operating activities for the year ended June 30, 2002. Our cash balance increased from $2,269,353 to $3,460,446 from June 30, 2002 to June 30, 2003 due to private financings which was offset by our operating losses. As described below, during the fiscal year ended June 30, 2003, we consummated three separate private placements of our securities and received a net aggregate amount of approximately $8,100,000 from such transactions. Further, subsequent to June 30, 2003, we completed a transaction for the sale of an additional $2,470,000 of convertible debentures and a separate transaction for the sale of $500,000 of our common stock.

A portion of our cash balance of $3,460,446, however, secures the outstanding line of credit held by DJS and DJS would need to obtain the consent from the lender prior to advancing funds to AHC. Further, our accumulated deficit has increased from $42,999,497 at June 30, 2002 to $53,062,512 at June 30, 2003.

To date, we have been largely dependent on our ability to sell additional shares of our common stock or other securities to fund our operating deficits. Under our current operating plan to introduce our Authentidate technology, our ability to improve operating cash flow is highly dependent on the market acceptance of our Authentidate related businesses. If we are unable to attain projected sales levels for our Authentidate, Authentidate International and Trac Medical offerings, it may be necessary to raise additional capital to fund our operations and to meet our obligations.

There is no assurance that such funding will be available, if needed. As a result of net losses incurred during fiscal 2003, we reduced our workforce . If we are unable to raise additional capital necessary to fund operations for fiscal 2004 and are unable to attain projected sales levels for Authentidate and related products, then we will implement additional cost reduction strategies in early fiscal 2004, including the possible shutdown or reduction of operations at Authentidate, Authentidate International or Trac Medical, as well as reductions in corporate expenses (including salary, marketing, professional fees and other costs). In the event

 

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we are required to shut down or reduce operations at Authentidate, Authentidate International and/or Trac Medical, goodwill approximating $11,600,000 could potentially become impaired and result in a non cash charge to operations. Our available cash balance at June 30, 2003 totaled $3,460,446. We believe that our existing cash and cash equivalents, including the funds raised in September 2003, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

During the quarter ended March 31, 2003, we acquired the remaining outstanding shares of capital stock of our subsidiary, Trac Medical Solutions, Inc., previously held by four other shareholders. Prior to the acquisition, we owned 85.8% of the outstanding stock of Trac Medical. As a result of the acquisition, we now own 100% of Trac Medical. Pursuant to the Stock Purchase Agreement dated as of March 13, 2003, we issued an aggregate of 130,000 shares of our common stock to the sellers, and also issued to the sellers who will continue as employees of Trac Medical 20,000 options to purchase shares of common stock at an exercise price equal to the closing price of our common stock as of the closing date of the transaction. In addition, these sellers may receive up to an aggregate amount of 75,000 additional shares of our common stock in the event that Trac Medical achieves certain sales and income performance targets during the twelve month period from October 1, 2002 to September 30, 2003. Upon achievement of each performance target, we will recognize compensation expense for such additional shares based on the fair value of the shares issued. Additional bonus options of up to 390,000 in fiscal year 2004 and 525,000 in fiscal year 2005 may be granted if certain sales and income performance targets are met in these years. Upon achievement of these performance targets, the bonus options will be issued to the employees at an exercise price equal to the fair value of our common stock on the grant issuance date. In addition, the sellers agreed to place an aggregate of 52,000 shares of the common stock issued to them into a six month escrow to provide for potential breaches of representations and warranties contained in the Stock Purchase Agreement regarding the financial condition and operations of Trac Medical. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon our financial condition.

In April 2003, the audit committee of our Board of Directors approved our plan to purchase all of the outstanding Series A Preferred Stock from our Chairman and Chief Executive Officer. Our Series A Preferred Stock provides the holder with the ability to elect a majority of our Board of Directors. We agreed with our Chief Executive Officer on a total purchase price for this transaction of $850,000 which represents a discount as compared to the appraised value of the shares of Series A Preferred Stock of $1.1 million, which was determined by an independent appraisal and valuation firm. Our Board ordered this valuation prior to agreeing upon the purchase price for the shares of Series A Preferred Stock. The purchase was consummated in June 2003. At the closing, $70,000 was paid in cash, $485,000 was offset against loans owed to us by our Chief Executive Officer and the remainder will be paid in monthly installments of $15,000, without interest, which payments commenced July 2003.

 

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During the fiscal quarter ended September 30, 2002, we consummated a private placement of our securities pursuant to Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 promulgated thereunder. The securities offered have a purchase price of $3.03 per unit. We sold an aggregate of 660,077 units of our securities, each unit comprised of one share of common stock and one warrant to purchase .20 shares of common stock. The warrants are exercisable at $3.26 per share for a period of five years from the date of issuance. We received approximately an aggregate of $1,955,000 in net proceeds after payment of expenses. The proceeds were used to fund business development, marketing and sales efforts for the Authentidate software services, along with our general working capital needs. A registration statement filed with the U.S. Securities and Exchange Commission was declared effective by the Commission during the quarter ending December 31, 2002 for these shares and the underlying warrant shares.

On January 9, 2002, we announced that we had entered into a letter of intent to acquire the assets of Zylab International, Inc., a privately owned company based in Germantown, Maryland for shares of AHC common stock. The letter of intent contemplated that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. Pursuant to the letter of intent, we loaned to Zylab an aggregate principle amount of $500,000, which loan was collateralized by all of the assets of Zylab, including its intellectual property. As of June 30, 2002, Zylab had defaulted on the notes. On September 23, 2002, we closed on a transaction pursuant to which our loan was repaid on the following terms. Zylab made payment to us of $350,000 in cash and $50,000 in prepaid license fees for a product DocStar licenses from Zylab. The remaining $100,000, which was reserved for in fiscal 2002, was written-off during the fiscal year ended June 30, 2003. Accordingly, our planned acquisition of Zylab has been cancelled. We have utilized the entire amount of the prepaid licenses.

In October 2002, we sold convertible debentures with a face value of $3,700,000 to institutional investors and warrants to purchase 444,000 shares of common stock. The debentures are convertible into shares of our common stock at an initial conversion price of $2.50 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At our option, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of four years from the date of issuance and are initially exercisable at $2.50 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment in the event we issue common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition, the conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization.

We have an option, but not a requirement, to sell another $2,470,000 of convertible debentures to the same investors provided that our common stock maintains a trading price at or above $3.00 per share for the 15 trading days preceding the election to sell additional debentures. Subsequent to June 30, 2003, we exercised this option and completed the transaction for the sale of an additional $2,470,000 of convertible debentures on September 12, 2003.

 

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Subsequent to our completion of the September 12, 2003 sale of $2,470,000 of convertible debentures and 247,000 warrants to the same investor group that participated in our October 2002 placement, we completed the sale of $500,000 of our common stock and warrants to purchase 50,000 shares of common stock to an additional investor. The securities issued in this transaction are subject to a twelve month lock-up period during which the investor may not sell or otherwise transfer the securities.

In May 2003, we completed a similar sale of convertible debentures in the amount of $2,725,300 and warrants to purchase 419,279 shares of common stock to certain institutional and accredited investors. The debentures are convertible into shares of our common stock at an initial conversion price of $2.60 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At our option the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of five years from the date of issuance and 50% of the warrants are initially exercisable at $2.60 per share and the remaining 50% of the warrants are initially exercisable at $2.86 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of subdivision, stock split, combination of shares or recapitalization.

Mr. J. David Luce, who serves as a non-executive member of our Board of Directors participated in this financing and purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants. Further, J&C Resources, LLC, an entity affiliated with Mr. Charles C. Johnston, who also serves as a non-executive member of our Board of Directors, purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants in this financing. In addition, Greener Fairways, Inc., an entity that is currently a beneficial owner of in excess of 5% of our common stock participated in this financing, purchasing $250,000 aggregate principal amount of convertible debentures and receiving 38,462 common stock purchase warrants.

The securities sold in the above offerings were restricted securities under the terms of Regulation D and may not be transferred or resold for a period of one year, except pursuant to registration under the Securities Act or an exemption hereunder. Except for the two transactions completed in September 2003, registration statements have been filed with and declared effective by the Securities and Exchange Commission registering the shares of common stock underlying the debentures and the warrants. We are obligated to file a registration statement covering the shares of common stock issuable or issued in the September financings pursuant to registration rights agreements entered into with the investors.

The following is a summary of the contractual commitments associated with our debt and lease obligations, as well as our purchase commitments as of June 30, 2003:

 

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    Payment due by period

 
Contractual Obligations
  Total   Less than
1 year
  1-3 years   3-5 years   More than
5 years
 
   

 

 

 

 

 
Long-term Debt Obligations
  $ 1,549,940   $ 218,811   $ 176,134   $ 103,605   $ 1,051,390  
Capital Lease Obligations
  $ 198,076   $ 112,522   $ 80,445   $ 5,109   $ 0  
Operating Lease Obligations
  $ 1,795,275   $ 611,125   $ 1,044,283   $ 139,867   $ 0  
Purchase Obligations
    N/A     N/A     N/A     N/A     N/A  
Convertible Debentures
  $ 6,425,300   $ 0   $ 3,700,000   $ 2,725,300   $ 0  
   

 

 

 

 

 
Total
  $ 9,968,591   $ 942,458   $ 5,000,862   $ 2,973,881   $ 1,051,390  
   

 

 

 

 

 

The above table excludes the sale of $2,470,000 of convertible debentures which occurred on September 12, 2003. These debentures are payable in full in September 2006.

We are the defendant in a third party complaint filed by Shore Venture Group, LLC in Federal District Court in Pennsylvania. The third party complaint was filed against us on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim for breach of contract and seeks indemnification. A trial was held in October, 2002 and we are currently awaiting the verdict of the judge. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flows.

We have also been advised of a claim by Shore Venture Group concerning additional shares of the Common Stock of our subsidiary, Authentidate, Inc. We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the parties. Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of our claims with Shore Venture will not have a materially adverse effect on our financial condition, results of operations or cash flows.

In May, 2001 we consummated two financings under Regulation S, which resulted in our receipt of an aggregate of $5,500,000 in gross proceeds. In these transactions we sold a total of 5,500 shares of our newly created Series C Convertible Preferred Stock and warrants to purchase 114,000 shares of our common stock. The Series C Preferred Stock is convertible into common stock at a conversion price of $4.845 per share and the warrants are exercisable at $4.845 per share for a period of five years from the date of issuance. The conversion price is not subject to any resets or adjustment for changes in the market price of our common stock. The Series C Preferred Stock also pays an annual 4% dividend, payable in cash or stock at our election, until conversion or redemption.

 

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We received approximately an aggregate of $5,200,000 in net proceeds after payment of commissions and expenses. The proceeds of these transactions were used to increase the business development, marketing and sales efforts for the Authentidate services, along with our general working capital needs.

The transactions were completed under Regulation S of the Securities Act of 1933, as amended, and the securities sold in the offering are deemed restricted securities under Regulation S. We registered for resale, effective as of July 8, 2002, the shares of common stock which may be:

 
issued upon the conversion of the Series C Preferred Stock;
     
 
paid as dividends on the Series C Preferred Stock; and
     
 
issued upon the exercise of the warrants.
 
Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.

Effects of Inflation and Changing Prices

The impact of general inflation on our operations has not been significant to date and we believe inflation will continue to have an insignificant impact on us. However, price deflation in the major categories of components we purchase for DocStar has been substantial and is anticipated to continue through fiscal 2003. Typically, new components such as new generations of microprocessors and new optical disk drive technologies etc. are introduced at premium prices, by its vendors. During this period, we earn lower margins on our products. As the life cycle progresses competitive pressures could force vendor prices down and thus improve our profit margins. We do not believe that competitive pressures will require us to lower our DocStar selling price. Because much of DJS’s business is service-related, price deflation has less of an impact on DJS’s profits. We do not believe that the impact of inflation will have a significant impact on our Authentidate business lines.

New Accounting Pronouncements

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Standard establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This standard becomes effective for any financial instruments entered into or modified after May 31, 2003. We do not expect the adoption of FAS No. 150, to have a material effect on our financial statements.

 

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In April 2003, the Financial Accounting Standards Board (FASB) issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities entered into after June 30, 2003 under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. We do not expect the adoption of FAS No. 149 to have a material effect on our financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. This interpretation gives guidance that determines whether consolidation of a Variable Interest Entity is required and is effective for all variable interest entities with which we become involved beginning in February 2003, and all pre-existing entities beginning after June 15, 2003. We do not expect the adoption of FIN 46 to have a material effect on our financial statements.

In December 2002, the FASB issued FAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure, an amendment of FAS No. 123. This Statement amends FAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Statement has varying effective dates commencing with interim periods beginning after December 15, 2002. We have adopted the disclosure requirements of FAS No. 148.

In November 2002, the FASB issued FAS Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. We have no guarantees to unaffiliated third parties so the adoption of FIN 45 had no impact on our financial statements.

In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Standard addresses the recognition, measurement and reporting of costs that are associated with exit or disposal activities. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of FAS No. 146 had no impact on our financial statements.

 

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Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

We do not believe that any of our financial instruments have significant risk associated with market sensitivity. Our exposure to financial market risks from changes in foreign currency exchange rates has been minimal to date and we are only minimally impacted by changes in interest rates. However, in the future, we may enter into transactions denominated in non-U.S. currencies or increase the level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.

Item 8.
Financial Statements and Supplemental Data

 The Financial Statements and Supplementary Data Schedule are annexed hereto.

Item 9.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

 None

Item 9A.   Controls and Procedures.
   
 
Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, conducted an evaluation of our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c)) as of the end of the period covered by this Annual Report on Form 10-K. Based on their evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that all material information required to be filed in this Annual Report on Form 10-K has been made known to them in a timely fashion.

 
Changes in Internal Controls Over Financial Reporting

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting or in other factors during our last fiscal quarter that could have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART III

Item 10.   Directors and Executive Officers of the Registrant

MANAGEMENT

Our executive officers and directors are as follows:

  Name Age
Office
       
  John T. Botti 40
President, Chief Executive Officer and Chairman of the Board
       
  Steven A. Kriegsman 60
Director
       
  J. Edward Sheridan 66
Director
       
  Charles C. Johnston 67
Director
       
  J. David Luce 41
Director
       
  Dennis H. Bunt 49
Chief Financial Officer
       
  Thomas Franceski 39
Vice President, Technology Products Group and President, DJS Marketing and DocStar division.

All directors hold office until the next annual meeting of shareholders or until their successors are elected and qualify. Officers are elected annually by, and serve at the discretion of, the Board of Directors. There are no familial relationships between or among any of our officers or directors.

In connection with our private placement through Whale Securities Co., L.P. (“Whale”), completed in December 1995, we granted Whale the right to nominate one person to our Board of Directors, or in the alternative, a person to attend meetings of the Board of Directors. Whale has selected Steven Kriegsman as its representative on the Board.

John T. Botti , a co-founder, has served as President, Chief Executive Officer and Director since our incorporation in August 1985. Mr. Botti graduated from Rensselaer Polytechnic Institute with a B.S. degree in electrical engineering in 1994 with a concentration in computer systems design and in 1996 earned a Master of Business Administration degree from RPI.

J. Edward Sheridan joined the Board of Directors in June, 1992. From 1985 to the present, Mr. Sheridan served as the President of Sheridan Management Corp. From 1975 to 1985, Mr. Sheridan served as the Vice President of Finance and Chief Financial Officer of AMF. From 1973 to 1975, he was Vice President and Chief Financial Officer of Fairchild Industries. From 1970 to 1973 he was the Vice President, Corporate Finance of F.S. Smithers. From 1967 to 1970 Mr. Sheridan was the Director of Acquisitions of Westinghouse Electric. From 1964 to 1967 he was employed by Corporate Equities, Inc., a venture capital firm, Mr. Sheridan holds an M.B.A. from Harvard University and a B.A. from Dartmouth College. Mr. Sheridan also serves as a director of Syntroleum Corporation.

 

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Steven A. Kriegsman joined the Board of Directors in December, 1997. Mr. Kriegsman is also the Chief Executive Officer of CytRx Corp. since July 2002. In 1989, Mr. Kriegsman founded The Kriegsman Group, a private financial consulting services firm and has served as its President since such time. In 1981 Mr. Kriegsman co-founded ANA Financial Services, Inc., a holding company engaged, through its subsidiaries, in securities brokerage, financial planning and investment advisory services and franchising of certified public accountants. Mr. Kriegsman served as Chairman and Chief Executive Officer of ANA Financial until 1989. Mr. Kriegsman is a former Certified Public Accountant. Mr. Kriegsman holds a B.S. from New York University.

Charles C. Johnston joined the Board of Directors in December, 1997. Mr. Johnston has been the Chairman of Ventex Technology, Inc., a privately-held neon light transformer company since July 1993. Mr. Johnston has also served as Chairman of AFD Technologies, a private corporation since 1994 and J&C Resources a private corporation, a position that he has held since 1987. Mr. Johnston serves as a Trustee of Worcester Polytechnic Institute and earned his B.S. degree from WPI in 1957.

J. David Luce was elected to our Board of Directors at our February 10, 2003 Annual Meeting of Shareholders. Mr. Luce has been a Senior Vice President of Fixed Income Sales with Lehman Brothers since 1990. Prior to joining Lehman Brothers, Mr. Luce served as a Vice President, Fixed Income Sales, at Kidder Peabody. Mr. Luce also currently acts as a private investment banker raising venture and mezzanine capital. Mr. Luce also serves on the Board of Directors of Issimo Food Group, Inc. Mr. Luce graduated from Duke University in 1983 with a B.A. in Economics.

Dennis H. Bunt has been our Chief Financial Officer since September 1992. Mr. Bunt has more than 27 years of financial management experience, primarily with high-technology companies, including Mechanical Technology, Inc. and General Electric. Mr. Bunt is a certified public accountant and worked for the Boston office of KPMG from 1976 to 1979. Mr. Bunt received his M.B.A. from Babson College in 1979 and received his B.S. in Accounting from Bentley College in 1976.

Thomas Franceski was a founder of DJS Marketing Group in 1993 and has served as President and Chief Financial Officer since its acquisition by Authentidate Holding Corp. in 1996. Mr. Franceski also serves as our Vice President, Technology Products Group, which includes our DocSTAR and DJS businesses. Prior to joining DJS, Mr. Franceski served as Chief Financial Officer of Automated Dynamics Corp., a technology based company focused on materials science technologies where his responsibilities were capital acquisition and operations. Mr. Franceski holds a B.S. degree from LeMoyne College and began his career with KPMG in Albany, New York.

 

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Significant Employees

Jan Wendenburg has been the President and Chief Executive Officer of Authentidate International, AG since March 2000. In 1998 he joined the Windhorst-Group, a German information technology concern, as Managing Director and in 1999 was appointed as the Chief Operating Officer to the Executive Board of Directors at Windhorst New Technologies AG, an international incubator for technology and media companies. He previously was employed by IBM in various Sales and Marketing Management positions from 1985 through 1998. Mr. Wendenburg received a degree in Trade Management from the German Department of Commerce and completed coursework towards an M.B.A. at the Open School of Business in Brussels, Belgium.

Jeffrey Frankel is the Chief Executive Officer and President of Trac Medical Solutions, Inc. and was one of the founders of WebCMN, Inc. which later acquired Trac Medical, Inc. and was renamed Trac Medical Solutions, Inc. Mr. Frankel has held such positions since March 2002 and served as the Executive Vice President of WebCMN and Trac Medical Solutions from June 2001 to March 2002. Prior to founding WebCMN, Mr. Frankel was the Chief Operations Officer for Health Focus of New York, a regional home medical equipment supplier. At the same time he was also president of White’s Homecare, a Health Focus partner. Mr. Frankel has 15 years of healthcare industry experience including 5 years consulting with Ernst and Young. Mr. Frankel holds an M.B.A. from Union College in Health Systems Administration and received his B.S. in Business Administration in 1984 from the University of Buffalo.

Committees of the Board of Directors

The Board of Directors has three Committees: Audit, Compensation and Executive Committee.

Audit Committee . The members of the Audit Committee are J. Edward Sheridan, Steven Kriegsman and Charles Johnston. The Audit Committee acts to: (i) acquire a complete understanding of our audit functions; (ii) review with management the finances, financial condition and our interim financial statements; (iii) review with our independent auditors the year-end financial statements; and (iv) review implementation with the independent auditors and management any action recommended by the independent auditors. During the fiscal year ended June 30, 2003, the Audit Committee met on two occasions and voted by unanimous written consent on one occasion.

Executive Committee . The members of the Executive Committee are currently John T. Botti, J. Edward Sheridan and J. David Luce. Messrs. Sheridan and Luce were appointed to the Executive Committee in February, 2003. The Executive Committee has all of the powers of the Board of Directors except it may not; (i) amend the Certificate of Incorporation or Bylaws; (ii) enter into agreements to borrow money in excess of $250,000; (iii) to grant security interests to secure obligations of more than $250,000; (iv) authorize private placements or public offerings of our securities; (v) authorize the acquisition of any major assets or business or change our business; or (vi) authorize any employment agreements in excess of $75,000. The Executive Committee meets when actions must be approved in an expedient manner and a meeting of the Board of Directors cannot be convened. During Fiscal 2003, the Executive Committee did not deem it necessary to meet but voted by unanimous written consent on two occasions.

 

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Compensation Committee . The members of the Compensation Committee are J. David Luce, J. Edward Sheridan and Charles C. Johnston. The Compensation Committee functions include administration of our 2000 Employee Stock Option Plan, 1992 Employee Stock Option Plan and the 2001 and 1992 Non- Executive Director Stock Option Plans and negotiation and review of all employment agreements of our executive officers. During the fiscal year ended June 30, 2003, the Compensation Committee held no meetings and voted by unanimous written consent on two occasions.

