SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] 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, 2002
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[ ] 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
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Commission File No. 0-20190
AUTHENTIDATE HOLDING CORP.
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(Exact Name of Issuer as Specified in Its Charter)
Delaware 14-1673067
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2165 Technology Drive Schenectady, N.Y. 12308
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (518) 346-7799
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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(Title of class)
[Cover Page 1 of 2 Pages]
Check whether Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
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. [ ]
The Issuer's revenues for its most recent fiscal ended June 30, 2002
were $16,642,904.
On September 17, 2002, the aggregate market value of the voting
stock of Authentidate Holding Corp. (consisting of Common Stock, $.001 par
value) held by non- affiliates of the Registrant (approximately 19,328,810
shares) was approximately $45,422,703.50 based on the closing price for such
Common Stock ($2.35) on said date as reported by the Nasdaq National Market
System.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On September 27, 2002, there were 19,972,480 shares of Common Stock,
$.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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[Cover Page 2 of 2 Pages]
Table of Contents
PART I
PAGE
Item 1. Business 1
Item 2. Properties 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder Matters 29
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplemental Data F-1
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Company 44
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management 59
Item 13. Certain Relationships and Related Transactions 62
Item 14. Controls and Procedures 63
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 63
iii
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 THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS OR THE
ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER
THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO
IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, THE
IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND
UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S 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 THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Authentidate Holding Corp. ("AHC"), its subsidiaries DJS Marketing Group,
Inc. ("DJS"), Authentidate, Inc., Authentidate International, AG and Trac
Medical Solutions, Inc. (f/k/a WebCMN, Inc.), and through its joint venture
Authentidate Sports, Inc. (f/k/a Authentidate Sports Edition, Inc.), are engaged
in the following businesses:
- the development, assembly and distribution of document imaging
software and systems;
- the development and sale of authentication 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
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shareholders at our March 23, 2001 Annual Meeting.
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 Novell, Microsoft Solutions and Lotus Notes.
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. 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. As discussed below, in March 2002, Authentidate
International is now a wholly-owned subsidiary of AHC. Authentidate
International is presently in the market development stage.
Our subsidiary, Trac Medical Solutions, Inc., is in the process of
developing a business model to apply the Authentidate technology to the medical
supply business relating to the automation and processing of Certificates of
Medical Necessity (a "CMN") and other medical forms. During the fiscal year
ended June 30, 2002, Trac Medical Solutions was engaged in product development.
Subsequently, Trac Medical Solutions has begun marketing its service. Trac
Medical Solutions realized its first sales from the processing of electronic
CMNs in August, 2002.
Authentidate Sports, Inc., established during the fiscal year ended June
30, 2001, as a joint venture with Internet Venture Capital, LLC, a partner
experienced in the sports memorabilia industry, is developing a service that
applies the Authentidate technology to the field of signature authentication as
it relates to sports memorabilia and entertainment collectibles. This company is
in the market development stage and has had minor sales to date.
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 PREVIOUS FISCAL YEAR
Acquisition of Authentidate International, AG
During the fiscal year ended June 30, 2002, we acquired all of the
outstanding capital stock of Authentidate International that we did not own.
Prior to the acquisition, we owned 39% of the outstanding stock of Authentidate
International. The parties completed the transaction effective on March 15, 2002
and Authentidate International is now our wholly-owned subsidiary.
Pursuant to the Stock Purchase Agreement, dated as of March 4, 2002, we
issued an
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aggregate of 1,425,875 shares of our common stock to the sellers, and also
issued 100,000 common stock warrants to the sellers, with an exercise price of
$5.00 per share. In addition, the sellers returned 250,000 common stock warrants
previously held by them to purchase shares of our common stock at an exercise
price of $8.03 per share.
In addition, the sellers agreed to place an aggregate of 300,000 shares of
our 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 Authentidate
International.
In connection with the acquisition, we entered into a three year
employment agreement with Jan Wendenburg, pursuant to which Mr. Wendenburg will
serve as President of Authentidate International. Pursuant to his employment
agreement, Mr. Wendenburg will receive a base salary of $200,000 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.
Series B Common Stock Purchase Warrant Exercise
In February, 2002, we offered the holders of our Series B Common Stock
Purchase Warrants the opportunity to receive new common stock purchase warrants
upon the exercise of their Series B Warrants for cash. The Series B Warrants
were originally issued in October, 1999. The warrant holders exercising Series B
Warrants received new warrants with an exercise price of $2.00 per share, which
was above the market price of our common stock at the time of the transaction.
Holders of 1,080,000 Series B Warrants elected to exercise their Series B
Warrants and an aggregate of 1,080,000 new warrants were issued. The new
warrants expire on October 1, 2004. Although the new warrants do not include
registration rights, we may elect to include the shares underlying these new
warrants in any future registration statement we may file.
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 is 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,
$50,000 in prepaid license fees for a product DocStar licenses from Zylab, and
agreed to pay to us 18% of the future net income of Zylab or a successor company
up to $100,000, after a $75,000
3
threshold. Accordingly, our planned acquisition of Zylab has been cancelled.
SUBSEQUENT EVENTS
Private Placement
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 will be 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 have agreed to file 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. In the event that we do not timely file the registration statement, or
it is not timely declared effective, the investors will be entitled to
liquidated damages equal to 2% of the purchase price for each month that the
relevant event is delayed.
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(R) (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(R) 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
4
system. The parties have initially schedule the service launch for October 16,
2002. 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
provides for revenue sharing between the parties based on gross revenue.
The agreement may be terminated as follows:
- By the mutual agreement of the parties;
- By either party if one party materially breaches the Agreement and
such breach continues for a period of thirty days after the date the
non-breaching party provides written notice of the breach;
- By USPS, without penalty, at any time upon thirty days written
notice if regulatory, legislative or judicial action or inaction
occurs which substantially impairs USPS's ability to perform its
obligations under this Agreement;
- Commencing six months after the launch of the EPM System, USPS may
terminate the Agreement upon one hundred eighty days written notice,
for any reason;
- We may, upon three hundred sixty days written notice, terminate the
Agreement for any reason; and
- USPS may terminate this Agreement by giving thirty days' written
notice to us in the event that there is a change in control in
Authentidate.
Pursuant to the terms of the Agreement, we will develop, integrate,
operate, host and maintain all elements of the EPM system. More specifically, we
will:
- provide the staff and resources as necessary to support the EPM
development, operation and promotion efforts;
- enable EPM to interoperate with products or systems used by
customers;
- implement billing and accounting systems to ensure prompt and
efficient aggregation of gross revenues and to support prompt
payment of gross revenues;
- provide customer support; and
- implement the sale and marketing of the EPM system.
5
USPS shall support the EPM system as follows:
- USPS will pay a total of $250,000 to Authentidate provided that
neither Authentidate Holding Corp. nor Authentidate are in default
under this Agreement;
- provide necessary access to technical personnel and information to
assist in the development efforts for program management, on-site
security inspection, and USPS certification and accreditation; and
- promote the EPM system on USPS.com and provide hyperlinks in
accordance with standard USPS practice, use its best efforts to
identify potential corporate and government customers, participate
in strategic sales efforts to acquire customers, issue public
announcements and press releases, send appropriate USPS
representatives for events, press tours, interviews, and speaking
engagements, provide introductions to USPS contract public relations
and advertising agency firms and acknowledge Authentidate's role in
providing the EPM System for any and all promotional and marketing
purposes.
INDUSTRY OVERVIEW
Along with our subsidiaries and joint venture, we offer the following
suite of products and services:
- document imaging software and systems;
- authentication 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 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.
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.
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We believe that the document imaging 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.
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.
We have also established the following subsidiaries and joint venture 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;
- Authentidate Sports, Inc. - a joint venture established during the
fiscal year ended June 30, 2001 with Internet Venture Capital, LLC,
to develop an authentication service based on our Authentidate
technology for use in the sports memorabilia and collectibles
industries; and
- Trac Medical Solutions, Inc. - a majority 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
7
computer integration services will continue to grow the next several years.