Compensation Committee Report on Executive Compensation

This report is submitted by the compensation committee of the Board of Directors of Authentidate Holding Corp. The compensation committee of the Board of Directors sets the compensation of the Chief Executive Officer and other executive officers, reviews the design, administration and effectiveness of compensation programs for other key executives, and approves stock option grants for all executive officers. The compensation committee currently consists of Messrs. J. Edward Sheridan, J. David Luce and Charles C. Johnston.

Overview and Philosophy.

AHC uses its compensation program to achieve the following objectives:

 
To provide compensation that attracts, motivates and retains the talented, high caliber officers and employees necessary to achieve AHC’s strategic objectives, as determined by the compensation committee;
     
 
To align the interest of officers with the success of AHC by linking compensation with AHC’s business objectives and performance;
     
 
To align the interest of officers with stockholders by including long-term equity incentives; and
     
 
To increase the long-term profitability of AHC and, accordingly, increase stockholder value.

 

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To meet these goals, the compensation committee has adopted an executive compensation program comprised of cash compensation in the form of base salary, bonus compensation and long-term incentive awards, generally in the form of options to purchase common stock. In addition, the compensation program includes various other benefits, including restricted stock awards, medical and insurance plans and AHC’s 401(k) Plan, which is generally available to all employees of AHC.

The Board and the compensation committee also believe that the compensation of the Chief Executive Officer and AHC’s other executive officers should be based to a substantial extent on AHC’s performance and adjusted, as appropriate, based on such executive officer’s performance against personal performance objectives. Generally, when establishing salaries, bonus levels and stock option awards for executive officers, the compensation committee considers: (a) the company’s financial performance during the past year and recent quarters, (b) the individual’s performance during the past year and recent quarters and (c) the salaries of executive officers in similar positions of companies of comparable size and capitalization and other companies within the software industry.

Compensation Components

The three major components of the Company’s executive officer compensation are (a) base salary, (b) long-term, equity-based incentive awards and (c) bonus compensation.

Base Salary.

Compensation levels for each of AHC’s officers, including the Chief Executive Officer, are generally set within the range of salaries that the compensation committee believes are paid to officers with comparable qualifications, experience and responsibilities at similar companies. In setting compensation levels, the compensation committee takes into account such factors as (i) AHC’s past performance and future expectations, (ii) individual performance and experience and (iii) past salary levels. The compensation committee does not assign relative weights or ranking to these factors, but instead makes a determination based upon the consideration of all of these factors as well as the progress made with respect to AHC’s long-term goals and strategies. Base salary, while reviewed annually, is only adjusted as deemed necessary by the compensation committee in determining total compensation for each officer. Base salary levels for each of AHC’s officers, other than the Chief Executive Officer, were also based in part upon evaluations and recommendations made by the Chief Executive Officer. Additionally, John T. Botti, our Chief Executive Officer, Jan Wendenburg, the Chief Executive Officer of Authentidate International AG, and Dennis H. Bunt, our Chief Financial Officer have existing employment agreements, which set forth certain levels of base salary and bonus compensations. During the fiscal year ended June 30, 2003, Mr. Botti received a Base Salary of $305,671, Mr. Bunt received a Base Salary of $146,669, and Mr. Wendenburg received a base salary of $231,000, as set forth in their respective employment agreements. During the fiscal year ended June 30, 2003, Mr. Robert Van Naarden, the former Chief Executive Officer of Authentidate, Inc., received a base salary of $255,115 pursuant to the terms of his then-existing employment agreement. Mr. Van Naarden’s employment agreement expired in July, 2003 and was not renewed.

 

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Equity Incentives.

The compensation committee believes that stock participation aligns officers’ interests with those of the stockholders. In addition, the compensation committee believes that equity ownership by officers helps to balance the short term focus of annual incentive compensation with a longer term view and may help to retain key executive officers. Long term incentive compensation, generally granted in the form of stock options, allows the officers to share in any appreciation in the value of AHC’s common stock. Our 2000 Employee Stock Incentive Plan (the “2000 Plan”), has been established to provide all our employees, including our executive officers, with an opportunity to share, along with our stockholders, in the long-term performance of AHC. Executives are eligible to receive stock options generally not more than once a year, giving them the right to purchase shares of our common stock in the future at a price equal to the fair market value at the date of grant. Unless the Board or the compensation committee determines otherwise, grants to all executives, including the Chief Executive Officer, are exercisable as to one-third of the underlying shares on the each of the first three anniversaries of the grant date. Annual grants to executives other than the Chief Executive Officer are approved by the compensation committee based upon recommendations made by the Chief Executive Officer based upon (1) the individual executive’s performance and (2) market data relating to option grants to individuals occupying similar positions at comparably situated companies.

In making stock option grants, the compensation committee considers general corporate performance, individual contributions to AHC’s financial, operational and strategic objectives, the Chief Executive Officer’s recommendations, level of seniority and experience, existing levels of stock ownership, previous grants of restricted stock or options, vesting schedules of outstanding restricted stock or options and the current stock price. With respect to the compensation determination for the fiscal year ended June 30, 2003, the compensation committee believes that the current stock ownership position of the executive officers was sufficient to achieve the benefits intended by equity ownership. Based on the foregoing, during the fiscal year ended June 30, 2003, the compensation committee did not grant stock options to any executive officers of AHC except for Dennis H. Bunt, the Chief Financial Officer, who was granted options to purchase an aggregate of 65,000 shares of common stock.

Other Benefits.

AHC also has various broad-based employee benefit plans. Executive officers participate in these plans on the same terms as eligible, non-executive employees, subject to any legal limits on the amounts that may be contributed or paid to executive officers under these plans. AHC offers a 401(k) plan, which allows employees to invest in a wide array of funds on a pre-tax basis. AHC also maintains insurance and other benefit plans for its employees, including its executive officers. During the fiscal year ended June 30, 2003, no executive officers were awarded additional bonus compensation except for Mr. Franceski, who received a $59,984 cash bonus.

 

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Chief Executive Officer Compensation.

In the fiscal year ended June 30, 2003, Mr. John T. Botti, Chief Executive Officer, received a salary of $305,671 which represents an increase of approximately 4.8% from the prior year. In the fiscal year ended June 30, 2002, Mr. Botti received a base salary of $291,630, which represents a 9.9% increase from his base salary of $265,005 in the fiscal year ended June 30, 2001. The terms of Mr. Botti’s employment compensation are determined primarily pursuant to his employment agreement which was entered into in January, 2000. In addition, the employment agreement provides for the payment of certain bonuses based upon performance by AHC. The base salary is believed by the compensation committee to be consistent with the range of salary levels received by executives in a similar capacity in companies of comparable size. Mr. Botti did not receive any bonus compensation and was not granted any stock options during the fiscal year ended June 30, 2003.

Tax Deductibility of Executive Compensation.

Section 162(m) of the Code limits the tax deduction to AHC to $1 million for compensation paid to any of the executive officers unless certain requirements are met. The compensation committee has considered these requirements and the regulations. It is the compensation committee’s present intention that, so long as it is consistent with its overall compensation objectives, substantially all executive compensation be deductible for United States federal income tax purposes. The compensation committee believes that any compensation deductions attributable to options granted under the employee stock option plan currently qualify for an exception to the disallowance under Section 162(m). Future option grants to executive officers under each of the AHC employee stock option plans will be granted by the compensation committee.

 
By the Compensation Committee of
of the Board of Directors of
Authentidate Holding Corp.
   
 
J. David Luce
J. Edward Sheridan
Charles C. Johnston
 
Compensation Committee Interlocks and Insider Participation

There are no compensation committee interlocks between the members of our compensation committee and any other entity. At present, J. Edward Sheridan, J. David Luce and Charles C. Johnston are the members of the compensation committee. None of the members of the Board’s compensation committee (a) was an officer or employee of AHC during the last fiscal year; (b) was formerly an officer of AHC or any of its subsidiaries; or (c) had any relationship with AHC requiring disclosure under Item 404 of Regulation S-K except that one member of our Compensation Committee, Mr. J. David Luce, and an affiliate of Mr. Charles C. Johnston, also a member of our Compensation Committee, participated in our private sale of debentures in May, 2003. Additional information pertaining to the interests of Mr. Luce and Mr. Johnston in this financing is set forth under Item 13., “Certain Relationships and Related Transactions”.

 

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Meetings of the Board of Directors

During the fiscal year ended June 30, 2003, our Board of Directors met on four occasions and voted by unanimous written consent on six occasions. No member of the Board of Directors attended less than 75% of the aggregate number of (i) the total number of meetings of the Board of Directors or (ii) the total number of meetings held by all Committees of the Board of Directors.

Certain Reports

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our Directors and officers, and persons who own, directly or indirectly, more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission (“SEC”) reports of ownership and reports of changes in ownership of common stock and other equity securities we issue. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms that they file. Based solely on review of the copies of such reports received by us, we believe that all Section 16(a) filing requirements applicable to officers, directors and 10% shareholders were complied with during the 2003 fiscal year.

Code of Ethics

On July 31, 2003, our Board of Directors approved the Code of Ethics and Business Conduct for our company. Our Code of Ethics and Conduct covers all our employees and Directors, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics and Conduct is included as an exhibit to this Annual Report.

 

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Item 11. Executive Compensation

The following table provides certain information concerning all Plan and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-K) compensation awarded to, earned by, we paid during the years ended June 30, 2003, 2002 and 2001 to each of the named executive officers.

SUMMARY COMPENSATION TABLE

Annual Compensation

                    Long Term
Compensation Awards

 
Name and Principal Position
  Fiscal
Year
  Salary   Bonus   Other
Annual
Compensation
  Restricted
Stock
Award(s)
   
  No. of
Securities
Underlying
Options/SARs
   

 

 

 

 

 

John Botti
    2003   $ 305,671   $ 0   $ 4,380 (1)   0 (2)   0  
   Chairman, President and
    2002   $ 291,630   $ 0   $ 7,910     0     0  
   Chief Executive Officer
    2001   $ 265,005   $ 0   $ 7,760     0     444,668 (3)
                                       
Robert Van Naarden
    2003   $ 255,115   $ 0   $ 3,048 (4)   0     0  
   Director and Chief Executive
    2002   $ 244,423   $ 0   $ 3,060     0     0  
   Officer of Authentidate, Inc. (*)
    2001   $ 317,733   $ 0   $ 426     0     547,397 (5)
                                       
Dennis H. Bunt,
    2003   $ 146,669   $ 0   $ 6,190 (6)   0     65,000  
   Chief Financial Officer
    2002   $ 126,612   $ 0   $ 5,426     0     0  
      2001   $ 105,605   $ 0   $ 5,573     0     86,849  
                                       
Thomas Franceski,
    2003   $ 158,462   $ 59,984   $ 9,376 (8)   0     0  
   Vice President
    2002   $ 146,231   $ 19,197   $ 11,634     0     100,000 (7)
      2001   $ 98,125   $ 30,000   $ 6,552     0     105,000  
                                       

 
(1)
Includes: (i) for 2003, automobile and expenses of $3,170, $1,304 for personal cell phone allowance and premiums on life insurance of $176; (ii) for 2002, automobile and expenses of $2,985, $2,095 for a personal cell phone allowance, matching contributions to AHC’s 401(k) plan of $2,654 and payment of premium on term life insurance of $176; and (iii) for 2001, an automobile and expenses of $2,985, matching contributions to AHC’s 401(k) plan of $4,573 and payment of premiums on term life insurance of $202.
(2)
No restricted stock awards were granted to Mr. Botti in fiscal 2003. Mr. Botti, however, owned 409,391 restricted shares of our Common Stock on June 30, 2003, the market value of which was $3.51 per share on such date, without giving effect to the diminution in value attributed to the restriction on such shares.
(3)
Represents options we granted pursuant to the employee’s acceptance of our offer to exchange securities of Authentidate, Inc. held by such person for like securities of AHC.
(4)
Includes (i) for 2003, commuting expenses of $2,872 and premiums of a term life insurance policy of $176 and for (ii) 2002, commuting expenses of $2,884 and premiums on a term life insurance policy of $176.
(5)
Represents 200,000 options granted pursuant to the terms of the employment agreement entered into between us and Mr. Van Naarden and 347,397 options granted pursuant to the employee’s acceptance of our offer to exchange securities of Authentidate, Inc. held by such person for like securities of AHC.
(6)
Includes: (i) for 2003, automobile and expenses of $2,181, premiums on life insurance of $176 and matching contributions to AHC’s 401(k) plan of $3,883; (ii) for 2002, premiums on a term life insurance policy of $176 and matching contributions to AHC’s 401(k) plan of $5,250 and (iii) for 2001, matching contributions to AHC’s 401(k) plan of $4,573, $798 in automobile expenses and premiums on a term life insurance policy of $202.

 

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(7)
Represents options granted during the fiscal year ended June 30, 2002.
(8)
Includes (i) for 2003, automobile expenses of $6,000, matching contributions to DJS’ 401(k) plan of $3,200 and $176 in premiums on a term life insurance poliy; (ii) for 2002, automobile expenses of $6,000, matching contributions to AHC’s 401(k) plan of $5,458 and premiums on a term life insurance policy of $176 and (iii) for 2001, $3,600 in automobile expenses, premiums on a term life insurance policy of $202 and matching contributions to AHC’s 401(k) plan of $2,750.
*
As of June 13, 2003, Mr. Van Naarden’s employment with Authentidate ended. Mr. Van Naarden was not nominated to serve on the Company’s Board of Directors which election occurred at our Annual Meeting held on February 10, 2003.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

    Individual Grants       Potential Realizable Value
At Assumed Annual Rates
of Stock
Price Appreciation For
Option Term
  Alternative to
(f) and (g)
Grant Date Value
 
   
     
 
 
Name
(a)
  Number of
Securities
Underlying
Option/SARs
Granted (#)
(b)
  Percent of
Total Option/
SARs Granted
To Employees
In Fiscal Year
(C)
  Exercise of
Base Price
(S/Sh)
(d)
  Expiration
Date
(c)
  5% ($)
(f)
  10% ($)
(g)
  Grant Date
Present Value $
(h)
 
   

 

 

 

 

 

 

 
John T. Botti
    0     N/A  
 
N/A     N/A  
 
N/A  
 
N/A            
Robert Van Naarden
    0     N/A  
 
N/A     N/A  
 
N/A  
 
N/A            
Dennis H. Bunt
    25,000     3.0%  
$
2.75     7/24/07  
$
18,994  
$
41,973            
Dennis H. Bunt
    40,000     4.8%  
$
2.50     10/01/07  
 
0  
 
0            
Thomas Franceski
    0     N/A  
 
N/A     N/A  
 
N/A  
 
N/A            

 
No Stock Appreciation Rights were granted to any of the named executive officers during the last fiscal year.

 

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AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

The following table contains information with respect to the named executive officers concerning options held as of the year ended June 30, 2003.

AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

Name
  Shares
Acquired
on Exercise
  Value
Realized
  Number of Unexercised
Options as of June 30, 2003
Exercisable/ Unexercisable
  Value of Unexercised In-the-Money
Options
at June 30, 2003(1)
Exercisable/ Unexercisable
 
   
 

 


 


 
John T. Botti
  0  
$
  0     1,334,668/0       884,889/0    
Robert Van Naarden
  0  
$
  0     219,184/331,598       0    
Dennis H. Bunt
  0  
$
  0     162,849/40,000       45,260/0    
Thomas Franceski
  0  
$
  0     205,000/0       0    
                             

 
(1)
Based upon the closing price ($3.51 per share) of our common stock on June 30, 2003 less the exercise price for the aggregate number of shares subject to the options.
 
Employment Agreements

In January, 2000, we entered into a new three year employment agreement with our Chief Executive Officer, which expired on January 1, 2003. This agreement automatically renewed for one additional year according to its terms. The agreement provides for:

  a base salary of $250,000 in the first year of the agreement, increasing by 10% in each year thereafter;
     
 
a bonus equal to 3% of our pre-tax net income, with such additional bonuses as may be awarded in the discretion of the Board of Directors;
     
 
certain insurance and severance benefits; and
     
 
automobile and expenses.

We are currently negotiating the terms of a new employment agreement with our Chief Executive Officer. Although we have not finalized all of the terms and conditions regarding a new employment agreement, the compensation committee of our Board of Directors has determined to grant Mr. Botti options to purchase 450,000 shares of common stock under our 2000 Employee Stock Option Plan as part of the compensation package to be included in the final agreement.

In October 2000, we entered into an employment agreement with our Chief Financial Officer which provides:

 

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an annual salary of $100,000 increasing to $110,000 on January 1, 2001;
     
 
annual increases every October to be determined by the Compensation Committee of the Board of Directors;
     
 
eligibility for annual bonuses at the discretion of the Compensation Committee of the Board of Directors;
     
 
a severance agreement equal to twelve months salary;
     
 
the award of Authentidate, Inc. stock options equal to 1.25% of the outstanding stock, convertible into AHC stock options upon the approval of such conversion by our shareholders.

In March 2002, Authentidate International, AG entered into a three-year employment agreement with its Chief Executive Officer, Mr. Jan Wendenburg. The agreement provides for:

 
a base salary of $231,000 with annual increases of 5%;
     
 
a bonus of up to 50% of the base salary in the event Authentidate International achieves the operating targets approved by AHC’s Board of Directors;
     
 
a severance payment not to exceed 18 months of his base salary or until he obtains alternative employment; and
     
 
184,000 stock options vesting over three years at an exercise price of $4.54 per share.

In July 2000, Authentidate entered into an employment agreement with its new Chief Executive Officer, Robert Van Naarden, for a three year term. The employment agreement provides for:

 
annual salary of $250,000;
     
 
an annual bonus of up to $200,000, with a minimum bonus of $80,000 during the first year;
     
 
a severance agreement equal to twelve months salary in the event employment agreement is terminated without cause or is not renewed;
     
 
the award of such number of shares of common stock of Authentidate as shall equal 5% of the shares outstanding on the date of the employment agreement, vesting in equal amounts over a four year period, commencing one year from the date of the agreement; and
     
 
the award of employee stock options to purchase 200,000 shares of common stock of AHC, vesting in equal amounts over a four year period, at an exercise price of $6.3125 per share.

This agreement expired July 5, 2003 and was not renewed. Mr. Van Naarden will receive his severance payments according to the terms of this agreement.

Compensation of Directors

Non-employee directors were compensated for their services during the last fiscal year in the amount of $5,000 annually. Under our Non-Executive Director Stock Option Plan, these directors also receive options to purchase 10,000 shares for each year of service on our Board of Directors, pro rata, based on the length of service during each year. These directors are also reimbursed for expenses incurred in order to attend meetings of the Board of Directors. Directors also receive 20,000 stock options upon being elected to the Board.

 

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Stock Option Plans

In March 2001, our shareholders approved the 2000 Employees Stock Option Plan (the “2000 Plan”) which provides for the grant of options to purchase up to 5,000,000 shares of our Common Stock. In July 2001, we filed a registration statement with the SEC to register the shares issuable upon exercise of the options granted or which may be granted under the 2000 Plan. Our shareholders were asked to adopt the 2000 Plan since there were no additional shares available for issuance under the 1992 Plan, the 1992 Plan was to expire in April 2002 and shareholder approval would have been required to increase the number of shares subject to the 1992 Plan.

In April 1992, we adopted the 1992 Employees Stock Option Plan (the “1992 Plan”) which provided for the grant of options to purchase up to 600,000 shares of the Company’s Common Stock. On January 26, 1995, our stockholders approved an amendment to the 1992 Plan to increase the number of shares of Common Stock available under the 1992 Plan to 3,000,000 shares.

Under the terms of the 2000 Plan and the 1992 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment (“ISOs”) under Section 422 of the Code, or options which do not so qualify (“Non-ISOs”). As of June 30, 2003, there were outstanding an aggregate of 4,843,117 options under the 2000 Plan and 1992 Plan combined, with exercise prices ranging from $0.01 to $9.125.

The 2000 Plan and the 1992 Plan are administered by the compensation committee designated by our Board of Directors. The compensation committee has the discretion to:

 
determine the eligible employees to whom, and the times and the price at which, options will be granted;
     
 
whether such options shall be ISOs or Non-ISOs;
     
 
the periods during which each option will be exercisable; and
     
 
the number of shares subject to each option.

The Board or Committee shall have full authority to interpret the 2000 Plan and 1992 Plan and to establish and amend rules and regulations relating thereto.

Under both the 2000 Plan and the 1992 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the Common Stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent stockholder (as defined in the 2000 Plan and the1992 Plan) such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISOs options may be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant which are designated as ISOs which become exercisable in any calendar year shall not exceed $100,000. The “fair market value” will be the closing NASDAQ bid price, or if our Common Stock is not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a market maker of our Common Stock, or if the Common Stock is not quoted by any of the above, by the Board of Directors acting in good faith.

 

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Previously, the compensation committee was authorized to grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay any taxes that may arise in connection with the exercise or cancellation of an option. In light of the passage of the Sarbanes-Oxley Act of 2002, the compensation committee will no longer undertake any such actions. In the past, no loans were given or guaranteed to employees to pay taxes in connection with the exercise of options granted pursuant to our employee stock option plans.