However, DJS expects to focus on the services aspect of its business where it
expects the most growth and greater profit margins.
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 be realized.
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 proprietary software and a personal
computer and may also include a scanner. 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 sell the hardware in order
provide the customer with a "turn-key" system, we believe that it is the
software employed in the DocStar system which differentiates us from our
competitors.
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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 modem. 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 a personal computer. 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 PC's for the 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
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. 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. 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. We believe that software upgrades and
enhancements are keys to our success.
Since inception, we have devoted efforts to research and development
activities in an effort to improve our current software and introduce new
products. Current development efforts are directed toward improving ease of use,
adding system enhancements and increasing performance. Product development
expense for document imaging was $88,027, $256,466 and $291,791 for fiscal years
2002, 2001 and 2000, respectively. We will continue to improve our document
imaging software in an effort to satisfy the needs of a dynamic marketplace.
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QUALITY CONTROL AND SERVICE
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.
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. We only assemble
the computer which is part of the DocStar system.
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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 telemarketing 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 four regional sales directors to cover the significant markets of the
country, a national sales director and one sales consultant in Canada. No
customer or distributor accounted for more than 10% of our total consolidated
revenue in the fiscal years ended June 30, 2002, 2001 or 2000.
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 Digitech,
Laserfiche and Optika. 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.
EMPLOYEES
We employ 41 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
11
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.
In 1999, 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.
RELATED ENTITIES
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 currently in the market
development stage. 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.
We established Authentidate Sports, Inc., a joint venture with Internet
Venture Capital, LLC, an investor experienced in the sports memorabilia
industry, during the fiscal year ended June 30, 2001. Authentidate Sports (f/k/a
Authentidate Sports Edition, Inc.) was created to market Authentidate services
to the sports memorabilia and collectibles industries. This company is currently
in the market development stage.
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
12
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, 2002, Trac
Medical Solutions was in the product development stage. Subsequently, Trac
Medical Solutions began to market this service under the trademark CareCert(TM)
and expects to realize sales revenue in the current fiscal year.
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, 2002. In August 2002, we announced that we
entered into an agreement with the United State Postal Service to market the
USPS Electronic Postmark Service(R) ("EPM(R)"). We anticipate generating revenue
from this arrangement during the current fiscal year.
Trac Medical Solutions commenced marketing its service, CareCert(TM),
subsequent to the end of the June 30, 2002 fiscal year. Trac Medical has entered
into its first commercial agreement with a medical device supplier and expects
to realize revenue during the fiscal year ending June 30, 2003.
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.
However, because of market uncertainty software development costs related to the
Authentidate Retail Version were fully amortized during the fourth quarter of
the year ended June 30, 2000. We have expensed $1,831,847 and $1,982,129 as
product development expenses related to our Authentidate technology in the years
ended June 30, 2002 and June 30, 2001, respectively. Further, for the year ended
June 30, 2002, Trac Medical incurred product development expense of $118,997 and
for the three and one-half month period commencing on the date of our
acquisition of Authentidate International and until June 30, 2002, Authentidate
International incurred $131,302 of product development expenses.
DEVELOPMENT AND SUPPLIERS
We have engaged AT&T, Inc., to provide and maintain a secure hosting
center at
13
a facility in New York State from where the Authentidate product line and the
EPM service offering will operate. 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 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. 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.
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 product to application
software companies to be included as an "added feature" in their products using
the same sales model as corporate accounts. Authentidate expects to use a
combination of terms, usage fees, flat fees and license fees. Trac Medical
Solutions markets the service offering to medical home care suppliers.
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.
EMPLOYEES
Currently, Authentidate has 21 employees, Authentidate International has
18 employees and Trac Medical Solutions has 6 employees. None of these employees
are represented by a collective bargaining agreement. We believe that our
employee relations are satisfactory.
14
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' 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.
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
15
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.
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& T Computers, ATEC and IP Logic. Some of our competitors may have
significantly greater financial, technical and other resources than us.
EMPLOYEES
DJS has 30 full-time staff members, including two (2) executive officers.
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
16
any future laws enacted for the protection of the environment, will not have a
material adverse effect on our business.
17
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 $9,951,402, $9,340,103 and $5,274,043 for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively. We have incurred
significant costs developing our Authentidate 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 our Authentidate Sports
venture, 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, 2002, June 30, 2001 and June 30, 2000, we used $6,003,316,
$1,391,651 and $5,078,674 in cash from operating activities, respectively. We
have capitalized the software development costs relating to our new Authentidate
product and our ability to recover such costs is highly dependent on the future
success of the marketing and sales of this product. If the revenue generated
from our Authentidate product is less than anticipated, the carrying value of
the software development costs may be impaired and require an impairment charge
in the future.
In July, 2002, we commenced a private placement of up to $4,800,000 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 closed on an aggregate of $2,000,035 of units in the offering.
The offering was conducted pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Regulation D, promulgated thereunder. We expect the net
proceeds received from this offering to satisfy our cash needs for an additional
six months. In the
18
future, we will need additional funds from loans and/or the sale of equity
securities to fully implement our business plans. 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 reduce our current and proposed operations.
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(R) 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.
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. In connection with this transaction, we made a $500,000 loan to
Authentidate International as of December 24, 2001. 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. 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 will receive
an initial base salary of US$200,000 and options to purchase 184,000 shares of
our common stock. We will also issue 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.
19
As described above, we have consummated the transaction to acquire
Authentidate International, AG and were negotiating the terms of an additional
acquisition, which negotiations have recently ceased. Due to the resources
devoted to our acquisition of Authentidate International and other acquisition
that we may consummate 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.
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. Accordingly, the grant has been classified as a
long term liability on our balance sheet. 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.
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.
20
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.
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 recently acquired the rights to an additional
patent application related to our Trac Medical Solutions, Inc., business model
and have two patents pending regarding this process. 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.
21
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. 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.
WE DEPEND ON OTHERS FOR COMPONENTS OF OUR PRODUCTS, WHICH MAY RESULT IN DELAYS
AND QUALITY-CONTROL ISSUES.
We do not own or lease any manufacturing facilities and do not manufacture
any of the component parts for our products. Rather, we purchase all of these
components from unaffiliated suppliers. All of our DocStar products are
assembled at our facilities. DJS acquires computer hardware from manufacturer or
third party resellers. We believe that at the present time we have sufficient
sources of supply of component parts and computer equipment, and that in the
event any existing supplier ceases to furnish these to us, alternative sources
are available. However, there can be no assurance that the future production
capacity of our current suppliers and manufacturers will be sufficient to
satisfy our requirements or that alternate suppliers and manufacturers will be
available on commercially reasonable terms, or at all. Further, there can be no
assurance that the availability of such supplies will continue in the future.
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.
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
22
time. There can be no assurances, however, that any of the Authentidate
products, including the service offered through the U.S. Postal Service, 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 expiring in January, 2003. 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 shareholders' 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 $5.00 per share and a market value of its public float
of $15,000,000.
On June 28, 2002, our closing bid price was $3.31. The dilution to our
shareholders which could be caused by the widespread conversion of the Series B
and Series C Preferred Stock 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, 2002, we had stockholders' equity of $17,945,334 and as of June 28,
2002 the market value of our public float was approximately $61,780,898.
In the future, if we should fail to meet Nasdaq maintenance criteria, our
Common Stock
23
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. Holders of our Series B Preferred Stock may convert
these shares into shares of our common stock at a conversion price of $1.875
beginning one year after the issuance of the Series B Preferred Stock. However,
after three years from the closing, the conversion price is subject to a
floating rate equal to the lower of $1.875 or 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 price may not be lower than $0.875. We originally
issued 50,000 shares of our Series B Preferred Stock in the October 1999 private
placement. As of the date of this Annual Report on Form 10-K, there are 28,000
shares of Series B Preferred Stock outstanding.