Non-Executive Director Stock Option Plans

In January, 2002, our shareholders approved the 2001 Non-Executive Director Stock Option Plan. Options are granted under the 2001 Director Plan until December, 2011 to (i) non-executive directors as defined and (ii) members of any advisory board we may establish who are not full-time employees of us or any of our subsidiaries. Our shareholders were asked to adopt the 2001 Director Plan since the 1992 Non-Executive Director Stock Option Plan, as amended, was to expire in April 2002. The 1992 Director Plan was approved by our stockholders in May, 1992. With the approval of the shareholders, the 1992 Director Plan was amended in December, 1997. Similar to the 1992 Director Plan, under the 2001 Director Plan, each non-executive director will automatically be granted an option to purchase 20,000 shares upon joining the Board and an option to purchase 10,000 shares each September 1st thereafter. Unlike the 1992 Director Plan, however, the 2001 Director Plan provides that the annual non-discretionary grant of options is to be on a pro rata basis, based on the time the director has served during the previous year. The 1992 Director Plan simply provided for a blanket grant of 10,000 options per year. The term non-executive director refers to those of our directors who is not otherwise a full-time employee of AHC or any subsidiary. In addition, each eligible member of an advisory board will receive, upon joining the advisory board, and on each anniversary of the effective date of his appointment, an option to purchase 5,000 shares of our common stock.

There is no aggregate cap on the number of options which may be granted under the 2001 Director Plan. This provides us with greater flexibility in expanding the Board of Directors without having to obtain stockholder approval for additional shares under the 2001 Director Plan. Since the amount, timing and terms of options granted under the 2001 Director Plan are non-discretionary, the imposition of a cap on the number of options which may be granted under the 2001 Director Plan would only serve to increase the burden of administering the 2001 Director Plan.

 

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As of June 30, 2003, there are outstanding 110,000 options under the 1992 Director Plan and 50,000 options have been granted under the 2001 Director Plan. The options outstanding have exercise prices ranging from $0.84 to $4.81. On September 1, 2003, we granted an aggregate of 37,500 options to our non-employee directors pursuant to the 2001 Director Plan. These options have an exercise price of $3.04 per share.

The exercise price for options granted under the both the 2001 and 1992 Director Plans is 100% of the fair market value of the common stock on the date of grant. The “fair market value” is the closing price of our common stock as reported by NASDAQ, or if our common stock is not quoted by NASDAQ, the closing bid price as reported by the National Quotation Bureau, Inc., or a market maker of our common stock, or if the common stock is not quoted by any of the above by the Board of Directors acting in good faith. The exercise price of options granted under the 2001 Director Plan must be paid at the time of exercise in cash. Under the 1992 Director Plan, grantees had the option of paying the exercise price either in cash or by delivery of shares of our common stock or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the 2001 or 1992 Director Plan, expires five years from the date of grant. The 2001 and 1992 Director Plans are administered by a committee of the board of directors composed of not fewer than three persons who are our officers. The committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the committee will make all determinations of the interpretation of the 2001 and 1992 Director Plans. Options granted under the 2001 and 1992 Director Plans are not qualified for incentive stock option treatment.

 

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Shareholder Return Performance Presentation

Set forth below is a line graph comparing the total cumulative return on our common stock and the Nasdaq Composite Index and a Software Index (assuming reinvestment of dividends). Our common stock is listed for trading in the Nasdaq National Market under the trading symbol ADAT.

Listed below is the value of a $10,000 investment at each of our last 5 year ends:

CUMULATIVE TOTAL SHAREHOLDER RETURN

Date
  AHC   Nasdaq Composite Index   Nasdaq Computer Index  

 

 

 

 
6/30/99
  $ 10,000   $ 10,000   $ 10,000  
6/30/00
  $ 58,750   $ 14,765   $ 16,908  
6/30/01
  $ 45,000   $ 8,043   $ 7,817  
6/30/02
  $ 31,100   $ 5,447   $ 4,919  
6/30/03
  $ 35,110   $ 6,041   $ 5,381  
                     

 
Footnotes:
(1)
Assumes $10,000 was invested at June 30, 1999 in AHC and each Index presented.
(2)
The comparison indices were chosen in good faith by management. Most of our peers are divisions of large multi-national companies, therefore a comparison is not meaningful. In addition, we are involved in three distinct businesses: document imaging software, authentidation/security software and computer systems integration, for which there is no peer comparison. Therefore, in addition to the Nasdaq Composite Index we have chosen the NASDAQ Computer and Data Processing Index, which is primarily comprised of software companies.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of September 3, 2003 with respect to (i) each director and each executive officer, (ii) all directors and officers as a group, and (iii) the persons (including any “group” as that term is used in Section l3(d)(3) of the Securities Exchange Act of l934), known by us to be the beneficial owner of more than five (5%) percent of our common stock.

Type of Class
   
Name and Address of
Beneficial Holder
    Amount and Nature of
Beneficial Ownership (1)
    Percentage of
Class (*)
 

 

 

 

 
Common
    John T. Botti
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
1,744,009
(2)   8.02%  
                     
Common
    Steven Kriegsman
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
60,000
(3)   0.30%  
                     
Common
    Dennis Bunt
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
163,682
(4)   0.79%  
                     
Common
    J. Edward Sheridan
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
60,000
(5)   0.30%  
                     
Common
    Charles Johnston
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
148,570
(6)   0.72%  
                     
Common
    J. David Luce
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
958,170
(7)   4.48%  
                     
Common
    Thomas Franceski
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
   
218,042
(8)   1.05%  
                     
Common
    Greener Fairways, Inc.
3144 Casseekey Island Road
Jupiter, FL 33477
   
1,086,052
(9)   5.05%  
                     
Directors/Officers as a group
                   
(2)(3)(4)(5)(6)(7)(8)
         
3,352,473
    15.66%  
                     

 
(1)
Unless otherwise indicated below, each director, officer and 5% shareholder has sole voting and sole investment power with respect to all shares that he beneficially owns.

 

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(2)
Includes vested stock options to purchase 1,334,668 shares of Common Stock. Does not include stock options to purchase 450,000 shares of Common Stock to be issued as part of new employment agreement.
   
(3)
Includes vested options to purchase 60,000 shares of Common Stock.
   
(4)
Includes vested options to purchase 162,849 shares of Common Stock and excludes nonvested options to purchase 40,000 shares of Common Stock.
   
(5)
Includes vested options to purchase 60,000 shares of Common Stock.
   
(6)
Includes vested options to purchase 50,000 shares of Common Stock. Excludes 6,631 shares of common stock owned by CCJ Trust and 20,000 shares of common stock owned by FILIT Trust. Also excludes the following securities owned by J&C Resources, LLC: warrants to purchase 38,462 shares of common stock and 96,154 shares of common stock issuable upon the conversion of $250,000 principal amount of convertible debentures.
   
(7)
Includes vested options to purchase 27,500 shares of Common Stock, warrants to purchase an aggregate of 504,471 shares of common stock and 96,154 shares of common stock issuable upon the conversion of $250,000 principal amount of convertible debentures.
   
(8)
Includes vested options to purchase 205,000 shares of Common Stock.
   
(9)
Includes 500,000 shares of common stock issuable upon the conversion of 28,000 shares of Series B Preferred Stock, warrants to purchase 38,462 shares of common stock and 96,154 shares of common stock issuable upon the conversion of $250,000 principal amount of convertible debentures.
   
*
Based on 20,408,198 shares of Common Stock outstanding as of September 3, 2003.

 

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Equity Compensation Plan Information

The following table provides information about our common stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of June 30, 2003 including the 1992 Employee Stock Option Plan, as amended, the 1992 Non-Employee Director Stock Option Plan, as amended, the 2000 Employee Stock Option Plan and the 2001 Non-Employee Director Stock Option Plan. Information concerning each of the aforementioned plans is set forth below following the caption “Shareholder Approved Option Plans.”

Plan Category
  Number of Securities to
be Issued upon Exercise
of Outstanding Options
and Rights

(a)
    Weighted Average
Exercise Price of
Outstanding Options

(b)
    Number of Securities Remaining Available for Future Issuance Under
Equity Compensation
Plans Excluding Securities Reflected in Column
  (a)
(c)
 

 
 

 

 
Equity Compensation Plans Approved by Stockholders.
  5,003,117(1)     $4.38     1,661,510(2)  
                   
Equity Compensation Plans Not Approved by Stockholders
  N/A     N/A     N/A  
   
 

 

 
Total
  5,003,117(1)     $4.38     1,661,510(2)  
   
 

 

 
                   

 
1.
Includes 1,224,627 options issued pursuant to our 1992 Employee Stock Option Plan, as amended; 110,000 options issued pursuant to our 1992 Director Stock Option Plan, as amended; 50,000 options issued pursuant to our 2001 Director Stock Option Plan; and 3,618,490 options issued pursuant to our 2000 Employee Stock Option Plan; but does not include 37,500 options issued pursuant to our 2001 Director Stock Option Plan on September 1, 2003.
2.
Consists of 1,381,510 options available for issuance pursuant to our 2000 Employee Stock Option Plan and assumes the issuance of 280,000 options pursuant to our 2001 Director Stock Option Plan according to the following analysis. The 2001 Director Stock Option Plan does not provide for a cap on the aggregate number of options which may be granted thereunder. All option grants under the 2001 Director Stock Option Plan are non-discretionary; each non-employee director receives an option to purchase 10,000 shares of our common stock each September 1, pro rata, based on the length of such directors service during the preceding year. Accordingly, if the number and identity of our non-employee directors remains constant over the life of the 2001 Director Stock Option Plan, we would issue a total of 280,000 options to our non-employee directors under the 2001 Director Stock Option Plan.

 

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Item 13.   Certain Relationships and Related Transactions

Except as disclosed herein, we have not entered into any material transactions or series of similar transactions with any director, executive officer or any security holder owning 5% or more of our Common Stock.

During the 2002 fiscal year we entered into certain loan and security arrangements involving Mr. John T. Botti, our Chairman and Chief Executive Officer, principally relating to certain obligations to financial institutions secured by Mr. Botti’s stock in AHC. We initially established these arrangements in 2001, and have agreed to certain modifications in February, 2002, as described below. These loan arrangements were repaid during the fiscal year ended June 30, 2003.

In January, 2001, we made a loan of $317,000 to Mr. Botti so as to enable him to avoid a margin call on the shares of AHC common stock owned by him that were held in a brokerage account as the Board of Directors believed that failing to do so would have a material adverse impact on the market price of its stock (the “2001 Loan”). The 2001 Loan was collateralized by a lien on all of the shares of AHC owned by Mr. Botti, as well as shares issuable to Mr. Botti upon the exercise of stock options granted to him. As of February 14, 2002, we agreed to loan an additional amount of $203,159.07 to Mr. Botti, which loan was also collateralized by a lien on all of shares of AHC owned by Mr. Botti or issuable to him (the “2002 Loan”). The 2001 Loan earned interest at the rate of 9% per annum and was due on January 5, 2003. The 2002 Loan earned interest at the rate of 6% per annum and was being repaid in bi-weekly installments of $5,000. In connection with the transactions described above, Mr. Botti pledged to us the shares of AHC stock currently owned by him or that he may later acquire upon the exercise of options. AHC’s interest was been perfected as to 409,341 shares of Common Stock of AHC owned (beneficially and of record) by Mr. Botti and options to purchase 1,334,668 shares of Common Stock of AHC. The pledge additionally extended to any proceeds realized by Mr. Botti from the sale of the pledged securities.

In June 2003, these loans were paid in full in connection with the sale to us by Mr. Botti of the 100 shares of Series A Preferred Stock then owned by him. We agreed to pay Mr. Botti the amount of $850,000 for such shares. The shares of Series A Preferred Stock had been appraised at $1,100,000 by an independent nationally recognized appraisal and valuation firm. Payment terms were as follows: $70,000 in cash was paid at closing, $485,000 was offset against the 2002 Loan and 2001 Loan and the balance will be paid to Mr. Botti in monthly installments of $15,000, without interest, which payments commenced in July, 2003.

 

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As described elsewhere in the Annual Report on Form 10-K, on May 29, 2003, we completed the sale of a private financing in the amount of $2,725,300 of our securities to certain investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder. In the transaction, we sold $2,725,300 of convertible debentures and warrants to purchase an aggregate of 419,279 shares of common stock. Mr. J. David Luce, who serves as a non-executive member of our Board of Directors participated in this financing and purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants. Further, J&C Resources, LLC, an entity affiliated with Mr. Charles C. Johnston, who also serves as a non-executive member of our Board of Directors, purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants in this financing. In addition, Greener Fairways, Inc., an entity that is currently a beneficial owner of in excess of 5% of our common stock participated in this financing, purchasing $250,000 aggregate principal amount of convertible debentures and receiving 38,462 common stock purchase warrants purchased.

For information concerning employment agreements with, and compensation of, our executive officers and directors, see “MANAGEMENT – Executive Compensation.”

Item 14.   Accounting Fees and Services.

Not applicable.

 

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PART IV

Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
(a)(1) Financial Statements
   
 
The following Financial Statements of AHC are included in Part II, Item 8 of this report:
     
 
Report of Independent Auditors;
     
 
Consolidated Balance Sheets as of June 30, 2003 and 2002;
     
 
Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001;
     
 
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2003, 2002 and 2001;
     
 
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001; and
     
 
Notes to Consolidated Financial Statements
 
(a)(2) Financial Statement Schedules

The following consolidated financial statement schedule for each of the three years in the period ended June 30, 2003 is included pursuant to item 14 (d):

Schedule II, Valuation and Qualifying Accounts

(a)(3) Exhibits

The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. 1230.411, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. Certain portions of exhibits marked with the symbol (‡) have been granted confidential treatment by the Securities and Exchange Commission. Such portions were omitted and filed separately with the Securities and Exchange Commission.

Item No.
Description
   
2.1
Form of Stock Purchase Agreement dated as of March 4, 2002 by and among Authentidate Holding Corp., Authentidate International AG and PFK Acquisition Group I, LLC. (Exhibit 2.1 to Form 8-K dated March 15, 2002).
   
3.1
Certificate of Incorporation of Bitwise Designs, Inc.-Delaware (Exhibit 3.3.1 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
3.1.1
Certificate of Designation of Series B Preferred Stock (Exhibit 3.2.1 to Form 10-KSB dated October 4, 1999)

 

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3.1.2
Certificate of Amendment to Certificate of Incorporation (filed as Exhibit 3 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission).
   
3.1.3
Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 4.1 to Form 10-Q dated May 14, 2001).
   
3.1.4
Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 3.1.4 to Form 10-K dated September 26, 2001).
   
3.1.5
Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series B Convertible Preferred Stock (Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 2002).
   
3.2
By-Laws (Exhibit 3.2 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
4.1
Form of Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
4.2
Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
4.3
Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the Registration Statement on form SB-2, File No. 33-76494)
   
4.4
Form of Warrant issued to certain individuals in fiscal year ended June 30, 2001 (Exhibit 4.7 to Form 10-K dated September 26, 2001).
   
4.5
Form of Warrant issued in connection with Series C Preferred Stock Offering (Exhibit 4.2 to Form 10-Q dated May 14, 2001).
   
4.6
Form of Series C Preferred Stock Certificate (Exhibit 4.9 to Form 10-Q dated May 14, 2001).
   
4.7
Form of Warrant Agreement issued to certain Warrant holders dated as of February 19, 2002 (Exhibit 10.1 to Form 8-K dated March 19, 2002).
   
4.8
Form of Warrant issued in connection with Unit Offering (Exhibit 4.12 to Form 10-K dated September 30, 2002).
   
4.9
Form of Debenture, dated as of October 25, 2002, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated October 25, 2002).
   
4.10
Form of Warrant , dated as of October 25, 2002, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated October 25, 2002).
   
4.11
Form of Debenture, dated as of May, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated May 30, 2003).
   
4.12
Form of Warrant , dated as of May, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated May 30, 2003).

 

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4.13
Form of Debenture, dated as of September 12, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated September 15, 2003).
   
4.14
Form of Warrant, dated as of September 12, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated September 15, 2003).
   
4.15
Form of Warrant, dated as of September 22, 2003, issued in connection with private placement (Exhibit 4.1 to Form 8-K dated September 22, 2003).
   
10.1
1992 Employee stock option plan (Exhibit 10.10 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
10.2
1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
10.3
Agreement with Prime Computer, Inc. (Exhibit 10.14 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
10.4
Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to Registration Statement on Form S-18, File No. 33-46246-NY)
   
10.5
Agreement and Plan of Merger by and among Bitwise Designs, Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22, 1996)
   
10.6
Employment Agreement between John Botti and the Company dated January 1, 2000 (Exhibit 10.27 to the Company’s Form 10-KSB dated June 30, 2000).
   
10.7
Employment Agreement between Robert Van Naarden and Authentidate.com, Inc. dated July 5, 2000 (Exhibit 10.29 to the Company’s Form 10-KSB dated June 30, 2000).
   
10.8‡
Joint Venture Agreement between The Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.30 to the Company’s Form 10-KSB dated June 30, 2000)
   
10.9‡
Technology License Agreement between The Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.31 to the Company’s Form 10-KSB dated June 30, 2000)
   
10.10
Series C Preferred Stock and Warrant Purchase Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.1 to Form 10-Q dated May 14, 2001).
   
10.11
Registration Rights Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.2 to Form 10-Q dated May 14, 2001).
   
10.12
2000 Employee Stock Option Plan (filed as Exhibit 2 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission).
   
10.13
Form of Security Exchange Agreement entered into between Authentidate Holding Corp., Authentidate, Inc. and certain security holders of Authentidate, Inc. (Exhibit 10.15 to the Company’s Form 10-K dated September 26, 2001)

 

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10.14
Agreement dated May 24, 2001 between Authentidate Holding Corp., Authentidate, Inc., Internet Venture Capital, LLC and Nicholas Themelis. (Exhibit 10.16 to the Company’s Form 10-K/A dated January 24, 2002)
   
10.15
Underlease Agreement of Authentidate, Inc. for a portion of the 43rd Floor at 2 World Financial Center. (Exhibit 10.17 to the Company’s Form 10-K dated September 26, 2001)
   
10.16
2001 Non-Executive Director Stock Option Plan (filed as Exhibit A to Proxy Statement dated December 18, 2001, as filed with the Commission).
   
10.17
Form of Letter of Credit dated as of May 6, 2002 between DJS Marketing Group, Inc. and Transamerica (filed as Exhibit 10.2 to Form 10-Q dated May 15, 2002).
   
10.18
Form of Unit Purchase Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.21 to Form 10-K dated September 30, 2002).
   
10.19
Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.22 to Form 10-K dated September 30, 2002).
   
10.20‡
Strategic Alliance Agreement between Authentidate Holding Corp., Authentidate, Inc. and United States Postal Service dated as of July 31, 2002. (Exhibit 10.23 to Form 10-K dated September 30, 2002).
   
10.21
Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.1 to Form 8-K dated October 25, 2002).
   
10.22
Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.2 to Form 8-K dated October 25, 2002).
   
10.23
Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 (Exhibit 10.1 to Form 8-K dated May 30, 2003).
   
10.24
Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 Exhibit 10.2 to Form 8-K dated May 30, 2003)
   
10.25
Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.1 to Form 8-K dated September 15, 2003).
   
10.26
Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.2 to Form 8-K dated September 15, 2003).
   
10.27
Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.1 to Form 8-K dated September 22, 2003).
   
10.28
Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.2 to Form 8-K dated September 22, 2003).
   
14*
Code of Ethics
   
21*
Subsidiaries of Registrant

 

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23*
Consent of PricewaterhouseCoopers LLP
   
31.1*
Certification of Chief Executive Officer
   
31.2*
Certification of Chief Financial Officer
   
32*
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
   
(b)
Reports on Form 8-K

During the quarter ended June 30, 2003 we filed the following reports on Form 8-K:

 
Date of Report
Item(s) Description
 


 
May 16, 2003
5, 7, 9 Announcement of quarterly financial information and proposed financing event and including related press releases.
 
May 23, 2003
5, 9 Announcement of partial closing of private financing and including related press release.
 
June 3, 2003
5, 7, 9 Announcement of partial closing of private financing and including related press release and form of transaction documents.
 
June 17, 2003
5, 7 Announcement of streamlining of operations and including related press release.
 
June 23, 2003
5, 7 Announcement of consummation of related-party transaction and including related press release.

 

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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.

 
AUTHENTIDATE HOLDING CORP.
   
 
By: /s/John T. Botti
John T. Botti
Chief Executive Officer, President
and Chairman of the Board

Dated: September 26, 2003

Pursuant to the requirements of the Securities Act of 1933, this Report has been signed below by the following persons in the capacities and on the dates indicated:

Signature
  Capacity   Date
         
/s/John T. Botti
  Chief Executive Officer, President   September 26, 2003
John T. Botti
  and Chairman of the Board    
         
/s/Steven A. Kriegsman
  Director   September 26, 2003
Steven A. Kriegsman
       
         
/s/J. Edward Sheridan
  Director   September 26, 2003
J. Edward Sheridan
       
         
/s/Charles C. Johnston
  Director   September 26, 2003
Charles C. Johnston
       
         
/s/ J. David Luce
  Director   September 26, 2003
J. David Luce
       
         
/s/ Dennis H. Bunt
  Chief Financial   September 26, 2003
Dennis H. Bunt
  Officer and Principal    
Accounting Officer
       
         
/s/ Thomas Franceski
  Vice President –   September 26, 2003
Thomas Franceski
  Technology Products Group    

 

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AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
 

VALUATIONS AND QUALIFYING ACCOUNTS

Schedule II

Column A
  Column B   Column C   Column D   Column E

 
 
 
 
                               
Description
 

Balance at
Beginning of
Period

  Additions
Charged to
Expense
  Additions
Charged to Other
Accounts
  Deductions   Balance At End
of Period

 

 

 

 

 

Allowance for doubtful accounts
                             
Year ended June 30:
                             
2003
  $ 609,185   $ 58,688         $ (207,133 ) $ 460,740
2002
  $ 532,241   $ 53,965   $ 54,289   $ (31,310 ) $ 609,185
2001
  $ 410,761   $ 152,711         $ (31,231 )   532,241
                               
Reserve for slow
moving or obsolete inventory
                             
Year ended June 30:
                             
2003
  $ 458,045   $ 137,610         $ (408,286 ) $ 187,369
2002
  $ 788,151   $ 234,976         $ (565,082 ) $ 458,045
2001
    736,926     314,937           (263,712 )   788,151
                               
Allowance for Note Receivable
                             
Year ended June 30:
                             
2003
  $ 100,000   $ 0         $ (100,000 ) $ 0
2002
  $ 0   $ 100,000         $ 0   $ 100,000
2001
  $ 0   $ 0         $ 0   $ 0

 

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EXHIBIT INDEX

The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. §230.411, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. Certain portions of exhibits marked with the symbol (‡) have been granted confidential treatment by the Securities and Exchange Commission. Such portions were omitted and filed separately with the Securities and Exchange Commission.

Item No.
  Description
2.1
  Form of Stock Purchase Agreement dated as of March 4, 2002 by and among Authentidate Holding Corp., Authentidate International AG and PFK Acquisition Group I, LLC. (Exhibit 2.1 to Form 8-K dated March 15, 2002).
3.1
  Certificate of Incorporation of Bitwise Designs, Inc.-Delaware (Exhibit 3.3.1 to Registration Statement on Form S-18, File No. 33-46246-NY)
3.1.1
  Certificate of Designation of Series B Preferred Stock (Exhibit 3.2.1 to Form 10-KSB dated October 4, 1999)
3.1.2
  Certificate of Amendment to Certificate of Incorporation (filed as Exhibit 3 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission).
3.1.3
  Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 4.1 to Form 10-Q dated May 14, 2001).
3.1.4
  Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series C Convertible Preferred Stock (Exhibit 3.1.4 to Form 10-K dated September 26, 2001).
3.1.5
  Certificate of Amendment of Certificate of Designations, Preferences and Rights and Number of Shares of Series B Convertible Preferred Stock (Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 2002).
3.2
  By-Laws (Exhibit 3.2 to Registration Statement on Form S-18, File No. 33-46246-NY)
4.1
  Form of Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33-46246-NY)
4.2
  Form of Series A Preferred Stock Certificate (Exhibit 4.2 to Registration Statement on Form S-18, File No. 33-46246-NY)
4.3
  Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the Registration Statement on form SB-2, File No. 33-76494)
4.4
  Form of Warrant issued to certain individuals in fiscal year ended June 30, 2001 (Exhibit 4.7 to Form 10-K dated September 26, 2001).
4.5
  Form of Warrant issued in connection with Series C Preferred Stock Offering (Exhibit 4.2 to Form 10-Q dated May 14, 2001).
4.6
  Form of Series C Preferred Stock Certificate (Exhibit 4.9 to Form 10-Q dated May 14, 2001).
4.7
  Form of Warrant Agreement issued to certain Warrant holders dated as of February 19, 2002 (Exhibit 10.1 to Form 8-K dated March 19, 2002).

 

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4.8
  Form of Warrant issued in connection with Unit Offering (Exhibit 4.12 to Form 10-K dated September 30, 2002).
4.9
  Form of Debenture, dated as of October 25, 2002, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated October 25, 2002).
4.10
  Form of Warrant , dated as of October 25, 2002, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated October 25, 2002).
4.11
  Form of Debenture, dated as of May, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated May 30, 2003).
4.12
  Form of Warrant , dated as of May, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated May 30, 2003).
4.13
  Form of Debenture, dated as of September 12, 2003, between Authentidate Holding Corp. and certain investors (Exhibit 4.1 to Form 8-K dated September 15, 2003).
4.14
  Form of Warrant , dated as of September 12, 2003, issued in connection with private placement (Exhibit 4.2 to Form 8-K dated September 15, 2003).
4.15
  Form of Warrant , dated as of September 22, 2003, issued in connection with private placement (Exhibit 4.1 to Form 8-K dated September 22, 2003).
10.1
  1992 Employee stock option plan (Exhibit 10.10 to Registration Statement on Form S-18, File No. 33-46246-NY)
10.2
  1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to Registration Statement on Form S-18, File No. 33-46246-NY)
10.3
  Agreement with Prime Computer, Inc. (Exhibit 10.14 to Registration Statement on Form S-18, File No. 33-46246-NY)
10.4
  Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to Registration Statement on Form S-18, File No. 33-46246-NY)
10.5
  Agreement and Plan of Merger by and among Bitwise Designs, Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22, 1996)
10.6
  Employment Agreement between John Botti and the Company dated January 1, 2000 (Exhibit 10.27 to the Company’s Form 10-KSB dated June 30, 2000).
10.7
  Employment Agreement between Robert Van Naarden and Authentidate.com, Inc. dated July 5, 2000 (Exhibit 10.29 to the Company’s Form 10-KSB dated June 30, 2000).
10.8‡
  Joint Venture Agreement between The Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.30 to the Company’s Form 10-KSB dated June 30, 2000)
10.9‡
  Technology License Agreement between The Company, Authentidate, Inc. and Windhorst New Technologies, Agi.G (Exhibit 10.31 to the Company’s Form 10-KSB dated June 30, 2000)
10.10
  Series C Preferred Stock and Warrant Purchase Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.1 to Form 10-Q dated May 14, 2001).

 

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10.11
  Registration Rights Agreement between Authentidate Holding Corp. and purchasers of Series C Preferred Stock (Exhibit 10.2 to Form 10-Q dated May 14, 2001).
10.12
  2000 Employee Stock Option Plan (filed as Exhibit 2 to Definitive Proxy Statement dated February 16, 2001 as filed with the Securities and Exchange Commission).
10.13
  Form of Security Exchange Agreement entered into between Authentidate Holding Corp., Authentidate, Inc. and certain security holders of Authentidate, Inc. (Exhibit 10.15 to the Company’s Form 10-K dated September 26, 2001)
10.14
  Agreement dated May 24, 2001 between Authentidate Holding Corp., Authentidate, Inc., Internet Venture Capital, LLC and Nicholas Themelis. (Exhibit 10.16 to the Company’s Form 10-K/A dated January 24, 2002)
10.15
  Underlease Agreement of Authentidate, Inc. for a portion of the 43rd Floor at 2 World Financial Center. (Exhibit 10.17 to the Company’s Form 10-K dated September 26, 2001)
10.16
  2001 Non-Executive Director Stock Option Plan (filed as Exhibit A to Proxy Statement dated December 18, 2001, as filed with the Commission).
10.17
  Form of Letter of Credit dated as of May 6, 2002 between DJS Marketing Group, Inc. and Transamerica (filed as Exhibit 10.2 to Form 10-Q dated May 15, 2002).
10.18
  Form of Unit Purchase Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.21 to Form 10-K dated September 30, 2002).
10.19
  Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors (Exhibit 10.22 to Form 10-K dated September 30, 2002).
10.20‡
  Strategic Alliance Agreement between Authentidate Holding Corp., Authentidate, Inc. and United States Postal Service dated as of July 31, 2002. (Exhibit 10.23 to Form 10-K dated September 30, 2002).
10.21
  Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.1 to Form 8-K dated October 25, 2002).
10.22
  Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of October 25, 2002 (Exhibit 10.2 to Form 8-K dated October 25, 2002).
10.23
  Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 (Exhibit 10.1 to Form 8-K dated May 30, 2003).
10.24
  Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of May 21, 2003 Exhibit 10.2 to Form 8-K dated May 30, 2003)
10.25
  Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.1 to Form 8-K dated September 15, 2003).
10.26
  Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors, dated as of September 12, 2003 (Exhibit 10.2 to Form 8-K dated September 15, 2003).
10.27
  Form of Securities Purchase Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.1 to Form 8-K dated September 22, 2003).

 

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10.28
  Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and a certain investor, dated as of September 22, 2003 (Exhibit 10.2 to Form 8-K dated September 22, 2003).
  Code of Ethics
  Subsidiaries of Registrant
  Consent of PricewaterhouseCoopers LLP
  Certification of Chief Executive Officer
  Certification of Chief Financial Officer
  Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

 

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Authentidate Holding Corp.
and Subsidiaries
Consolidated Financial Statements
(and Report of Independent Auditors)
For the Years Ended June 30, 2003, 2002 and 2001

 


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Authentidate Holding Corp. and Subsidiaries
Contents
For the Years Ended June 30, 2003, 2002 and 2001
     

 
    Page(s)  
  F-1  
Consolidated Financial Statements
     
  F-2  
  F-3  
  F-4 - F-5  
  F-6  
  F-7 - F-33  

 


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Report of Independent Auditors

To the Board of Directors and Shareholders
Of Authentidate Holding Corp.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 present fairly, in all material respects, the financial position of Authentidate Holding Corp. and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion

September 5, 2003, except for Note 22,
as to which the dates are September 12,
2003 and September 22, 2003

 

F-1


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Authentidate Holding Corp. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 and 2002


Assets
  2003   2002  
   

 

 
Current assets
             
   Cash and cash equivalents
  $ 3,460,446   $ 2,269,353  
   Accounts receivable, net of allowance for doubtful accounts of
$460,740 and $609,185 at June 30, 2003 and 2002
    3,642,221     4,222,472  
   Due from related parties
    2,279     27,444  
   Inventories
    193,101     479,702  
   Note receivable
        197,287  
   Prepaid expenses and other current assets
    69,248     123,766  
   

 

 
         Total current assets
    7,367,295     7,320,024  
Property and equipment, net
    3,764,846     4,008,925  
Other assets
             
   Software development costs, net of accumulated amortization of
$3,659,589 and $2,556,824 on June 30, 2003 and 2002
    355,082     1,161,650  
   Goodwill
    12,795,501     12,439,145  
   Investment in affiliated companies
        294,427  
   Patent costs, net
    277,406     235,789  
   Other intangible assets
    189,479     258,766  
   Note receivable
        302,713  
   Deferred financing fees
    268,935      
   Other assets
    27,296     30,547  
   

 

 
         Total assets
  $ 25,045,840   $ 26,051,986  
   

 

 
Liabilities and shareholders’ equity
             
Current liabilities
             
   Accounts payable
  $ 1,436,943   $ 1,899,786  
   Accrued expenses and other current liabilities
    2,772,710     1,932,034  
   Current portion of obligations under capital leases
    112,520     88,827  
   Current portion of long-term debt
    218,811     35,747  
   Line of credit
    877,863     1,753,394  
   Income taxes payable
    24,843     17,800  
   

 

 
         Total current liabilities
    5,443,690     5,727,588  
Convertible debentures
    3,316,815      
Long-term debt, net
    1,331,129     1,281,768  
Deferred grant
    1,000,000     1,000,000  
Obligations under capital leases, net of current portion
    85,556     97,296  
   

 

 
         Total liabilities
    11,177,190     8,106,652  
   

 

 
Commitments and contingencies
             
Shareholders’ equity
             
   Preferred stock $.10 par value, 5,000,000 shares authorized:
             
      Series A — 100 shares issued and outstanding at June 30, 2002
        10  
      Series B — 28,000 shares issued and outstanding at June 30, 2003
         and June 30, 2002
    2,800     2,800  
      Series C — 3,600 shares issued and outstanding at June 30, 2003,
         and 4,000 shares issued and outstanding at June 30, 2002
    360     400  
      Common stock, $.001 par value; 40,000,000 shares authorized;
         20,388,174 shares issued and outstanding at June 30, 2003 and
         19,308,594 shares issued and outstanding at June 30, 2002
    20,388     19,309  
   Additional paid-in capital
    66,916,663     61,376,632  
   Accumulated deficit
    (53,062,512 )   (42,999,497 )
   

 

 
      13,877,699     18,399,654  
   Currency translation adjustment
    (9,049 )   53,111  
   Other equity
        (507,431 )
   

 

 
         Total shareholders’ equity
    13,868,650     17,945,334  
   

 

 
         Total liabilities and shareholders’ equity
  $ 25,045,840   $ 26,051,986  
   

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-2


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Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended June 30, 2003, 2002 and 2001


    2003   2002   2001  
   

 

 

 
Net sales
                   
   Product sales
  $ 24,143,959   $ 15,135,663   $ 16,472,754  
   Service sales
    1,142,512     1,507,241     1,387,790  
   

 

 

 
      Total net sales
    25,286,471     16,642,904     17,860,544  
   

 

 

 
                     
Cost of sales
                   
   Products
    18,575,474     11,398,458     13,536,309  
   Services
    594,362     692,077     647,137  
   

 

 

 
      Total cost of sales
    19,169,836     12,090,535     14,183,446  
   

 

 

 
      Gross profit
    6,116,635     4,552,369     3,677,098  
   

 

 

 
                     
Selling, general and administrative expenses
    12,600,901     11,470,073     11,950,719  
Product development expenses
    2,534,777     2,170,173     1,221,639  
   

 

 

 
      Total operating expenses
    15,135,678     13,640,246     13,172,358  
   

 

 

 
      Loss from operations
    (9,019,043 )   (9,087,877 )   (9,495,260 )
   

 

 

 
                     
Other income (expense)
                   
   Interest and other income
    572,481     180,360     399,996  
   Interest expense
    (871,856 )   (124,824 )   (124,816 )
   Equity in net loss of affiliated companies
    (514,427 )   (958,788 )   (104,023 )
   

 

 

 
      (813,802 )   (903,252 )   171,157  
   

 

 

 
      Loss before income taxes
    (9,832,845 )   (9,991,129 )   (9,324,103 )
Income tax expense
    (6,464 )   (14,119 )   (16,000 )
   

 

 

 
      Loss before minority interest
    (9,839,309 )   (10,005,248 )   (9,340,103 )
Minority interest
        53,846      
   

 

 

 
         Net loss
  $ (9,839,309 ) $ (9,951,402 ) $ (9,340,103 )
   

 

 

 
                     
   Per share amounts
                   
   Basic and diluted loss per common share
  $ (.50 ) $ (.69 ) $ (.63 )
   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3


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Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended June 30, 2003, 2002 and 2001


    Preferred Stock

  Common Stock

                      Total   Comprehensive  
    Number
of Shares
  $.10 Par
Value
  Number
of Shares
  $.001 Par
Value
  Paid-in
Capital
  Accumulated
Deficit
  Other
Equity
  Treasury
Stock
  Translation
Adjustment
  Shareholders’
Equity
  Income
(Loss)
 
   

 

 

 

 

 

 

 

 

 

 

 
Balance, June 30, 2000
    50,200   $ 5,020     14,421,758   $ 14,422   $ 38,740,271   $ (21,715,176 ) $     $ (76,719 ) $     $ 16,967,818   $    
Exercise of stock warrants
                459,516     459     1,584,087                             1,584,546        
Exercise of stock options
                316,626     317     198,775                             199,092        
Retire treasury shares
                (28,082 )   (28 )   28     (76,719 )         76,719                  
Convert preferred stock to common
    (2,000 )   (200 )   26,667     26     174                                    
Purchase of an equity interest in Authentidate Inc.
                917,608     918     4,243,019                             4,243,937        
Private equity offerings
    5,500     550                 5,204,308                             5,204,858        
Retire preferred shares
    (100 )   (10 )               10                                    
Warrants for non-employee services
                            204,042                             204,042        
Costs of registration
                            (32,474 )                           (32,474 )      
Stock option compensation
                            1,380,694           (517,760 )               862,934        
Warrants issued to joint venture partner
                            111,849                             111,849        
Cash dividends to Series B preferred shareholders
                                  (151,667 )                     (151,667 )      
Loan to shareholder
                                        (317,000 )               (317,000 )      
Net loss
                                  (9,340,103 )                     (9,340,103 )   9,340,103  
   

 

 

 

 

 

 

 

 

 

 

 
Balance June 30, 2001
    53,600     5,360     16,114,093     16,114     51,634,783     (31,283,665 )   (834,760 )             19,537,832   $ 9,340,103  
                                                               
 
Exercise of stock warrants
                1,109,517     1,110     1,574,520                             1,575,630   $    
Exercise of stock options
                31,999     32     80,296                             80,328        
Convert preferred stock to
                                                                   
common stock
    (21,500 )   (2,150 )   576,263     576     1,574                                    
Purchase of Authentidate AG
                1,425,875     1,426     6,393,881                             6,395,307        
Warrants for services
                            74,572                             74,572        
Cost to register common shares
                            (66,943 )                           (66,943 )      
Stock option compensation
                                        517,760                 517,760        
Cash and stock dividends to Series B
                                                                   
and Series C preferred shareholders
                50,847     51     219,947     (300,428 )                     (80,430 )      
Loan to executive
                                        (190,431 )               (190,431 )      
Currency translation adjustment
                                                    53,111     53,111     53,111  
Beneficial conversion
                            1,464,002     (1,464,002 )                            
Net loss
                                  (9,951,402 )                     (9,951,402 )   (9,951,402 )
   

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-4


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Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended June 30, 2003, 2002 and 2001


    Preferred Stock

  Common Stock

                      Total   Comprehensive  
    Number
of Shares
  $.10 Par
Value
  Number
of Shares
  $.001 Par
Value
  Paid-in
Capital
  Accumulated
Deficit
  Other
Equity
  Treasury
Stock
  Translation
Adjustment
  Shareholders’
Equity
  Income
(Loss)
 
   

 

 

 

 

 

 

 

 

 

 

 
Balance June 30, 2002
    32,100     3,210     19,308,594     19,309     61,376,632     (42,999,497 )   (507,431 )       53,111   $ 17,945,334   $ (9,898,291 )
                                                               
 
Exercise of stock warrants
                3,000     3     3,297                             3,300        
Exercise of stock options
                94,257     94     209,440                             209,534        
Convert Series C preferred stock to common stock
    (400 )   (40 )   82,560     82     (42 )                                  
Warrants for services
                            256,283                             256,283        
Cost to register common shares
                            (64,672 )                           (64,672 )      
Cash and stock dividends to Series B and Series C preferred shareholders
                61,996     62     155,921     (223,706 )                     (67,723 )      
Repayment of note receivable — shareholder
                                        507,431                 507,431        
Currency translation adjustment
                                                    (62,160 )   (62,160 ) $ (62,160 )
Buy back Series A preferred shares
    (100 )   (10 )               (849,990 )                           (850,000 )      
Offering expenses
                            (85,000 )                           (85,000 )      
Private equity offering
                660,077     660     1,999,375                             2,000,035        
Convertible debenture interest paid in common shares
                47,690     48     143,618                             143,666        
Debt discount related to issuance of convertible debentures, net of issuance costs ($163,968)
                            3,433,931                             3,433,931        
Purchase minority interest, Trac Medical
                130,000     130     337,870                             338,000        
Net loss
                                  (9,839,309 )                              (9,839,309 )   (9,839,309 )
   

 

 

 

 

 

 

 

 

 

 

 
Balance June 30, 2003
    31,600   $ 3,160     20,388,174   $ 20,388   $ 66,916,663   $ (53,062,512 ) $   $   $ (9,049 ) $ 13,868,650   $ (9,901,469)  
   

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

F-5


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Authentidate Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2003, 2002 and 2001


    2003   2002   2001  
   

 

 

 
Cash flows from operating activities
                   
   Net loss
  $ (9,839,309 ) $ (9,951,402 ) $ (9,340,103 )
   Adjustments to reconcile net loss to net cash used in operating activities
                   
      Depreciation and amortization
    1,886,085     1,690,382     1,814,278  
      Provision for doubtful accounts receivable
    58,688     53,965     152,711  
      Equity in net loss of affiliated companies
    514,427     958,788     104,023  
      Amortization deferred financing costs and debt discount
    537,172          
      Interest paid in stock
    143,666          
      Non-cash compensation and other
    160,154     709,950     1,066,976  
      Changes in operating assets and liabilities, net of business acquired
                   
            Accounts receivable and due from related parties
    596,728     (642,299 )   539,750  
            Inventories
    286,601     320,702     1,551,983  
            Prepaid expenses and other current assets
    54,518     87,618     516,000  
            Accounts payable, accrued expenses and other current liabilities
    405,110     698,700     2,186,627  
            Income taxes
    7,043     17,169     16,104  
   

 

 

 
                  Net cash used in operating activities
    (5,189,117 )   (6,056,427 )   (1,391,651 )
   

 

 

 
Cash flows from investing activities
                   
   Purchases of property and equipment
    (283,903 )   (556,598 )   (893,181 )
   Trademarks acquired
    (31,775 )   (42,673 )   (27,114 )
   Patent and license costs
    (62,005 )   (174,240 )   (47,985 )
   Software development costs
    (296,197 )   (346,331 )   (2,764,678 )
   Note receivable
    350,000     (500,000 )    
   Investment in affiliated companies
    (220,000 )   (385,568 )   (250,000 )
   Acquisition of business, net of cash acquired
        58,078      
   Other
    (97,999 )   (33,678 )   (4,149 )
   

 

 

 
                     Net cash used in investing activities
    (641,879 )   (1,981,010 )   (3,987,107 )
   

 

 

 
Cash flows from financing activities
                   
   Proceeds from private equity offering
    1,955,035         5,204,858  
   Stock warrants exercised
    3,300     1,575,630     1,584,546  
   Stock options exercised
    209,535     80,328     199,092  
   Dividends
    (35,000 )   (104,525 )   (151,667 )
   Sale of convertible debentures, net of issuance costs ($163,968)
    6,261,332          
   Principal payments on obligations under capital leases
    (121,935 )   (47,920 )   (3,300 )
   Loan to shareholder, net of repayments
        (190,431 )   (317,000 )
   Payment of registration costs
    (64,672 )   (66,943 )   (32,474 )
   Net payments under line of credit
    (875,531 )        
   Deferred financing costs
    (142,000 )        
   Principal payments on long-term debt
    (35,815 )   (32,926 )   (30,327 )
   Purchase Series A preferred shares
    (70,000 )        
   

 

 

 
                     Net cash provided by financing activities
    7,084,249     1,213,213     6,453,728  
   

 

 

 
Effect of exchange rate changes on cash flows
    (62,160 )   53,111      
Net increase (decrease) in cash and cash equivalents
    1,191,093     (6,771,113 )   1,074,970  
Cash and cash equivalents, beginning of period
    2,269,353     9,040,466     7,965,496  
   

 

 

 
Cash and cash equivalents, end of period
  $ 3,460,446   $ 2,269,353   $ 9,040,466  
   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


1.
Summary of Significant Accounting Policies
   
 
Description of Business and Business Continuity
   
 
Authentidate Holding Corp. (AHC) and its subsidiaries Authentidate, Inc., Authentidate International, AG (AG), DJS Marketing Group, Inc. (DJS), and Trac Medical Solutions, Inc. (Trac Med), collectively referred to as the “Company”, are engaged in the following businesses. Through its DocStar Division the Company markets and sells document imaging software and related products. Through DJS the Company markets network integration services, Internet services and related computer hardware. Authentidate, Inc., AG and Trac Med are all engaged in the business of providing authentication and security software services.
   