The following chart presents the maximum number of common shares issuable
on conversion of the currently outstanding shares of Series B Preferred Stock
based on different conversion rates. While we expect to issue a maximum of an
additional 373,333 shares of common stock upon conversion of the Series B
Preferred Stock until October 5, 2002, we could issue a significantly greater
number of common shares upon conversion of the Series B Preferred Stock after
October 5, 2002, when the floating conversion rate is triggered.
24
Percentage
of Total Shares
Conversion Conversion Maximum Number of Shares of Common Stock
Period Rate of Common Stock Issuable Outstanding
------ ---- ------------------------ -----------
10/6/2000 - $1.875 373,333 1.9%
10/5/2002
10/6/2002 - $1.875 373,333 1.9%
10/6/2002 - $ 1.50 466,667 2.4%
10/6/2002 - $ 1.00 700,000 3.6%
10/6/2002 - $0.875 800,000 4.1%
Regardless of the date of exercise, dilution could occur from the
widespread conversion of the Series B Preferred Stock. The following scenarios
could result in dilution to our common shareholders:
- In either period, the conversion price could be lower than the
actual trading price on the day of conversion. This could result in
the holder immediately selling all of its converted common shares,
which would have a dilutive effect on the value of the outstanding
common shares.
- After three years, if the average trading price falls below $1.875,
the lower the average trading price, the greater the number of
common shares that a holder of our Series B Preferred Stock will
receive upon conversion; provided, however, that the conversion
price may not be lower than $0.875. This might further encourage the
holders of the Series B Preferred Stock to covert their shares into
common shares. The increased number of common shares would further
depress the average trading price of our common stock.
- 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
25
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. The warrants may not be exercised until the earlier of one year from the
date of issuance or upon the effectiveness of a registration statement covering
the common stock underlying the warrants. 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 the date of this Annual
Report on Form 10-K, there are outstanding 4,000 shares of Series C Preferred
Stock which are convertible into an aggregate of 825,593 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 September 17, 2002, there were 3,461,514 shares of common stock
currently outstanding may be deemed "restricted securities" as that term is
defined under the Securities Act of 1933, and in the future, may be sold
pursuant to a registration under the Securities Act, in compliance with Rule 144
under the Securities 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.
THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY DEPRESS OUR STOCK
PRICE.
As of June 30, 2002, there were outstanding stock options to purchase an
aggregate of 5,280,349 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 $4.43. As of
June 30, 2002 there were outstanding immediately exercisable warrants to
purchase an aggregate of 2,685,818 shares of common stock at exercise prices
ranging from $1.00 to $13.04 per share. In addition, there are outstanding
28,000 shares of our Series B Preferred Stock, which are currently convertible
into an aggregate of 373,333 Shares of common stock and 4,000 shares of our
Series C Preferred Stock, which are convertible into an aggregate of 825,593
shares of common stock. To the extent that outstanding stock options and
warrants are exercised or the Series B and Series C Preferred Stock is
converted, dilution to our shareholders will occur. Moreover, the terms upon
which we will be able to obtain additional equity capital may be
26
adversely affected, since the holders of the outstanding options and warrants
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 the outstanding options,
warrants and preferred stock.
IF WE CANNOT OFFSET FUTURE TAXABLE INCOME OUR TAX LIABILITIES WILL INCREASE.
At June 30, 2002, the date of our most recent fiscal year end, we had net
operating loss carryforwards ("NOLS") for federal income tax purposes of
approximately $36,000,000 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.
SINCE THE HOLDERS OF OUR OUTSTANDING SERIES A PREFERRED STOCK CONTROL OUR BOARD
OF DIRECTORS, OTHER SHAREHOLDERS MAY NOT BE ABLE TO INFLUENCE OUR DIRECTION.