 
In June 1999, AHC established a majority owned subsidiary Authentidate, Inc. (Authentidate), to engage in a new software business providing users with a service which can verify the authenticity of digital images by employing a secure clock that will date stamp the images when received providing proof of time, date and also proof of content via the Internet.
   
 
In 2001, the Company formed a subsidiary named Trac Medical Solutions, Inc., to develop and provide authentication software services in the medical supply industry, for the processing of Certificates of Medical Necessity and other related forms.
   
 
In March 2000, Authentidate, Inc. formed a joint venture known as Authentidate International Holdings, AG, with a German company, Windhorst New Technologies, Agi.G., to market Authentidate in countries outside of the Americas, Japan, Australia, New Zealand and India. AHC owned 39% of this joint venture originally. In March 2002, the Company purchased the 61% of Authentidate AG that it did not own in order to secure worldwide rights for the marketing of the Authentidate technology. Prior to consolidation (March 2002), the Company’s share of net losses of AG under the equity method of accounting for fiscal year ended June 30, 2002 was $625,282.
   
 
In May 2001, the Company became a 50% owner in a joint venture known as Authentidate Sports (Sports) with outside partners to provide the same Authentidate services in the sports memorabilia industry. During fiscal 2003, the Company and its partner closed Sports and discontinued operations. The Company may revive Sports in the event they are able to attract a partner in the sports memorabilia industry. The Company’s share of net losses in this joint venture in 2003 approximated $515,000.
   
 
During the fiscal year ended June 30, 2003 the Company incurred a net loss of $9,839,309, and cash used in operating activities totaled $5,189,117. To date, the Company has been largely dependent on its ability to sell additional shares of its common stock or other financing to fund its operating deficits. Under its current operating plan to introduce the new Authentidate technology, the Company’s ability to improve operating cash flow is highly dependent on the market acceptance of the Authentidate related businesses. If the Company is unable to attain projected sales levels for Authentidate, AG and Trac Med, it may be necessary to raise additional capital to fund operations to meet its obligations.

 

F-7


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
There is no assurance that such funding will be available, if needed. As a result of net losses incurred during fiscal 2003, the Company reduced its workforce (Note 12). If the Company is unable to raise additional capital necessary to fund operations for fiscal 2004 and is unable to attain projected sales levels for Authentidate and related products then it will implement additional cost reduction strategies in early fiscal 2004, including the possible shutdown or reduction of operations at Authentidate, AG, or Trac Med, as well as reductions in corporate expenses (including salary, marketing, professional fees and other costs). In the event the Company is required to shut down or reduce operations at Authentidate, AG and/or Trac Med, goodwill approximating $11,600,000 could potentially become impaired and result in charges to operations. The Company’s available cash balance at June 30, 2003 totaled $3,460,446. The Company believes that its existing cash and cash equivalents which include the funds raised in September 2003 (Note 22) will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months.
   
 
Purchase 100% Interest of Authentidate, International, AG.
   
 
In March 2002, the Company purchased 61% of the outstanding shares of Authentidate AG which it did not already own, and as a result, now owns 100% of AG. The Company issued 1,425,875 common shares and issued 100,000 common stock warrants to the sellers. The sellers also returned 250,000 outstanding warrants to the Company as part of the transaction. The aggregate fair value of equity consideration to consummate the acquisition approximated $6,400,000. The acquisition was recorded under the purchase method of accounting and the operations of AG have been included in the statement of operations since the acquisition date of March 15, 2002.
   
 
Purchase Minority Interest of Trac Medical Solutions, Inc.
   
 
During the quarter ended March 31, 2003, AHC acquired the remaining outstanding shares of capital stock of its subsidiary, Trac Medical Solutions, Inc., previously held by four other shareholders. Prior to the acquisition, AHC owned 85.8% of the outstanding stock of Trac Med. As a result of the acquisition, AHC now owns 100% of Trac Med. Pursuant to the Stock Purchase Agreement dated as of March 13, 2003, AHC issued an aggregate of 130,000 shares of its common stock to the sellers, and also issued to the sellers who will continue as employees of Trac Med 20,000 options to purchase shares of common stock at an exercise price equal to the closing price of AHC’s common stock as of the closing date of the transaction. In addition, the sellers who will continue as employees of Trac Med may receive, up to an aggregate amount of 75,000 additional shares of common stock of AHC in the event that Trac Med achieves certain sales and income performance targets during the twelve month period from October 1, 2002 to September 30, 2003. Upon achievement of each performance target, the Company will recognize compensation expense for such additional shares based on the fair value of the shares issued. Additional bonus options of up to 390,000 in fiscal year 2004 and 525,000 in fiscal year 2005 may be granted if certain sales and income performance targets are met in these years upon achievement of the performance targets, such options will be issued to the certain employees at an exercise price equal to the fair value of the Company’s common stock on the grant issuance date. In addition, the sellers agreed to place an aggregate of 52,000 shares of the AHC common stock issued to them into a six month escrow to provide for the potential breaches of representations and warranties contained in the Stock Purchase Agreement regarding the financial condition and operations of Trac Med. The parties completed the transaction effective on March 18, 2003. The acquisition does not have a material effect upon the financial condition of AHC.

 

F-8


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Purchase Minority Interest of Authentidate, Inc.
   
 
In fiscal year ended June 30, 2001, the Company issued 917,608 shares of Authentidate Holding Corp. common stock (valued at approximately $4,200,000) to acquire approximately 25% of the outstanding shares not owned by AHC of Authentidate, Inc. As of June 30, 2003, the Company owns approximately 98% of Authentidate, Inc. The acquisition of the minority interest has been accounted under the purchase method of accounting. The excess purchase price which approximates $4,200,000 was being amortized over a 5-year period. Beginning July 1, 2001, the Company no longer amortizes goodwill (see “Goodwill”).
   
 
In connection with the aforementioned transaction, the Company’s CEO was granted options to acquire 444,668 shares of Company common stock with an intrinsic value of approximately $1,380,000 which was expensed during the fiscal years ended June 30, 2001 and June 30, 2002.
   
 
Principles of Consolidation
   
 
The consolidated financial statements include the accounts of AHC and its subsidiaries. The accounts of the subsidiaries have been consolidated since the acquisition date. All material intercompany balances and transactions have been eliminated in consolidation.
   
 
Cash Equivalents
   
 
The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents. At June 30, 2003 and 2002, cash equivalents were composed primarily of investments in commercial paper and overnight interest bearing deposits.
   
 
Inventories
   
 
Inventories are stated at the lower of cost or market and are valued at average cost.
   
 
Property and Equipment
   
 
Property and equipment are stated at cost. Depreciation and amortization are determined using the straight-line method. Estimated useful lives of the assets range from three to forty years.
   
 
Repairs and maintenance are charged to expense as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is recognized.
   
 
Software Development Costs
   
 
Software development and modification costs incurred subsequent to establishing technological feasibility are capitalized and amortized based on anticipated revenue for the related product with an annual minimum equal to the straight-line amortization over the remaining economic life of the related products (generally three years). Software development costs capitalized during 2003, 2002 and 2001 amounted to approximately $296,000, $346,000 and $2,765,000, respectively. Amortization expense related to software development costs for the years ended June 30, 2003, 2002 and 2001 was $1,102,765, $1,087,293 and $1,033,646, respectively. These expenses are included in cost of sales.

 

F-9


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Goodwill
   
 
Effective July 1, 2001, the Company applied FAS No. 142, Goodwill and Other Intangible Assets. FAS 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Prior to July 1, 2001, goodwill was amortized on a straight-line basis over periods ranging from 5 to 20 years. Goodwill amortization expense for the year ended June 30, 2001 was not material to the Company’s financial statements. The adoption of FAS 142 on July 1, 2001 did not result in an impairment of goodwill.
   
 
The Company periodically reviews goodwill to assess recoverability, and impairments would be recognized in operating results if a permanent diminution in value were to occur. The Company completed annual impairment tests, as required. These tests did not result in any impairment charges. The changes in the carrying amount of goodwill for the year ended June 30, 2003 are as follows:
   
    DJS   Authentidate   AG   TracMed   Total  
   

 

 

 

 

 
Balance, June 30, 2001
  $ 1,173,665   $ 4,102,471   $     $     $ 5,276,136  
Reclass to patents based on valuation
          (120,000 )              
 (120,000
)
Purchase 61% of AG
               
 6,709,801
         
 6,709,801
 
Reclassification of 39% of AG
               
 573,208
         
 573,208
 
   

 

 

 

 

 
Balance, June 30, 2002
    1,173,665     3,982,471     7,283,009          
 12,439,145
 
Acquisition of minority interest
                     
 338,000
   
 338,000
 
Changes in carrying amount of goodwill
    5,100     5,100     8,156          
 18,356
 
   

 

 

 

 

 
Balance, June 30, 2003
  $ 1,178,765   $ 3,987,571   $ 7,291,165   $ 338,000   $ 12,795,501  
   

 

 

 

 

 
   
 
Income Taxes
   
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

F-10


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Revenue Recognition and Warranty Provisions
   
 
Revenue from the sale of products and services is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and collectibility is reasonably assured. Service revenue is recognized as it is earned. The Company provides a one- year warranty on hardware products it assembles. On products distributed for other manufacturers, the original manufacturer warranties the product. Warranty expense was not significant to any of the years presented.
   
 
Stock-Based Compensation
   
 
The Company has also adopted the disclosure requirements of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No. 123) and FAS No. 148 with respect to pro forma disclosure of compensation expense for options issued. For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. Had the Company recorded compensation expense for the fair value of stock options, net loss and loss per share would have been affected as indicated by the pro forma amounts below.
   
 
The Company applies APB No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in the Company’s financial statements for stock options under any of the stock plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. However, compensation cost has been recognized for warrants granted to non-employees for services provided. If under FAS No. 123, the Company determined compensation cost based on the fair value at the grant date for its stock options, net loss and loss per share would have been increased to the pro forma amounts indicated below:
   
    2003   2002   2001  
   

 

 

 
Net loss
                   
   As reported
  $ (9,839,309 ) $ (9,951,402 ) $ (9,340,103 )
   Deduct: total stock based employee compensation expense determined under fair value method
    (1,981,504 )   (4,480,325 )   (3,529,170 )
   

 

 

 
   Pro forma
  $ (11,820,813 ) $ (14,431,727 ) $ (12,869,273 )
   

 

 

 
Basic and diluted loss per share
                   
   As reported
  $ (.50 ) $ (.69 ) $ (.63 )
   Pro forma
  $ (.59 ) $ (.95 ) $ (.86 )

 

F-11


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
The weighted average fair value of each option granted under the Company’s employee option plans during fiscal 2003, 2002 and 2001 was $.60, $1.11 and $2.90, respectively. These amounts were determined using the Black Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments and the risk-free interest rate over the expected life of the option. The dividend yield was zero in 2003, 2002 and 2001. The expected volatility was based on the historic stock prices. The expected volatility was 95.3%, 89.6% and 91.6% for 2003, 2002 and 2001, respectively. The risk-free interest rate was the rate available on zero coupon U.S. government issues with a term equal to the remaining term for each grant. The risk-free rate ranged from 3.0% to 5.1% in 2003, 4.4% to 5.1% in 2002 and 5.1% in 2001, respectively. The expected life of the options was estimated based on the exercise history from previous grants and is estimated to be one to five years.
   
 
The effects of applying FAS 123 on providing pro-forma disclosures are not necessarily likely to be representative of the effects on reported net income for future years.
   
 
New Accounting Pronouncements
   
 
In May 2003, the Financial Accounting Standards Board (FASB) issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . This Standard establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This standard becomes effective for any financial instruments entered into or modified after May 31, 2003. The Company does not expect the adoption of FAS No. 150, to have a material effect on its financial statements.
   
 
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities . This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities entered into after June 30, 2003. The Company does not expect the adoption of FAS No. 149 to have a material effect on its financial statements.
   
 
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities . This interpretation gives guidance that determines whether consolidation of a Variable Interest Entity is required and is effective for all variable interest entities with which the Company becomes involved beginning in February 2003, and all pre-existing entities beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its financial statements.
   
 
In December 2002, the FASB issued FAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FAS No. 123 . This Statement amends FAS No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Statement has varying effective dates commencing with interim periods beginning after December 15, 2002. The Company has adopted the disclosure requirements of FAS No. 148.

 

F-12


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
In November 2002, the FASB issued FAS Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others . FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002. The Company has no guarantees to unaffiliated third parties so the adoption of FIN 45 had no impact on the Company’s financial statements.
   
 
In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities . This Standard addresses the recognition, measurement and reporting of costs that are associated with exit or disposal activities. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of FAS No. 146 had no impact on the Company’s financial statements.
   
 
Advertising Expenses
   
 
The Company recognizes advertising expenses as incurred. Advertising and promotion expense for 2003, 2002 and 2001 was approximately $461,000, $454,000 and $835,000, respectively.
   
 
Currency Translation Adjustment
   
 
Assets and liabilities of non-U.S. operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the year. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in “Comprehensive Income” and accumulated in shareholders’ equity in the caption “Translation Adjustments”.
   
 
Use of Estimates
   
 
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
   
 
Reclassifications
   
 
It is the Company’s policy to reclassify, where appropriate, prior year financial statements to conform to the current year presentation.
   
2.
Loss Per Share
   
 
The following is basic and diluted loss per common share information:
   
    2003   2002   2001  
   

 

 

 
Net loss
  $ (9,839,309 ) $ (9,951,402 ) $ (9,340,103 )
Preferred stock dividends
    (223,706 )   (1,764,430 )   (151,667 )
   

 

 

 
Net loss applicable to common shareholders
  $ (10,063,015 ) $ (11,715,832 ) $ (9,491,770 )
   

 

 

 
Weighted average shares
    20,028,736     17,035,030     15,013,135  
Basic and diluted loss per common share
  $ (.50 ) $ (.69 ) $ (.63 )

 

F-13


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Options (5,003,117), warrants (3,968,539), convertible preferred stock (1,243,034) and convertible debentures (2,528,192) were antidilutive to the fiscal year 2003 calculation of dilutive loss per share, and were accordingly excluded from the calculation. Options (5,280,000), warrants (2,685,000) and convertible preferred stock (1,190,000) were antidilutive to the fiscal year 2002 calculation and options (4,325,000), warrants (2,908,000) and convertible preferred stock (1,775,000) were antidilutive to the fiscal year 2001 calculation, and were accordingly excluded from the respective calculations.
   
3.
Inventories
   
 
Inventories relate to DocStar and DJS only and at June 30 consist of:
   
    2003   2002  
   

 

 
Purchased components and raw materials
  $ 63,115   $ 317,772  
Finished goods
    129,986     161,930  
   

 

 
    $ 193,101   $ 479,702  
   

 

 
   
4.
Property and Equipment
   
 
Property and equipment at June 30 consist of the following:
   
    2003   2002   Estimated
Useful Life
In Years
 
   

 

 

 
Building
  $ 1,618,640   $ 1,618,640     40  
Land
    698,281     698,281     N/A  
Machinery and equipment
    3,494,683     3,145,986     3-6  
Demonstration and rental computers
    125,732     125,732     5-6  
Furniture and fixtures
    651,522     594,309     5-7  
Leasehold improvements
    50,069     48,893     5  
   
 
       
      6,638,927     6,231,841        
Less: accumulated depreciation and
amortization
    (2,874,081 )   (2,222,916 )      
   
 
       
    $ 3,764,846   $ 4,008,925        
   
 
       
   
 
In June 1999, the Company completed construction of a new office/production facility in Schenectady, New York for approximately $2,300,000. The Company was awarded a grant totaling $1,000,000 from the Empire State Development Corporation (an agency of New York State) to be used towards the construction of the facility. The funding was received in stages as costs are incurred and submitted for reimbursement. The grant stipulates that the Company is obligated to achieve certain annual employment levels at the new site between January 1, 2002 and January 1, 2005 or some or all of the grant will have to be repaid. The Company has not achieved the agreed upon employment levels to date but would like to achieve such levels by 2005. The $1,000,000 is recorded as deferred grant. The remainder of the financing for the new facility, totaling approximately $1,400,000, was provided by a local financial institution in the form of a mortgage loan (Note 7).

 

F-14


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Depreciation and amortization expense on property and equipment for the years ended June 30, 2003, 2002 and 2001 was $661,870, $553,615 and $377,832, respectively.
   
5.
Accrued Expenses and Other Current Liabilities
   
 
Accrued expenses and other current liabilities consist of the following at June 30:
   
    2003   2002  
   

 

 
Accrued severance
  $ 405,065   $  
Accrued legal
    500,000     577,964  
Deferred revenue
    738,166     250,612  
Other
    1,129,479     1,103,458  
   

 

 
    $ 2,772,710   $ 1,932,034  
   

 

 
   
6.
Line of Credit
   
 
The Company’s subsidiary, DJS has a revolving line of credit in the amount of $2.5 million with a financial institution of which approximately $878,000 was outstanding at June 30, 2003. The interest rate is prime (minimum prime rate of 7%) plus 1.75%. At June 30, 2003, the interest rate was 8.75%. DJS may borrow on this line based on a formula of qualified accounts receivable and inventory. Based upon this formula, $1,614,000 was available for use at June 30, 2003, of which $736,000 was unused. The line was collateralized by all assets of DJS and is guaranteed by Authentidate Holding Corp. Under the line of credit agreement, DJS is required to comply with certain restrictive covenants including tangible net worth and debt to tangible net worth. As of June 30, 2003, the Company was in compliance with its debt covenants.
   
7.
Long-term Debt
   
 
Long-term debt at June 30 consists of the following:
   
  2003   2002  
   

 

 
Mortgage payable with Central National Bank in the original amount of $1,400,000 with interest, adjusted every five years, equal to the five-year Treasury Bill rate plus 2.5%, not to be less than 8.25% (8.25% at June 30, 2003). Payments are made on a 20 year amortization schedule with a balloon payment due in October 2009, when it matures. The mortgage is collateralized by a first mortgage lien on the Company’s headquarters.
  $ 1,281,700   $ 1,317,515  
               
Note payable to the Company’s Chief Executive Officer in connection with the purchase of 100 shares of Series A preferred stock.
    268,240        
   

 

 
    1,549,940     1,317,515  
Less current portion
    (218,811 )   (35,747 )
   

 

 
 Long-term debt, net of current portion
  $ 1,331,129   $ 1,281,768  
   

 

 

 

F-15


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
The aggregate principle maturities of long-term debt for each of the subsequent five years and thereafter are as follows:
   
2004
  $ 218,811  
2005
    130,381  
2006
    45,753  
2007
    49,674  
2008
    53,931  
Thereafter
    1,051,390  
   

 
    $ 1,549,940  
   

 
   
 
This schedule does not include convertible debentures of $6,425,300 maturing in fiscal year 2006 (Note 18).
   
8.
Income Taxes
   
 
Income tax expense for the years ended June 30, 2003, 2002 and 2001 consists of currently payable state and local income taxes.
   
 
At June 30, 2003, the Company has federal net operating loss carryforwards for tax purposes approximating $45,000,000. The years in which the net operating loss carryforwards expire are as follows: 2003-$3,000; 2004-$6,000; 2008-$1,568,000; 2009-$867,000; 2011- $2,762,000; 2012-$686,000; 2013-$3,197,000; 2019-$1,350,000; 2020-$7,698,000; 2021-$9,900,000, 2022-$8,000,000 and 2023-$9,000,000.
   
 
Because of significant changes in ownership during the prior years, the use of net operating loss carryforwards may be subject to limitation.
   
 
Pre-tax book (loss) from foreign sources totaled $(1,544,741), $(1,216,209) and $(99,455) for the years ended June 30, 2003, 2002 and 2001, respectively.
   
 
The following table reconciles the expected tax benefit at the federal statutory rate of 34% to the effective tax rate.
   
    2003   2002   2001  
   

 

 

 
Computed expected tax benefit
  $ (3,343,167 ) $ (3,396,984 ) $ (3,170,195 )
Increase in valuation allowance
    3,465,936     3,922,113     3,008,814  
Nondeductible goodwill amortization
            136,770  
Adjustment to prior years’ taxes
            20,871  
State income taxes, net of federal benefit
    (659,832 )   (727,225 )   10,560  
Nondeductible foreign losses
    525,212     200,915      
Other nondeductible expenses
    18,315     15,300     9,180  
   

 

 

 
    $ 6,464   $ 14,119   $ 16,000  
   

 

 

 

 

F-16


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30 are presented below:
   
    2003   2002  
   

 

 
Deferred income tax asset:
             
Allowance for doubtful accounts
  $ 122,069   $ 174,062  
Inventories
    73,984     221,467  
Software development costs
    884,118     612,047  
Investment in affiliated companies
    292,521     407,025  
Other intangible assets
    1,292,697     1,648,655  
Deferred compensation
    482,558     485,018  
Accrued expenses and other liabilities
    444,971     253,897  
Net operating loss and tax credit carryforwards
    18,318,194     14,614,860  
Other
    2,808     1,107  
   

 

 
      Total gross deferred tax assets
    21,913,920     18,418,138  
Less valuation allowance
    (21,761,661 )   (18,295,725 )
   

 

 
      Net deferred tax asset
    152,259     122,413  
Deferred income tax liability:
             
Equipment, principally due to differences in
             
   depreciation methods
    (152,259 )   (122,413 )
   

 

 
      Net deferred income taxes
  $   $  
   

 

 
   
 
The Company has recorded a full valuation allowance against its deferred tax asset since it believes it is more likely than not that such deferred tax asset will not be realized. The valuation allowance for deferred tax assets as of June 30, 2003 and 2002 was $21,761,661 and $18,295,725, respectively. The net change in the total valuation allowance for the years ended June 30, 2003, 2002 and 2001was an increase of $3,465,936, $3,922,113 and $3,008,814, respectively.
   
9.
Lease Commitments
   
 
The Company is obligated under operating leases and capital leases for certain equipment and facilities expiring at various dates through the year 2007.
   
 
As of June 30, 2003, future minimum payments by year, and in the aggregate for noncancelable operating leases with initial terms of one year or more consist of the following:
   
    Capital   Operating  
    Leases   Leases  
   

 

 
Fiscal year ending June 30:
             
   2004
  $ 136,901   $ 611,125  
   2005
    75,724     571,333  
   2006
    15,230     472,950  
   2007
    5,373     139,867  
     
 
 
      233,228   $ 1,795,275  
         

 
   Amounts representing interest
    (35,152 )      
   
       
Present value of net minimum lease payments
    198,076        
Less current portion
    (112,520 )      
   

       
Long-term portion
  $ 85,556        
   
       

 

F-17


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Rental expense was approximately $516,000, $345,000 and $272,000 for the years ended June 30, 2003, 2002 and 2001, respectively. The amount of accumulated depreciation for capital leases at June 30, 2003 and 2002 was $92,560 and $29,513, respectively. The equipment financed by these capital leases may be purchased at the end of the lease for a bargain purchase amount.
   
10.
Preferred Stock
   
 
The Board of Directors is authorized to issue shares of preferred stock, $.10 par value per share, from time to time in one or more series. The Board may issue a series of preferred stock having the right to vote on any matter submitted to shareholders including, without limitation, the right to vote by itself as a series, or as a class together with any other or all series of preferred stock. The Board of Directors may determine that the holders of preferred stock voting as a class will have the right to elect one or more additional members of the Board of Directors, or the majority of the members of the Board of Directors. The Board of Directors has designated a series of preferred stock which has the right to elect a majority of the Board of Directors. The holders of Series A preferred stock which have the right to elect a majority of the Board of Directors are therefore able to control the Company’s policies and affairs.
   
 
In June 2003, the Company purchased all of the Series A preferred stock (100 shares) from its Chief Executive Officer for $850,000. Payment terms are as follows: $70,000 in cash was paid, $485,000 was offset against loans owed to the Company by its Chief Executive Officer, and the remainder will be paid in monthly installments of $15,000 commencing July 2003, interest free (Notes 13 and 19).
   
11.
Stock Option Plans and Stock Warrants
     
  A)
2000 and 1992 Employees Stock Option Plans
     
   
In March 2001, the shareholders approved the 2000 Employees Stock Option Plan (“the 2000 Plan”) which provided for the grant of options to purchase up to 5,000,000 shares of the Company’s Common Stock. The Company’s shareholders were asked to adopt the 2000 Plan since there were no additional shares available for issuance under the 1992 Plan and the 1992 Plan expired in 2002. In 2001, the Company filed a registration statement with the SEC to register the shares issued under the 2000 Plan.
     
   
The 1992 Employees Stock Option Plan (the “1992 Plan”) provided for the grant of options to purchase 3,000,000 shares of the Company’s common stock.
     
   
Under the terms of the two Plans, options granted thereunder may be designated as options which qualify for incentive stock option treatment (“ISO”) under Section 422 of the Internal Revenue Code, or options which do not so qualify (“non-ISOs”).

 

F-18


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


   
The Plans are administered by a Compensation Committee designated by the Board of Directors. The Compensation Committee is comprised entirely of outside directors. The Board or the Committee, as the case may be, has the discretion to determine eligible employees and the times and the prices at which options will be granted, whether such options shall be ISOs or non-ISOs, the period during which each option will be exercisable and the number of shares subject to each option. Options generally begin to vest one year after the date of grant. Vesting generally occurs one-third per year over three years. Options generally have a life of five years. The Board or the Committee has full authority to interpret the Plans and to establish and amend rules and regulations relating thereto. Under the two Plans, the exercise price of an option designated as an ISO may not be less than the fair market value of the Company’s common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent shareholder, the exercise price shall be at least 110% of such fair market value. The aggregate fair market value on the grant date of shares subject to options which are designated as ISOs which become exercisable in any calendar year, shall not exceed $100,000 per optionee.
     
   
The Board or the Committee may in its sole discretion grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay any taxes that may arise in connection with the exercise or cancellation of an option. As of June 30, 2003, no loans had been granted or guaranteed. Loans may not be granted or guaranteed to executive officers.
     
   
The 1992 Plan expired May 2002 and the 2000 Plan will expire in the year 2010.
     
              Number of
Shares
      Weighted
Average Option
Price per Share
     
   

 

 
Outstanding at June 30, 2000
    2,186,173   $ 5.67  
Options granted equal to market price
    1,863,532     4.93  
Options granted lower than market price
    444,668     1.52  
Options exercised
    (61,733 )   2.93  
Options canceled or surrendered
    (247,935 )   5.86  
   
       
Outstanding at June 30, 2001
    4,184,705     4.93  
Options granted equal to market price
    1,313,875     4.22  
Options granted lower than market price
    151,500     .01  
Options exercised
    (21,999 )   2.27  
Options canceled or surrendered
    (507,732 )   7.50  
   
       
Outstanding at June 30, 2002
    5,120,349     4.48  
Options granted equal to market price
    459,075     3.15  
Options granted greater than market price
    373,667     3.21  
Options cancelled or surrendered
    (1,046,526 )   4.06  
Options exercised
    (63,448 )   2.04  
   
       
Outstanding at June 30, 2003
    4,843,117     4.38  
   
       

 

F-19


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


   
The following is a summary of the status of employee stock options at June 30, 2003:
     
    Outstanding Options

  Exercisable Options

 
Exercise Price Range
  Number   Average
Remaining
Contractual
Life
  Weighted
Average
Exercise
Price
  Number   Weighted
Average
Exercise
Price
 

 

 

 

 

 

 
$.01 – $4.60
    2,818,442     3.3   $ 3.36     1,365,877   $ 2.99  
$4.61 – $9.125
    2,024,675     2.4   $ 5.80     1,513,225   $ 5.98  
     
   
As of June 30, 2003 and 2002, 2,879,102 shares and 2,840,122 shares, respectively, were exercisable under the 2000 and 1992 Employees Stock Option Plan.
     
  B)
Non-Executive Director Stock Option Plan
     
   
In January 2002, our shareholders approved the 2001 Non-Executive Director Stock Option Plan (the 2001 Director Plan). Options are granted under the 2001 Director Plan until December 2011 to (i) non-executive directors as defined and (ii) members of any advisory board established by the Company who are not full-time employees of the Company or any of its subsidiaries. The 2001 Director Plan provides that each non-executive director will automatically be granted an option to purchase 20,000 shares upon joining the Board of Directors and 10,000 on each September 1st thereafter, prorated based upon the amount of time such person served as a director during the period beginning twelve months prior to September 1. Each eligible director of an advisory board will receive, upon joining the advisory board, and on each September 1st thereafter, an additional option to purchase 5,000 shares of the Company’s common stock, providing such person has served as a director of the advisory board for the previous 12-month period.
     
   
The Company’s shareholders were asked to adopt the 2001 Director Plan since the 1992 Non-Executive Director Stock Plan (the 1992 Director Plan) expired in April 2002. Under the 1992 Director Plan, which was adopted by our shareholders in April 1992, directors were automatically granted a fully vested option to purchase 20,000 shares upon joining the Board of Directors and a fully vested option to purchase 10,000 shares on each September 1 thereafter.
     
   
The exercise price for options granted under the 2001 and 1992 Director Plans is 100% of the fair market value of the common stock on the date of grant. The “fair market value” is the closing NASDAQ bid price, or if the Company’s common stock is not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a market maker of the Company’s common stock. If the common stock is not quoted by any of the above the Board of Directors acting in good faith will determine fair market value. The exercise price of options granted under both the 2001 and 1992 Director Plans must be paid at the time of exercise in cash. The term of each option commences on the date it is granted and unless terminated sooner, as provided in the 2001 and 1992 Director Plans, expires five years from the date of grant. The 2001 and 1992 Director Plans are administered by a committee of the board of directors composed of not fewer than three persons who are officers of the Company (the “Committee”). The Committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Committee will make all determinations of the interpretation of both the 2001 and 1992 Director Plans. Options granted under the 2001 and 1992 Director Plans are not qualified for incentive stock option treatment.

 

F-20


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


   
A schedule of director stock option activity is as follows:
     
    Number
of
Shares
  Weighted
Average
Option
Price
Per Share
 
   

 

 
Outstanding June 30, 2000
    130,000   $ 1.92  
Options granted equal to market price
    30,000       .84  
Options exercised
    (20,000 )     .92  
   
       
Outstanding June 30, 2001
    140,000     2.68  
Options granted equal to market price
    30,000     3.76  
Options exercised
    (10,000 )   3.38  
   
       
Outstanding June 30, 2002
    160,000     2.84  
Options granted equal to market price
    50,000     2.63  
Options cancelled or surrendered
    (10,000 )   3.88  
Options exercised
    (40,000 )   2.78  
   
       
Outstanding June 30, 2003
    160,000     2.72  
   
       
     
   
The options range in exercise price from $.84 to $4.81 per share and have a weighted average remaining contractual life of 2.6 years.
     
  C)
Common Stock Warrants
     
   
A schedule of common stock warrant activity is as follows:
     
    Number
of
Shares
  Weighted
Average
Warrant
Price
Per Share
 
   

 

 
Outstanding June 30, 2000
    3,025,477   $ 3.87  
Warrants granted equal to market price
    106,667     2.33  
Warrants granted greater than market price
    184,780     5.57  
Warrants granted lower than market price
    314,000     5.19  
Warrants cancelled or surrendered
    (258,806 )   4.60  
Warrants exercised
    (463,668 )   3.47  
   
       
Outstanding June 30, 2001
    2,908,450     4.14  
               
Warrants granted equal to market price
    109,868     5.00  
Warrants granted greater than market price
    1,217,500     2.28  
Warrants cancelled or surrendered
    (425,000 )   8.15  
Warrants exercised
    (1,125,000 )   1.48  
   
       
Outstanding June 30, 2002
    2,685,818     3.81  
Warrants granted greater than market price
    235,000     3.28  
Warrants granted below market price
    1,119,080     2.68  
Warrants exercised
    (3,000 )   3.25  
Warrants cancelled or surrendered
    (68,359 )   8.99  
   
       
Outstanding June 30, 2003
    3,968,539     3.37  
   
       

 

F-21


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


   
During fiscal year ending June 30, 2003, 235,000 warrants were issued to various consultants as compensation for services performed.
     
   
In May 2003, the Company issued 419,279 warrants to a group of investors in connection with a sale of convertible debentures in the amount of $2.7 million. The Company valued these warrants using the Black Scholes Model and will amortize the costs as part of the debt discount over the three year life of the debentures. In addition, 36,923 warrants were issued as finders fees.
     
   
In October 2002, the Company issued 444,000 warrants to a group of investors in connection with a sale of $3.7 million of convertible debentures. The Company valued these warrants using the Black Scholes Model and will amortize the costs as part of the debt discount over the three year life of the debentures. In addition, 86,863 warrants were issued as finders fees.
     
   
In August 2002, the Company issued 132,015 warrants in connection with a private common stock sale of approximately $2.0 million.
     
   
In March 2002, the Company issued 100,000 warrants in connection with the acquisition of Authentidate International AG. In February 2002, the Company issued 1,080,000 warrants to certain series B warrant holders with an exercise price of $2.00 per warrant in exchange for their exercise of 1,080,000 outstanding Series B warrants for which the Company received $1,485,000 in cash (Note 20).
     
   
In May 2001, the Company issued 114,000 warrants to two foreign institutions and 150,000 warrants to investment bankers as professional fees related to two private equity financings further described in Note 18.
     
   
The following is a summary of the status of common stock warrants at June 30, 2003:
     
    Outstanding Warrants

  Exercisable Warrants

 
Exercise Price
Range
  Number   Weighted
Average
Remaining
Contractual
Life
  Weighted
Average
Exercise
Price
  Number   Weighted
Average
Exercise
Price
 

 

 

 

 

 

 
$1.00 – $2.85
    2,271,178     2.7   $ 2.06     2,271,178   $ 2.06  
$2.86 – $11.00
    1,697,361     2.7   $ 5.13     1,697,361   $ 5.13  

 

F-22


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


12.
Commitments and Contingencies
   
 
We are the defendant in a third party complaint filed by Shore Venture Group, LLC (Shore Venture) in Federal District Court in Pennsylvania. The third party complaint was filed against us on May 7, 2001. Shore Venture is the defendant to an action commenced by Berwyn Capital. The third party complaint alleges a claim for breach of contract and seeks indemnification. A trial was held in October, 2002 and we are currently awaiting the verdict of the judge. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flows.
   
 
We have also been advised of a claim by Shore Venture concerning additional shares of the Common Stock of our subsidiary, Authentidate, Inc. We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the partners. Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of our claims with Shore Venture will not have a materially adverse effect on our financial condition, results of operations or cash flows.
   
 
We are engaged in no other litigation which would be anticipated to have a material adverse impact on our financial condition, results of operations or cash flows.
   
 
At June 30, 2003, the Company had a severance accrual of $405,000 for employees that were terminated during fiscal year 2003. These payouts will occur throughout fiscal year 2004.
   
13.
Cash Flows – Supplemental Information
   
 
Cash Flows
   
 
The Company paid interest in the amounts of $195,276, $115,378 and $115,323 for the years ended June 30, 2003, 2002 and 2001, respectively. Income taxes paid aggregated $494, $1,912 and $230 for the years ended June 30, 2003, 2002 and 2001, respectively.
   
 
Noncash Investing and Financing Activities
   
 
During the fiscal year ending June 30, 2003, the Company issued 130,000 shares of its common stock to acquire all of the shares of Trac Medical. In addition, the Company entered into capital lease obligations for property and equipment totaling $176,178, including interest (Note 10).
   
 
During the fiscal year ending June 30, 2002, the Company issued 1,425,875 shares of its common stock to acquire all the shares of Authentidate International AG that it did not already own. This transaction is more fully described in Note 1. During the fiscal year, the Company entered into capital lease obligations for property and equipment totaling $278,554, including interest.
   
 
During the fiscal year ended June 30, 2001, the Company issued 917,608 shares of its common stock with a value approximating $4,200,000, to acquire a portion of the remaining minority interest of Authentidate, Inc. In addition, the Company entered into capital lease obligations totaling $15,923, including interest. Furthermore, the Company issued 28,082 shares of common stock out of treasury (totaling $76,719) in connection with preferred stock being converted into common stock.

 

F-23


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


14.
Employee Benefit Plan
   
 
The Company has a qualified defined contribution 401(k) profit sharing plan for all eligible employees. The Company can make contributions in percentages of compensation, or amounts as determined by the Company. The Company contributed $143,080, $134,640 and $111,869 to the plan during the years ended June 30, 2003, 2002 and 2001, respectively.
   
15.
Intangible Assets
   
 
A summary of intangible assets is as follows:
   
    June 30, 2003

  June 30, 2002

       
    Gross       Gross              
    Carrying   Accumulated   Carrying   Accumulated   Useful Life  
    Amount   Amortization   Amount   Amortization   In Years  
   

 

 

 

 

 
Patents
  $ 321,085   $ 43,679   $ 260,581   $ 24,792     17  
Trademarks
    138,578     22,583     106,803     15,654     20  
Completed technologies
    59,400     37,125     59,400     7,425     2  
Accreditation
    121,800     76,125     121,800     15,225     2  
Licenses
    15,101     9,567     13,600     4,533     3  
   
 
 
 
       
Total
  $ 655,964   $ 189,079   $ 562,184   $ 67,629        
   
 
 
 
       
   
 
Also refer to Note 1 with regard to Completed Technologies and Accreditation. The Company amortizes intangible assets under the straight line method. Amortization expense was $121,450, $49,970 and $9,537 for the years ended June 30, 2003, 2002 and 2001, respectively. Intangible amortization expense is expected to be immaterial for the next five fiscal years.
   
16.
Financial Instruments
   
 
Concentrations of Credit Risk
   
 
Financial instruments which subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. To reduce credit risk, the Company places its temporary cash investments with high credit quality financial institutions. The Company’s credit customers are not concentrated in any specific industry or business. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
   
 
At June 30, 2003, there was one customer whose accounts receivable balance exceeded 30% of total accounts receivable. This receivable has since been substantially collected. At June 30, 2002, there was one customer whose accounts receivable balance exceeded 10% of total accounts receivable.

 

F-24


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
One DJS customer accounted for approximately 50% of consolidated net sales but only represented approximately $625,000 of gross profit out of total gross profit of $6.1 million, during the fiscal year ended June 30, 2003. Sales to this same customer accounted for approximately 13% of consolidated net sales for the fiscal year ended June 30, 2002, but only represented about $150,000 of gross profit. Sales to this customer were primarily low margin computer hardware sales.
   
 
Fair Value
   
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
   
 
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Expenses and Other Current Liabilities
   
 
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximates fair value because of the short maturity of these instruments.
   
 
Long Term Debt
   
 
Long-term debt approximates fair value as the Company’s current borrowing rate approximates the interest rates on its debt.
   
17.
Segment Information
   
 
FAS 131 establishes standards for reporting financial and descriptive information about an enterprise’s operating segments in its annual financial statements and selected segment information in interim financial reports.
   
 
The Company has three reportable segments: DocStar, a document imaging software company, DJS Marketing Group, Inc. (DJS), a computer systems integrator, and all Authentidate related companies including Authentidate Inc., Authentidate AG and Trac Medical Solutions Inc. DocStar sells document storage and retrieval software and related products through a national dealer network of approximately 100 dealers and DJS markets computer services including network services, internet services and software installation and integration. In addition, DJS sells a complete line of personal computers and peripheral equipment in the Albany, New York area primarily, although DJS has several national accounts. The Authentidate related businesses all provide authentication software services nationally and through AG internationally.
   
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
   
 
The Company’s reportable segments are separate divisions which are managed separately. The corporate expenses which are not managed at the segment level include all public company type expenses and therefore are excluded from the Company’s operating segments results. Goodwill is included in corporate assets.

 

F-25


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


Segment Information:
  DocStar   DJS   Authentidate
Related
  Totals  

 

 

 

 

 
2003
                         
Net sales from external customers
  $ 6,781,230   $ 17,124,802   $ 1,380,439   $ 25,286,471  
Intersegment revenues
    13,770     62,268         76,038  
Interest and other revenue
    566         181,017     181,583  
Interest expense
    107,735     18,057     100,975     226,767  
Depreciation and amortization
    414,848     50,757     1,322,019     1,787,624  
Segment profit/(loss)
    796,866     146,917     (5,974,728 )   (5,030,945 )
Segment assets
    4,327,634     3,198,953     2,268,673     9,795,260  
                           
2002
                         
Net sales from external customers
  $ 6,719,803   $ 9,871,923   $ 51,178   $ 16,642,904  
Intersegment revenues
        88,577         88,577  
Interest and other revenue
    15,411     23     25,725     41,159  
Interest expense
    110,185     1,675     12,964     124,824  
Depreciation and amortization
    431,910     60,819     1,172,387     1,665,116  
Segment profit/(loss)
    287,859     96,801     (5,723,055 )   (5,338,395 )
Segment assets
    4,878,141     4,112,197     3,316,513     12,306,851  
                           
2001
                         
Net sales from external customers
  $ 6,239,579   $ 11,620,407   $ 558   $ 17,860,544  
Intersegment revenues
        428,488         428,488  
Interest and other revenue
    14,792         2,352     17,144  
Interest expense
    112,784     12,032         124,816  
Depreciation and amortization
    411,441     58,468     1,120,840     1,590,749  
Segment (loss)/profit
    (459,391 )   385,283     (5,824,663 )   (5,898,771 )
Segment assets
    5,454,528       3,372,212       3,746,305     12,573,045  

 

Reconciliations
  2003   2002   2001  

 

 

 

 
Net sales
                   
Total net sales for reportable segments
  $ 25,362,509   $ 16,731,481   $ 18,289,032  
Elimination of intersegment revenues
    (76,038 )   (88,577 )   (428,488 )
   

 

 

 
Total consolidated net sales
  $ 25,286,471   $ 16,642,904   $ 17,860,544  
   

 

 

 
Total profit or loss for reportable segments
  $ (5,030,945 ) $ (5,338,395 ) $ (5,898,771 )
Product development expenses
    (2,534,777 )   (2,170,173 )   (1,221,639 )
Corporate expenses and other
    (2,258,830 )   (2,494,793 )   (2,188,413 )
Elimination of intersegment profits
    (8,293 )   12,232     (15,280 )
   

 

 

 
Loss before income taxes
  $ (9,832,845 ) $ (9,991,129 ) $ (9,324,103 )
   

 

 

 
Assets
                   
Total assets for reportable segments
  $ 9,795,260   $ 12,306,851   $ 12,573,045  
Corporate assets
    15,274,268     13,760,530     13,322,487  
Elimination of intersegment assets
    (23,688 )   (15,395 )   (27,627 )
   

 

 

 
Consolidated total assets
  $ 25,045,840   $ 26,051,986   $ 25,867,905  
   

 

 

 

 

F-26


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
In Germany, the Company had revenues from external customers of $857,540 for 2003 and $25,267 for the period March 2002 through June 2002 (See Note 1) and segment assets of $918,930 and $635,665 at June 30, 2003 and 2002, respectively. All other revenue and assets are located in the United States.
   