Our Certificate of Incorporation authorizes our Board of Directors to
issue up to 5,000,000 shares of Preferred Stock, from time to time, in one or
more series. The Board of Directors is authorized, without further approval of
the stockholders, to fix the dividend rights and terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges and restrictions applicable to each new
series of Preferred Stock. We previously established 200 shares of Series A
Preferred Stock which are owned by John Botti and Ira Whitman, our founders and
officers. Currently there are only 100 shares of Series A Preferred Stock
outstanding, all of which are owned by Mr. Botti. The Series A Preferred Stock
entitles the holders to elect a majority of the Board of Directors. The
existence of such stock could adversely affect the voting power of the holders
of Common Stock and, under certain circumstances, make it more difficult for a
third party to gain control of us, discourage bids for the common stock at a
premium, or otherwise adversely affect the market price of the common stock. In
connection with our recent sale of Series C Preferred Stock, the holder of the
Series A Preferred Stock agreed not to exercise these rights unless we are
current in meeting our dividend obligations and the shares of common stock
issuable upon conversion or payable as dividends are not restricted from public
distribution in the United States. As of the date of this Annual Report on Form
10-K, there are outstanding 4,000 shares of our Series C Preferred Stock. and
28,000 shares of our Series B Preferred Stock.
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
27
the amount of $1,318,000.
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
will be required to repay up to $600,000 of the grant to New York State.
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 on May 7, 2002. 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. This matter is currently in the
discovery phase, which is expected to be completed by the end of September,
2002. 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 conducting settlement negotiations with Shore Venture and believe that the
claim will not have a material adverse impact on our financial condition,
results of operations or cash flows. We believe that we have reached an
agreement in principal and we are currently negotiating the specifics of a
settlement agreement with Shore Venture. 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
28
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 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
Fiscal Year 2000
1st Quarter ........................... $ 1.46875 $ .875
2nd Quarter ........................... $19.875 $ 1.125
3rd Quarter ........................... $18.25 $11.25
4th Quarter ........................... $13.6875 $ 5.875
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 11, 2002, there were approximately 417 holders of record
of our Common Stock. We believe there are more than 500 beneficial holders of
our Common Stock.
29
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 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
- - 4,000 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
Warrant Issuance
We entered into a corporate advisory services with Sands Brothers & Co.,
Ltd. as of February 8, 2002. Pursuant to this agreement, we issued to Sands
warrants to purchase 37,500 shares of our common stock initially exercisable at
$3.20 per share and exercisable until February 7, 2007. This agreement was
terminated as of May 29, 2002.
30
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,
2002 2001 2000 1999 1998
STATEMENT OF OPERATIONS
DATA:
Net Sales $ 16,642,904 $ 17,860,544 $ 15,289,738 $ 17,094,765 $ 33,755,625
Gross Profit 4,552,369 3,677,098 2,879,320 5,500,777 8,022,507
Net (Loss)/Net Income (9,951,402) (9,340,103) (5,274,043) (3,166,488) (5,464,059)
Basic and Diluted
Net(Loss)/Net Income
Per Common Share (0.69) (0.63) (0.49) (0.43) (0.74)
BALANCE SHEET DATA:
Current Assets 7,320,024 13,524,429 15,232,894 9,857,681 12,138,995
Current Liabilities 5,727,588 4,004,905 1,809,264 6,225,966 4,789,896
Working Capital 1,592,436 9,519,524 13,423,630 3,631,715 7,349,099
Total Assets 26,051,986 25,867,905 21,128,335 14,484,984 14,708,454
Total Long Term Liabilities 2,379,064 2,325,168 2,351,253 5,327,901(1) 3,975,000(2)
Stockholders' Equity 17,945,334 19,537,832 16,967,818 3,335,705 6,478,226
- --------------------
(1) Long-term liabilities excluding discount of $404,588.
(2) Long-term liabilities excluding discount of $534,668.
31
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 products and systems integration services and products. Our
products include DocStar document imaging products, the Authentidate security
software products and system integration services and products through our DJS
subsidiary. We also offer, through our Trac Medical Solutions subsidiary, the
CareCert(TM) Internet-based medical forms processing service. Authentidate
products are sold by Authentidate, Inc., Trac Medical Solutions, Inc.,
Authentidate International, AG and Authentidate Sports, Inc. Revenues during the
current fiscal have been primarily derived from systems integration services and
products and sales of our document imaging products.
In March 1996, we acquired DJS, a system integrator, and computer reseller
in Albany, New York. DJS is an authorized sales and support provider for Novell,
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. 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. This
proposal was recommended to our shareholders in connection with the decision of
our Board of Directors to focus on our Authentidate business line. We currently
own approximately 98% of Authentidate, Inc.
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 same Authentidate product in
the European marketplace.
We also organized Trac Medical Solutions (f/k/a WebCMN, Inc.) 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(TM) service
and entered into its first revenue-generating agreement subsequent to the fiscal
year end.
During our the fiscal year ended June 30, 2001, we established a joint
venture, Authentidate
32
Sports, Inc. (f/k/a Authentidate Sports Edition, Inc.), to develop an
application of our Authentidate technology to the field of signature
authentication relating to sports memorabilia and entertainment collectibles.
Authentidate Sports is a 50/50 non-consolidated joint venture and is 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 more
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. We loaned $500,000 to an unrelated company in a planned acquisition,
Zylab International, Inc. Our loan to Zylab is 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, $50,000 in prepaid license fees for a product DocStar
licenses from Zylab, and agreed to pay to us 18% of the future net income of
Zylab or a successor company up to $100,000, after a $75,000 threshold.
Accordingly, our planned acquisition of Zylab has been cancelled.
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 joint venture company having operations or
technology in areas within its 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.
33
We have capitalized software development costs related to our newly
launched Authentidate product and significant goodwill related to acquisitions,
for which the recoverability of such capitalized costs and 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 the future revenue
generated from such product launch is less than anticipated, the carrying value
of the software development costs and goodwill may be impaired and require an
impairment charge in the future.
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 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
16, "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.
34
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.
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.
Fiscal Year 2001 Compared to Fiscal Year 2000
We realized a consolidated net loss of $9,340,103 ($.63 per share) and
$5,274,043 ($.49 per share) for the fiscal years ended June 30, 2001 and 2000,
respectively. Consolidated net sales totaled $17,860,544 and $15,289,738 for the
fiscal years ended June 30, 2001 and 2000, respectively.
The sales increase is due to an increase in sales from our DJS Marketing,
Inc. (DJS) subsidiary where sales increased by 20% from $9,699,764 to
$11,620,407. The sales increase is also due to improved sales in the DocStar
Division where sales increased 12% from $5,589,830 to $6,239,579. The
Authentidate subsidiary has not recognized significant sales through June 2001.
35
The consolidated net loss increase is mainly attributable to losses
incurred by our Authentidate subsidiary. Please see footnote 16, "Segment
Reporting" in the consolidated financial statements. The segment profit for DJS
improved from $231,357 to $385,283 and the segment loss for DocStar decreased
significantly from $1,177,239 to $295,680. The Authentidate subsidiary incurred
significant selling, general and administrative expenses in the process of
building a team of experienced managers and professionals. Major expenses
include compensation and benefits, professional fees, public relations,
amortization, rent, advertising and marketing. Authentidate expects to start
generating revenue during the first half of the fiscal year ending June 30,
2002. Corporate expenses also increased mainly due to non cash compensation
expenses resulting from the conversion of Authentidate, Inc. common shares into
Authentidate Holding Corp. common shares.
Consolidated gross profit for the fiscal years ending June 30, 2001 and
2000 was $3,677,098 and $2,879,320, respectively. This increase is due to the
sales increase of DocStar and DJS discussed above. The consolidated profit
margin was 21% and 19% for the years ending June 30, 2001 and 2000,
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 37% in 2001 compared to 24% in 2000. The increase is due
to sales volume increases, cost reductions and fewer sales discounts compared to
2000.
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 $11,950,719 and $8,016,192 for the twelve months ended June
30, 2001 and 2000, respectively. The increase is mainly due to Authentidate
which has been building a staff for several months and incurred significant
payroll, consulting, selling and advertising expenses. DJS S,G&A expenses
increased during the same period as selling expenses increased as a result of an
increase in sales. DocStar S,G&A expenses remained about the same. The parent
company also incurred a corporate non-cash expense of $862,934 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 67% and 52% for the years ended
June 30, 2001 and 2000, respectively.