18.
Private Equity and Debt Offerings
   
 
In May and June 2003, the Company sold convertible debentures with a face value of $2,725,300 to institutional investors and warrants to purchase 419,279 shares of common stock (Note 19). The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $2.60 per share. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable quarterly in arrears. At the option of the Company, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of five years from the date of issuance and 50% of the warrants are initially exercisable at $2.60 per share and the remaining 50% of the warrants are initially exercisable at $2.86 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment in the event the Company issues common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition, the conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization. At June 30, 2003, the convertible debentures are convertible into 1,048,192 shares of common stock.
   
 
In October 2002, the Company sold convertible debentures with a face value of $3,700,000 to institutional investors and warrants to purchase 444,000 shares of common stock. The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $2.50 per share. At June 30, 2003, the convertible debentures are convertible into 1,480,000 shares of common stock. The debentures are due three years from the date of issuance and accrue interest at the rate of 7% per annum, payable in quarterly in arrears. At the option of the Company, the interest may be paid in either cash or additional shares of common stock. The warrants are exercisable for a period of four years from the date of issuance and are initially exercisable at $2.50 per share. The conversion price of the debentures and the exercise price of the warrants are subject to adjustment in the event the Company issues common stock or securities convertible into common stock at a price per share of common stock less than the conversion price or exercise price on the basis of a weighted average formula. In addition, the conversion price of the debentures and the exercise price of the warrants are subject to adjustment at any time as the result of any subdivision, stock split, combination of shares or recapitalization. The Company has an option, but not a requirement, to sell another $2,470,000 of convertible debentures to the same investors provided the Company’s common stock maintains a trading price at or above $3.00 per share for the 15 trading days preceding an election to sell additional debentures. This option is in effect for 12 months following the effective date of the registration statement covering the shares underlying the debentures. In September 2003, the Company exercised its option and sold $2,470,000 of convertible debentures to the same group of investors (Note 22).

 

F-27


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
Under generally accepted accounting principles, the Company is required to record the value of the beneficial conversion feature of these convertible debentures as debt discount. In addition, the value of the warrants using the Black Scholes method is also recorded as debt discount. The total debt discount recorded on the two convertible debenture sales during fiscal 2003 was approximately $3,598,000. This debt discount will be amortized and charged to interest expense over a period of 36 months. In the event the investors convert the debentures prior to the end of 36 months then generally accepted accounting principles require the Company to expense the unamortized balance of the debt discount in full.
   
 
Through June 30, 2003, $489,000 has been recorded as noncash interest expense on the Company’s income statement relative to the amortization of debt discount on these convertible debentures. Going forward, the Company will incur a noncash interest expense of approximately $1,200,000 per year.
   
 
In July 2002, the Company sold 660,077 shares of its common stock at $3.03 per share in a private transaction. The Company received gross proceeds of approximately $2.0 million before expenses. The Company also issued 132,015 common stock purchase warrants to the buyers which have an exercise price of $3.26 per share and have a five-year life.
   
 
In 2001, the Company, in two separate transactions closed on the sale of $5,500,000 of its securities to two foreign institutions pursuant to Regulation S, promulgated under the Securities Act of 1933, as amended. In the transactions, the Company sold 5,500 of its Series C Convertible Preferred Stock, with a dividend rate of 4%, payable in either cash or Company Common Stock to the foreign institutions convertible at $4.845 per share and five year warrants to purchase 114,000 shares of Common Stock exercisable at $4.845 per share. The conversion price is not subject to resets or adjustments for changes in the market price of the Company’s common stock. The right of conversion incorporated into the Series C Preferred Stock constitutes a beneficial conversion feature which was determined to have a value of approximately $1,464,002. The beneficial conversion feature was amortized as a preferred stock dividend over a one-year period commencing July 1, 2001 using the effective interest method. The Company received net proceeds of approximately $5,200,000 from the transaction after paying commissions and expenses. The securities sold in this offering are restricted securities under the terms of Regulation S and may not be transferred or resold in the United States for a period of one year, except pursuant to registration under the Securities Act or an exemption thereunder. During the fiscal year ended June 30, 2003 and 2002, 400 Series C preferred shares and 1,500 Series C preferred shares were converted into 82,560 common stock shares and 309,598 common stock shares, respectively.

 

F-28


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
During fiscal 2000, the Company closed three concurrent private offerings. In the first offering, the Company sold 740,000 units at an aggregate offering price of $740,000, each unit consisting of two shares of common stock and two Series B common stock purchase warrants (the “Series B Warrants”). The Series B Warrants entitle the holder to purchase one share of common stock at an exercise price of $1.375 per share during the offering period commencing on the date of issuance and terminating five years thereafter. The Series B warrants are redeemable at any time commencing one year after issuance at the option of the Company with not less than 30 nor more than 60 days written notice to the registered holders at a redemption price of $.05 per warrant provided; (i) The public sale of the shares of common stock issuable upon exercise of the Series B warrants are covered by a tentative registration statement; and (ii) During each of the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s common stock is at least $3.25 per share. As of June 30, 2003, 400,000 Series B warrants are outstanding.
   
 
In the second offering, the Company sold 50,000 shares of a newly created class of Series B convertible cumulative preferred stock (the “Series B Preferred Stock”). The Series B preferred stock was sold at $25.00 per share for an aggregate offering price of $1,250,000. Dividends on the Series B Preferred Stock are payable at the rate of 10% per annum, semi-annually in cash. Each share of Series B Preferred Stock is convertible into shares of the Company’s common stock or is converted into such number of shares of the common stock as shall equal $25.00 divided by the conversion price of $1.875 per share subject to adjustment under certain circumstances. Commencing three years after the closing, the conversion price shall be the lower of $1.875 per share or the average of the closing bid and asked price of the Company’s common stock for the 10 consecutive trading days immediately ending one trading day prior to the notice of the date of conversion; provided, however, that the holders are not entitled to convert more than 20% of the Series B preferred shares held by such holder on the third anniversary of the date of issuance per month. The Series B Preferred Stock is redeemable at the option of the Company at any time commencing one year after issuance or not less than 30 nor more than 60 days written notice at a redemption price of $25 per share plus accrued and unpaid dividends provided; (i) the public sale of the shares of common stock issuable upon conversion of the Series B preferred Stock (the “Conversion Shares”) are covered by an effective registration statement or are otherwise exempt from registration; and (ii) during the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s Common Stock is not less than $3.75 per share.
   
 
On October 30, 2002, the Company filed a Certificate of Amendment of the Certificate of Designations, Preferences and Rights and Number of Shares of Series B preferred stock with the Secretary of State of the State of Delaware. The amendment provides that the conversion rate applicable to the outstanding shares of Series B preferred stock will be fixed at $1.40. Previously, the conversion rate was equal to the lower of $1.875 and the average of the closing bid and asked prices of our common stock for the immediately preceding ten consecutive trading days ending one day prior to the notice of conversion; provided, however, that the conversion rate would not be below $0.875. Accordingly, the outstanding 28,000 shares of Series B preferred stock are presently convertible into an aggregate of 500,000 shares of the Company’s common stock. Prior to the amendment, the outstanding shares of Series B preferred stock were convertible into a maximum of 800,000 shares of the Company’s common stock. In consideration of obtaining the consent of the holder of the outstanding Series B preferred stock, the Company agreed to defer its ability to redeem those shares for a period of two years.

 

F-29


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


 
As of June 30, 2003, 22,000 Series B preferred shares have been converted leaving 28,000 shares outstanding which are convertible in 500,000 common shares.
   
 
Commencing October 2004, the Series B preferred stock is redeemable at the option of the Company without regard to the closing price of the Company’s common stock.
   
 
As part of this equity offering in fiscal 2000 the Company also created a new subsidiary, Authentidate Inc. In connection with the above offerings, the purchasers were granted the right to purchase 20% of Authentidate for $100,000. The purchasers subsequently exercised this right, however, the Company repurchased this portion in fiscal year 2001 and now own approximately 98% of Authentidate (Note 1). In addition, the Purchasers were issued an aggregate of 999,999 Series C common stock purchase warrants (the “Series C Warrants”). The Series C Warrants were redeemable at any time commencing six months after issuance, on not less than 30 nor more than 60 days written notice to registered holders at a redemption price equal to $.05 per Warrant, provided (i) the public sale of the shares of common stock issuable upon exercise of the Series C Warrants (the “Warrant Shares”) are covered by an effective registration statement or are otherwise exempt from registration; and (ii) during each of the immediately preceding 20 consecutive trading days ending within 10 days of the date of the notice of redemption, the closing bid price of the Company’s common stock is not less than 120% of the current exercise price of the Series C Warrants.
   
 
The Series C Warrants were also divided into three classes (333,333 warrants per class) to provide for varying exercise prices. The exercise price of the Series C Warrants is as follows:
   
 
Class I – $1.50 per share of Common Stock, increasing (i) $.75 per share thirty days after the effective date of the registration statement covering the underlying shares (the “Registration Statement”); (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations.
   
 
Class II – $1.50 per share of Common Stock, increasing (i) $.75 per share sixty days after the effective date of the Registration Statement; (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations.
   
 
Class III – $1.50 per share of Common Stock, increasing (i) $.75 per share ninety days after the effective date of the Registration Statement; (ii) an additional $.75 per share seven months after the effective date of the Registration Statement; and (iii) an additional $.75 per share 13 months after the effective date of the Registration Statement, subject to adjustment for stock splits and corporate reorganizations.
   
 
All of the Series C warrants had been exercised as of June 30, 2002.
   
 
The Company received gross proceeds of approximately $2,100,000, approximately $1,900,000 after expenses. The Company utilized the proceeds of the three offerings as follows: approximately $600,000 was utilized to repay a portion of the Company’s line of credit; approximately $160,000 was utilized to make a past due interest payment on the Company’s outstanding 8% convertible notes, and the remainder was reserved for working capital. As of June 30, 2003, the 3,600 Series C preferred shares outstanding are convertible into 743,034 shares of common stock.

 

F-30


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


19.
Related Party Transactions
   
 
The Company entered into certain loan and security arrangements involving Mr. John T. Botti, our Chairman and Chief Executive Officer, principally relating to certain obligations to financial institutions collateralized by Mr. Botti’s stock in AHC. The Company initially established these arrangements in 2001, and agreed to certain modifications in February 2002, as described below.
   
 
In January 2001, the Company made a loan of $317,000 to Mr. Botti so as to enable him to avoid a margin call on the shares of AHC common stock owned by him that were held in a brokerage account as the Board of Directors believed that failing to do so would have a material adverse impact on the market price of its stock (the “2001 Loan”). The 2001 Loan was collateralized by a lien on all of the shares of AHC owned by Mr. Botti, as well as shares issuable to Mr. Botti upon the exercise of stock options granted to him. On February 14, 2002, the Company agreed to loan an additional amount of $203,159 to Mr. Botti, which loan was also collateralized by a lien on all of shares of AHC owned by Mr. Botti or issuable to him (the “2002 Loan”). The 2001 Loan bore interest at the rate of 9% per annum. The 2002 Loan bore interest at the rate of 6% per annum. These loans were paid in full in June 2003 as the result of Mr. Bolt selling his 100 shares of Series A preferred stock to the Company for $850,000. The Series A preferred stock had been appraised at $1,100,000 by an independent nationally recognized appraisal and valuation firm.
   
 
On May 29, 2003, the Company completed the sale of a private financing in the amount of $2,725,300 of securities to certain investors pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D, promulgated thereunder (Note 18). In the transaction, the Company sold $2,725,300 of convertible debentures and warrants to purchase an aggregate of 419,279 shares of common stock. A non-executive member of our Board of Directors participated in this financing and purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants. Further, an entity affiliated with a non-executive member of our Board of Directors, purchased $250,000 aggregate principal amount of convertible debentures and received 38,462 common stock purchase warrants in this financing. In addition, an entity that is currently a beneficial owner of in excess of 5% of our common stock participated in this financing, purchasing $250,000 aggregate principal amount of convertible debentures and receiving 38,462 common stock purchase warrants purchased. The convertible debentures, which are payable in full in May 2006, bear interest at 7% annum, payable quarterly in arrears.
   
20.
Private Financing
   
 
In February 2002, the Company offered the holders of its Series B common stock warrants the opportunity to receive new warrants upon the exercise of the Series B warrants for cash. The exercise price of these warrants was $1.375 per common stock warrant. The warrant holders would receive a new warrant exercisable at $2.00 per common stock warrant, which was slightly above the market price of the Company’s common stock on February 19, 2002, the date the Board approved the transaction. 1,080,000 warrants were exercised and the Company received $1,485,000 in cash, in addition 1,080,000 new warrants were issued. The new warrants expire October 1, 2004 and have no registration rights.

 

F-31


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


21.
Interest/Other Income and Interest Expense
   
 
Interest and other income at June 30 consist of:
   
    2003   2002   2001  
   
 
 
 
Interest income, from financial institutions
  $ 76,606   $ 140,393   $ 381,990  
Proceeds from “9/11 Fund”
    163,465          
Proceeds from insurance company related to 9/11 attack
    275,489          
Miscellaneous income
    56,921     39,967     18,006  
   

 

 

 
   Total interest and other income
  $ 572,481   $ 180,360   $ 399,996  
   

 

 

 
   
 
Interest expense at June 30 consists of:
   
    2003   2002   2001  
   
 
 
 
Interest paid to financial institutions
  $ 211,573   $ 124,824   $ 124,816  
Interest paid in stock
    143,666          
Accrued non-cash interest related to discount on convertible debt
    489,414          
Interest paid on convertible debt
    27,203          
   

 

 

 
   Total interest expense
  $ 871,856   $ 124,824   $ 124,816  
   

 

 

 
   
22.
Subsequent Events
   
 
On September 12, 2003, we completed the sale of $2,470,000 of convertible debentures which mature in September 2006 and bear interest at 7% payable quarterly in cash or stock at the Company’s option. Included in the sale were warrants to purchase an aggregate of 247,000 shares, having an exercise price of $3.00 per share and expire in four years. The portion of the sale price allocated to the fair value of the warrants (approximately $800,000) and the beneficial conversion feature value (approximately $1,500,000) will be recorded as a debt discount and amortized as interest expense over the term of the debt. In addition to this financing, on September 22, 2003, the Company sold 166,667 shares of common stock and warrants to purchase 50,000 shares of Company common stock to an investor who participated in the May 2003 financing. The shares were sold for $3.00 per share and the investor agreed to a one- year lock-up during which he will be unable to sell or otherwise transfer the securities purchased in this sale. 50,000 warrants were also issued to this investor which have an exercise price of $3.00 and expire in four years. The underlying shares of these warrants are also subject to a one-year lock-up. The Company also issued five year warrants to purchase an aggregate of 59,400 shares of Company common stock to certain consultants for services rendered in connection with these transactions which are exercisable at $3.00 per share. The consultants also received a cash fee equal to 6% of the gross proceeds that the Company received.

 

F-32


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Authentidate Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2003, 2002 and 2001


23.
Quarterly Data Financial (Unaudited)
   
    First   Second   Third   Fourth  
    Quarter   Quarter   Quarter   Quarter  
   
 
 
 
 
Fiscal year ended June 30, 2003
                         
Net sales
  $ 5,464,576   $ 5,920,575   $ 8,105,870   $ 5,795,450  
Gross profit
    1,299,933     1,773,383     1,453,173     1,590,146  
Net loss
    (1,994,866 )   (1,953,555 )   (3,009,758 )   (2,881,130 )
Loss per share
    (.10 )   (.10 )   (.15 )   (.14 )
                           
Fiscal year ended June 30, 2002
                         
Net sales
  $ 3,263,503   $ 4,131,286   $ 3,592,159   $ 5,655,956  
Gross profit
    972,142     1,191,812     1,087,126     1,301,289  
Net loss
    (2,608,970 )   (2,222,955 )   (2,533,384 )   (2,586,093 )
Loss per share
    (.19 )   (.16 )   (.18 )   (.16)  

 

F-33


Exhibit 14

 

Authentidate Holding Corp. (“AHC”) Code of Ethics and Conduct

1. Introduction to and Administration of the AHC Code of Ethics and Conduct

1.1       Introduction . AHC has adopted this Code of Ethics and Conduct (the “Code”) to advise all AHC Employees of the ethical and legal standards that we expect you to observe when dealing with AHC, your AHC colleagues, our customers and our vendors. When you encounter ethical or legal issues where you are not certain about the correct course of action, you should apply the principles described in this Code as guideposts in deciding how to proceed. We have adopted this Code to give you guidance for resolving these questions. When you are in doubt about the correct or best course of action, you should always consider consulting your manager or our Chief Financial Officer or Human Resources director for guidance. AHC expects all AHC Employees to adhere to this Code and to comply with all legal requirements. Accordingly, we have established a procedure for reporting suspected violations of the Code. Any violations of the Code may result in disciplinary action, including termination of employment. These matters are described in more detail below. Throughout this Code, we use the terms “AHC Employees”, “you” and “your” to refer to all AHC employees, directors and independent contractors, and the terms “AHC”, the “company”, “we” and “our” to refer to AHC and its subsidiaries.

1.2 Administration

1.2.1      Ongoing Review of Compliance . We require all AHC Employees to comply with this Code. Upon your receipt of this Code, and also from time to time as we deem to be necessary, we may require you to sign an acknowledgment that you have read and understood this Code and agree to comply with its provisions. We reserve the right to monitor the ongoing compliance by any or all AHC Employees with this Code and to investigate any suspected violations. If substantiated, these violations could result in disciplinary action, including immediate termination of employment.

1.2.2       Reporting of Suspected Violations . All AHC Employees are to report information about suspected violations of this Code by any other AHC Employee, regardless of the identity or position of the person who is the subject of such report, to the attention of our Chief Financial Officer, Human Resources director or Audit Committee. If you suspect improper accounting or auditing matters, you should bring such information to the attention of our Chief Financial Officer or a member of our Audit Committee. To contact our Audit Committee or to submit a report to them, please contact Audit Committee Chairman. With respect to any suspected violation, you may make an anonymous report through the Assistant to the President.

AHC will treat all information in a confidential manner and will not take any acts of retribution or retaliation against any AHC Employee for making a report. As the failure to report wrongful conduct may be interpreted as condoning such actions, the failure to report knowledge of wrongdoing may result in disciplinary action against any AHC Employee who fails to report.

1.2.3      Non-Retaliation . Retaliation in any form against an AHC Employee who reports a violation of this Code (even if the report is mistaken but was submitted in good faith) or who assists in the investigation of a reported violation is a serious violation of this Code. Acts of retaliation should be reported immediately and may result in severe disciplinary action.

1.2.4       Investigation of Suspected Violations . Suspected violations will be investigated under the supervision of our Chief Financial Officer, Human Resources director or Audit Committee as deemed appropriate. All AHC Employee’s are expected to cooperate in the investigation of reported violations. In order to protect the privacy of persons involved in investigations, persons investigating a suspected violation will use their best efforts to keep confidential, the identity of anyone reporting a suspected violation or participating in an investigation, unless disclosure is required by law or is otherwise in the company’s best interests. Persons involved in an investigation are obliged to act in the best interests of AHC as a company and not on behalf of any AHC Employee, including executive officers. Our Board of Directors has ultimate responsibility for final interpretation of this Code and for determining whether any violations of this Code have occurred.

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1.2.5      Disciplinary Action . If we determine, in our good faith discretion, that any AHC Employee has violated any provision of this Code, such AHC Employee may be subject to disciplinary action, including termination of employment, without prior warning.

1.2.6      Amendments to this Code; Disclaimers . This Code may be revised, changed or amended at any time by our Board of Directors. Following any material revisions or updates, an amended version of this Code will be distributed to you, and will immediately supercede the prior version of this Code. We may ask you to sign an acknowledgment confirming that you have read and understood the revised version of the Code, and that you agree to comply with its provisions. This Code reflects general principles to assist AHC Employees in making ethical decisions and cannot, and is not intended to, address every specific situation in which we may find it appropriate to take disciplinary action. This Code is not intended to create any contract (express or implied) with you, including without limitation any employment contract, and is not a promise that your employment will be not terminated except for cause.

1.2.7      Special Provisions Applicable to AHC Employees with Financial Reporting Obligations . Given the important position of trust and authority that they occupy, our Chief Executive Officers, Chief Financial Officer, the heads of our subsidiaries and operating divisions and AHC Employees involved in the Company’s financial reporting function (collectively, the “Financial Reporting Personnel”) should use the utmost of discretion and caution in interpreting and applying this Code. In the event that any Financial Reporting Personnel wishes to engage in a proposed action that is not consistent with the Code, such person must obtain a waiver of the relevant Code provisions in advance from our Audit Committee. U.S. federal law requires AHC to make public disclosure of our Financial Reporting Personnel’s compliance with the Code. Therefore, we will publicly report on a Current Report on Form 8-K any waivers of any provision of the Code granted by our Board of Directors to any Financial Reporting Personnel. Similarly, violations of the Code by our Financial Reporting Personnel may also be immediately reported on Form 8-K. Additional provisions of this Code pertaining solely to Financial Reporting Personnel are set forth in Section 5.

2. Conflicts of Interest

2.1       Generally. All AHC Employees have a duty of loyalty to act in the best interests of the company. The business decisions and actions of AHC Employees must never be influenced by personal considerations or personal relationships. AHC Employees should avoid any relationship or activity that might impair, or appear to impair, their ability to make objective and fair business decisions. Generally, a conflict of interest arises whenever your personal interests diverge from your responsibilities to AHC or from AHC’s best interests. For example, a conflict of interest may occur when family members or close personal friends are involved in business relationships with you, either inside or outside the company. Other examples of potential conflicts of interest include, but are not limited to:

employment by an actual or potential competitor, customer, vendor or regulator while you are employed by AHC;
   
acceptance of gifts, payments, products or anything of value from anyone seeking to do business with AHC;
   
placement of AHC business with an entity in which you or a family member has a financial interest;
   
Appropriating or diverting to yourself or others any business opportunity or idea in which AHC might have an interest; and
   
a significant ownership interest in a AHC competitor.

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In such situations, or where even the appearance of a conflict of interest may exist, seek guidance from your manager or our Human Resources Director.

2.2       Use of Company Assets. You are responsible for the proper use of AHC's assets and property, as well as its proprietary information. Our offices, equipment, supplies and other resources may not be used for activities which are not related to your employment with AHC, except for any activities that have been approved in writing in advance by us, or for personal usage that is minor in amount and reasonable. If you are found to be engaging in, or attempting, theft of any AHC property, including without limitation, documents, equipment, intellectual property, personal property of other employees, you may be subject to immediate termination of your employment and we reserve the right to refer the matter for criminal proceedings. We expect you to report any theft or attempted theft to your manager or our Human Resources director.

Proprietary marks, slogans, logos or other devices used to identify AHC and its proprietary products and technologies are important and valuable assets which require discretion in their use. You may not negotiate or enter into any agreement concerning AHC s trademarks, service marks or logos without first consulting an authorized officer of the Company. We also respect the intellectual property rights of others, and any proposed name of a new product or offering intended to be sold or provided to customers should be submitted to the appropriate authorized officer for clearance prior to its adoption and use. Similarly, using the trademark or service mark of another company for marketing purposes (even one with whom AHC has a business relationship), requires clearance or approval. You must avoid the unauthorized use of copyrighted or patented materials of others and should ask an authorized officer if you have any questions regarding the permissibility of photocopying, excerpting, electronically copying or otherwise using copyrighted or patented materials. All copies of work that is authorized to be made available for ultimate distribution to the public should bear the prescribed form of copyright notice.

2.3       Gifts, Gratuities and Entertainment . You may not offer money, gifts or other items or products of value to customers or potential customers for the purpose of securing a contract or obtaining favorable treatment. Business-connected favors or gifts may not be extended to customers or vendors (current or prospective), unless they (a) are consistent with customary business practices; (b) do not have substantial monetary value and would not be viewed as improper by others; and (c) do not violate applicable laws or regulations. Business entertainment in the form of meals and beverages or other entertainment may be offered only if these activities and related expenses are modest and infrequent.

You should decline any gift, favor, entertainment or anything else of value from current or prospective customers, vendors or contractors or their representatives except for (a) gifts that do not have substantial monetary value given at holidays or other special occasions and (b) reasonable entertainment at lunch, dinner or business meetings where the return of the expenditure on a reciprocal basis is likely to occur and would be properly chargeable as a business expense. Other routine entertainment that is business-related such as sports outings or cultural events is acceptable under this policy only if reasonable, customary and not excessive. If you question the propriety of any gift, consult with your manager or our Chief Financial Officer.

3. Laws and Regulations

3.1       Generally . All AHC Employees are to comply with all applicable local, state and federal laws and regulations, both domestic and international, and refrain from illegal, dishonest or unethical conduct. Although laws and regulations may sometimes be difficult to interpret, we expect you to make a good-faith effort to follow both the letter and the spirit of the law. You must consult your manager or our Human Resources director if you are uncertain as to whether a specific act or omission is legal. In addition, all AHC Employees are to comply with all applicable AHC policies and procedures. This includes, but is not limited to, our policies on equal opportunity, harassment, drug-free workplace, computer usage and information technology, data protection, expense reimbursement and travel, as well as our internal financial controls and procedures. We may modify or update these policies and procedures in the future, and adopt new company policies and procedures from time to time. You must ensure that you remain aware of all such changes to these policies. You are also expected to observe the terms of any Non-Disclosure, Non-Solicitation or Non-Compete Agreement, Employment Agreement or other similar agreement that applies to you. If you previously signed one of these agreements with AHC, it remains in full force and effect.

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3.2       Bribes . Bribery is illegal and subject to criminal penalties. You may not give any bribes, kickbacks or other similar considerations to any person or organization to attract business. All decisions regarding the purchasing of materials, supplies, products and services must be made on the basis of competitive price, quality and performance, and in a way that preserves AHC’s integrity. Fees, commissions or other amounts paid to outside consultants, agents or other third parties must be fully disclosed to our Chief Financial Officer or Controller, and must be legal, proper and reasonable.

3.3       International Operations. You are expected to comply with the legal requirements and ethical standards of each country in which you conduct AHC business, as well as with all U.S. laws applicable in other countries. The U.S. Foreign Corrupt Practices Act (FCPA) applies to business transactions both inside the United States and in other countries. Its requirements relate to accurate and complete financial recording, transactions with foreign government officials and restrictions on the use of funds for unlawful or improper purposes. The FCPA makes illegal any corrupt offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value to any foreign official, or any foreign political party, candidate or official, for the purpose of:

  Influencing any act, or failure to act, in the official capacity of that foreign official or party; or
     
  Inducing the foreign official or party to use influence to affect a decision of a foreign government or agency, in order to obtain or retain business for anyone, or direct business to anyone.

Because violation of the FCPA can bring severe penalties, including criminal fines for the company and individuals and jail terms, it is essential that you become familiar with the FCPA s requirements if you are living or working in a foreign country. Other statutes that may affect our international operations include, but are not limited to, the Anti-Bribery and Fair Competition Act and the Export Administration Act. All supervisory personnel are expected to monitor continued compliance with these laws to ensure our compliance. If you have any questions regarding these legal requirements, please contact your manager or our Chief Financial Officer.

3.4       Political Activity. You should not make political contributions in a way that might appear to be an endorsement or contribution by AHC. We will not reimburse you for political contributions under any circumstances.

3.5       Antitrust Considerations . Antitrust laws prohibit agreements or actions that restrain trade or reduce competition. Violation of antitrust laws can result in severe civil and criminal penalties, including imprisonment for individuals, and AHC can be subjected to substantial fines and monetary awards. AHC as a company avoids conduct that may even appear to be questionable under antitrust laws and expects all AHC Employees to carry out company business consistent with this policy. In all contacts with our competitors, you are expected to avoid discussing prices, costs, competition, market share, marketing plans or studies, and any other proprietary or confidential information. Examples of agreements or arrangements with competitors which should therefore be avoided include: (a) Agreements that affect the price or other terms or conditions of sale; (b) Agreements regarding the customer to whom AHC will, or will not, sell its products; (c) Agreements to refuse to buy from particular vendors; and (d) Agreements that limit the types of products which AHC will provide. Furthermore, AHC cannot coerce customers into complying with restrictive arrangements. Therefore, you should not negotiate agreements with customers without the approval of an authorized company officer which (a) require or prohibit customers from purchasing all of their requirements from AHC or other companies or (b) require customers to buy one AHC product as a condition of obtaining another. In all cases where there is question or doubt about a particular activity or practice, AHC Employees should promptly contact our Chief Financial Officer or Human Resources director.

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3.6       Securities Laws and Insider Trading. AHC is a publicly-traded company. As an employee of AHC you have been subject to AHC’s policy against insider trading as set forth in the Employee Handbook previously distributed to you. Simply stated, material, non-public information is not to be used for personal gain, and you should not trade in AHC stock when you possess such information. If you have any question regarding whether it is appropriate to engage in any transaction, contact the Chief Financial Officer.

The U.S. securities laws forbid an investor from purchasing or selling securities based upon “inside” information not available to the other party. The consequences of insider trading violations can be severe. AHC Employees who trade on inside information, or who communicate (or “tip”) this information to others so that they may trade, may face substantial civil penalties, criminal fines and imprisonment. Additionally, AHC may also face severe legal consequences, including, among other things, substantial criminal penalties.

AHC Employees who have material, nonpublic (i.e., “inside”) information about the company should not buy or sell AHC securities until a reasonable time after the inside information has been publicly disclosed. You also should not disclose inside information to others outside AHC until a reasonable time after the information has been publicly disclosed. In addition, it is never appropriate for you to advise others to buy or sell AHC securities. We further believe that it is highly inappropriate for any AHC person to “sell short” AHC stock or engage in other transactions where the person will earn a profit based on a decline in AHC's stock price. These rules also apply to the use of material, nonpublic information about other companies (including, for example, our customers, competitors and potential business partners). In addition to you, these rules apply to your spouse, children, parents and siblings, as well as any other family members living with you in your household. Additional guidance pertaining to this issue is provided in your Employee Manual.

3.7       Government Contracting. AHC frequently does business with federal, state or local government agencies in the United States and in other countries. All AHC Employees engaged in business with these government entities must comply with specific rules and regulations concerning relations with these entities. Important considerations for doing business with government entities include:

Not offering or accepting kickbacks, bribes, gifts, or anything else of value with the intent of obtaining favorable treatment from the recipient (note that a gift that is customary in the private sector may be impermissible to a government entity); and
   
Not improperly soliciting or obtaining confidential information, such as sealed competitors' bids, from government officials prior to the award of a contract.

3.8       Retention of Documents . Certain documents and records must be retained for specific periods of time to comply with legal and regulatory requirements or contractual obligations. You are to comply with all document retention requirements applicable to your work. If you are uncertain whether the documents or records you are handling are subject to these requirements, please consult with your manager or our Chief Financial Officer. If at any time you become aware that any document or record may be required to be disclosed in connection with a lawsuit or government investigation, you must preserve all possibly relevant documents. This means that you must immediately cease disposing of or altering all potentially relevant documents, even if that activity is ordinary or routine. If you are uncertain whether documents or records under your control should be preserved because they might relate to a lawsuit or investigation, you should contact your manager or our Chief Financial Officer.

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4. Confidentiality

4.1       AHC Confidential Information. You will often have access to information that is confidential and proprietary to AHC, has not been made public and constitutes trade secrets or proprietary information. Protection of this information is critical to our success. Your obligations with respect to our confidential trade secrets and proprietary information are:

Not to disclose the information outside of AHC;
   
Not to use the information for any purpose except to benefit AHC’s business; and
   
Not to disclose the information within AHC, except to other AHC Employees who need to know, or use, the information and are aware that it constitutes a trade secret or proprietary information.

These obligations continue even after you leave AHC. If you have previously signed a Non-Disclosure Agreement, Employment Agreement or other similar agreement that governs your obligations with respect to our information, you must also follow such agreements. Any documents, papers or records that contain trade secrets or proprietary information are our property, and must remain at the company. Our confidential trade secrets and proprietary information may include, information regarding our operations, business plans, customers, strategies, trade secrets, finances, assets, technology, data or other information that reveals the processes, methodologies, technology or “know how” by which our existing or future products, services or methods of operation are developed or conducted.

4.2       Confidential Information of Third Parties. In the normal course of business, you will acquire information about others, including customers, vendors and competitors. We properly gather this kind of information for such purposes as evaluating customers’ business needs, determining requirements and evaluating vendors. We also collect information on competitors from a variety of legitimate sources to evaluate the relative merits of our products and marketing methods. You may not use information obtained from our customers or vendors in any way that harms them or violates contractual obligations to them. When working with sensitive information about customers or vendors, you should use that information only for the purposes for which it was disclosed to you and make it available only to other AHC Employees with a legitimate “need to know”.

4.3       Inadvertent Disclosure. In order to avoid the inadvertent disclosure of any confidential information, you should never discuss with any unauthorized person (whether or not an AHC Employee) any information that AHC considers confidential or which we have not made public. You should also not discuss this information with family members or with friends, as they may unintentionally pass the information on to someone else.

4.4       Contacts with Reporters, Analysts and Other Media. Because of the importance of the legal requirements regarding disclosure of certain information to our investors, we must ensure the accuracy of any information regarding our business, financial condition or operating results that is released to the public. As a result, you should not discuss internal AHC matters with anyone outside of AHC, except as clearly required in the performance of your job duties. This prohibition applies particularly to inquiries about AHC made by the news media, securities analysts and investors. All responses to these inquiries must be made only by the following authorized persons: our Chief Executive Officer, Chief Financial Officer or any individuals specifically designated by them. Only these individuals are authorized to discuss information about AHC with the news media, securities analysts and investors. If you receive inquiries from these sources, you should immediately refer them to one of these authorized spokespersons.

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5. Duties of Financial Reporting Personnel; Accounting and Financial Records and Disclosure

5.1       General . AHC has a responsibility to maintain complete, accurate and reliable records of our business and must comply with various disclosure requirements imposed by the United States Securities and Exchange Commission and by any exchange on which its securities are listed for trading. AHC’s executive officers, the heads of AHC’s subsidiaries and operating divisions and members of AHC’s finance department have a special role in the preparation of these reports. To satisfy these requirements, AHC has implemented procedures to ensure that only proper transactions are entered into by the Company, that such transactions have proper management approval, that such transactions are properly accounted for in the books and records of the Company and that the reports and financial statements of the Company fairly and accurately reflect such transactions. All AHC Financial Reporting Personnel are to familiarize themselves with these policies, accounting controls, procedures and records and comply with these requirements. Ultimately, AHC’s Financial Reporting Personnel bear significant responsibility for the accuracy and timeliness of disclosures in reports and documents AHC files with or submits to the Securities and Exchange Commission and in other public communications.

Due to these considerations, AHC’s Financial Reporting Personnel bear a special responsibility for promoting integrity throughout the organization, with responsibilities to stakeholders both inside and outside of AHC. These particular persons have a special role both to adhere to these principles themselves and also to ensure that a culture exists throughout the company as a whole that ensures the fair and timely reporting of AHC’s financial results and condition. Each AHC Financial Reporting Personnel agrees to:

Provide information that is accurate, complete, objective, relevant, timely and understandable to ensure full, fair, accurate, timely, and understandable disclosure in reports and documents that AHC files with, or submits to, government agencies and in other public communications.
   
Comply with rules and regulations of federal, state and local governments, and other appropriate private and public regulatory agencies.
   
Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated.
   
Respect the confidentiality of information acquired in the course of work except when authorized or otherwise legally obligated to disclose.
   
Promptly report to the Audit Committee any conduct that the individual believes to be a violation of law or business ethics or of any provision of this Code, including any transaction or relationship that reasonably could be expected to give rise to such a conflict.

5.2       Disclosures to Investors; Financial Reporting Considerations. AHC is required under U.S. federal securities laws to provide the public with periodic disclosure regarding our business and financial condition (such as quarterly and annual reports and materials for our annual stockholders’ meeting). We provide additional disclosures to the public through quarterly earnings releases and other press releases. All AHC Employees who participate in the preparation or dissemination of this information, or who provide information that they know may be used in the preparation of these disclosures, have a legal and ethical duty to ensure that the content of the disclosures is accurate, complete and timely. We have created disclosure controls and procedures which are designed to ensure that all public disclosures are accurate, complete and timely.

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To administer these controls and procedures, AHC has established a Disclosure Committee that reports to the Chief Executive Officer and Chief Financial Officer. The Disclosure Committee is (or certain of its members are), among other things, charged with reviewing AHC’s periodic reports and press releases. It is the responsibility of the Committee to ensure that it has reviewed and disseminated all material information about the Company that, by law, should be disseminated. You may be asked to serve on this Committee or to assist the Disclosure Committee in reviewing certain materials in connection with it’s responsibilities. If you do so, you must accomplish this faithfully and in accordance with all the Committee’s policies. You should report to the Disclosure Committee all information that it needs to fulfill its duties.

5.3       Accounting and Financial Records . AHC is required under U.S. federal securities laws and generally accepted accounting principles to keep books, records and accounts that accurately reflect all transactions and to provide an adequate system of internal accounting and controls. We expect you to ensure that those portions of our books, records and accounts for which you have responsibility are valid, complete, accurate and supported by appropriate documentation in verifiable form.

You should not:

Improperly accelerate or defer expenses or revenues to achieve financial results or goals;
   
Maintain any undisclosed or unrecorded funds or “off the book” assets;
   
Establish or maintain improper, misleading, incomplete or fraudulent accounting documentation or financial reporting;
   
Record revenue for any project that has not fully complied with AHC's revenue recognition guidelines;
   
Make any payment for purposes other than those described in the documents supporting the payment;
   
Submit or approve any expense report where you know or suspect that any portion of the underlying expenses were not incurred or are not accurate; or
   
Sign any documents believed to be inaccurate or untruthful.

All AHC Employees who exercise supervisory duties over AHC’s assets or records are expected to establish and implement appropriate internal controls over all areas of their responsibility. This will help ensure the safeguarding of AHC's assets and the accuracy of our financial records and reports. We have adopted various types of internal controls and procedures as required to meet internal needs and applicable laws and regulations. You are to adhere to these controls and procedures to assure the complete and accurate recording of all transactions. Any accounting entries or adjustments that materially depart from generally accepted accounting principles must be approved by our Audit Committee and reported to our independent auditors. You must not interfere with or seek to improperly influence (directly or indirectly) the review or auditing of our financial records by our Audit Committee or independent auditors.

If you become aware of any questionable transaction or accounting practice concerning AHC or our assets, we expect you to report the matter immediately to our Chief Financial Officer or to a member of our Audit Committee. In addition, we expect you to report all material off-balance-sheet transactions, arrangements and obligations, contingent or otherwise, and other AHC relationships with unconsolidated entities or other persons that may have material current or future effects on our financial condition or results of operations to our Chief Financial Officer or to a member of our Audit Committee.

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5.5       Confidentiality Considerations; Securities Law Compliance. All Financial Reporting Personnel will have special access to AHC’s confidential financial information. This may include non-public reports and analyses, pro-forma financial statements and other draft or preliminary financial information. AHC’s Financial Reporting Personnel should (i) never disclose this information to individuals outside the Company and (ii) caution individuals within the Company to whom you provide such information to carefully maintain its confidentiality and prevent its disclosure. AHC’s Financial Reporting Personnel must also apply the utmost consideration to transactions involving AHC securities in light of their possession to confidential financial information. Financial Reporting Personnel are therefore expected to notify our Chief Financial Officer prior to engaging in any transactions involving AHC securities in order to ensure compliance with all securities laws and regulations. Similarly, AHC imposes periodic blackout periods during which Financial Reporting Personnel may not engage in transactions involving AHC securities. All Financial Reporting Personnel should notify our Chief Financial Officer before purchasing or selling any AHC securities in order to obtain clearance from the Chief Financial Officer that the proposed transaction complies with all securities laws and regulations and AHC policies.

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Exhibit 21

 

LIST OF SUBSIDIARY COMPANIES

DJS Marketing Group, Inc.
Albany, NY

Authentidate, Inc.
New York, New York

Trac Medical Solutions, Inc.
Schenectady, New York

Authentidate International, AG
Dusseldorf, Germany

82


Exhibit 23

 

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 33-80917, 333-05445, 333-49160, 333-70880, 333-100546, 333-101354 and 333-106174) and Form S-8 (Nos. 333-23933, 333-65894, 333-91337 and 333-97965) of Authentidate Holding Corp. of our report dated September 5, 2003, except for Note 22, as to which the dates are September 12, 2003 and September 22, 2003, relating to the financial statements and financial statement schedule, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Albany, New York
September 29, 2003

 


  Exhibit 31.1

 

  CERTIFICATION
   
  I, John T. Botti, certify that:
1. I have reviewed this annual report on Form 10-K of Authentidate Holding Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b) [reserved]
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 


 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 29, 2003

/s/ John T. Botti            
John T. Botti,
Chief Executive Officer

2


  Exhibit 31.2

 

  CERTIFICATION
   
   I, Dennis H. Bunt, certify that:
1. I have reviewed this annual report on Form 10-K of Authentidate Holding Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b) [reserved]
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 


 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 29, 2003

/s/ Dennis H. Bunt            
Dennis H. Bunt,
Chief Financial Officer

2


Exhibit 32

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Fiscal Year End Report of Authentidate Holding Corp. (the “Company”) on Form 10-K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being, John T. Botti, Chief Executive Officer of the Company, and Dennis H. Bunt, Chief Financial Officer of the Company, respectfully, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated: September 29, 2003

     
      /s/ John T. Botti                /s/ Dennis H. Bunt     
Chief Executive Officer    Chief Financial Officer