Interest expense was $124,816 and $299,994 for the years ended June 30,
2001 and 2000, respectively. The decrease is due to the conversion of
convertible debt to common stock and the payoff of our line of credit during the
prior fiscal year.
Product development expenses, excluding capitalized costs, relate to
software development for Authentidate and for DocStar. These costs totaled
$1,221,639 and $179,696 for the years ended June 30, 2001 and 2000,
respectively. The increase is due to product development of the Authentidate
software product. 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 goods sold.
LIQUIDITY AND CAPITAL RESOURCES
36
Our primary sources of funds to date have been the issuance of equity and
the incurrence of third party debt. The principal balance of all long-term debt
at June 30, 2002 totaled $1,317,515 all of which relates to a mortgage loan on
our principle office located in Schenectady, New York.
In May, 2002, our DJS subsidiary closed on a $2,000,0000 revolving line of
credit with a financial institution collateralized by all the assets of DJS and
guaranteed by Authentidate Holding Corp. The interest rate on this line of
credit is prime plus 1.75%, with a minimum rate of 7%. DJS may borrow on this
line of credit based on a formula of qualified accounts receivables and
inventory. Based upon this formula, $247,000 was available for use at June 30,
2002.
Property, plant and equipment expenditures totaled $556,398 and newly
capitalized software development expenditures totaled $346,331 for the twelve
months ended June 30, 2002. There are no significant purchase commitments
outstanding.
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, but expect to achieve such levels by 2005. No
assurances can be given that such employment levels will be achieved by 2005 so
the grant has been classified as a long term liability on the balance sheet. 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. Our cash balance at June 30, 2002 was $2,269,353
and total assets were $26,051,986. Management believes existing cash and
short-term investments should be sufficient to meet our operating requirements
for the next twelve months provided the Authentidate businesses start to
generate material sales. In the event the Authentidate, Authentidate
International and Trac Medical do not increase sales materially, then we will
either need to obtain outside financing, reduce expenses or a combination of
both.
During the year ended June 30 2002, we incurred a net loss of $9,951,402.
Cash used in operating activities totaled $6,003,316 for the year ended June 30,
2002 compared to $1,391,651 used in operating activities for the year ended June
30, 2001. Our cash balance decreased from $9,040,466 to $2,269,353 from June 30,
2001 to June 30, 2002. Further, our accumulated deficit increased from
$31,283,665 at June 30, 2001 to $42,999,497 at June 30, 2002 To date, we have
been largely dependent on our ability to sell additional shares of our common
stock to obtain financing to fund our operating deficits. Under our current
operating plan to introduce the new Authentidate technology, our ability to
improve operating cash flow is highly dependent on the market acceptance of our
products and our ability to reduce overhead costs. Authentidate and its
37
related businesses, Trac Medical and Authentidate International, are currently
cash flow negative and along with our operations, were responsible for the
negative cash flow from operations for the year ended June 30, 2002. If we are
unable to attain projected sales levels for Authentidate and related products
and unable to raise additional capital to fund our operations, we will be
required to implement cost reduction strategies, including ceasing or reducing
the operations of Authentidate, Authentidate International or Trac Medical
Solutions.
Long term debt at June 30, 2002 and 2001 consists of the following:
2002 2001
----------- -----------
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, 2002), payable
in monthly installments through October 2019. The
mortgage is collateralized by a first mortgage lien on the
Company's headquarters $ 1,317,515 $ 1,350,441
Less current portion (35,747) (32,926)
----------- -----------
Long-term debt, net of current portion $ 1,281,768 $ 1,317,515
=========== ===========
The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter are as follows:
2003 $ 35,747
2004 38,810
2005 42,136
2006 45,747
2007 49,668
Thereafter 1,105,407
$1,317,515
==========
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, 2002, future minimum payments by year, and in the
aggregate, noncancelable operating leases with initial terms of one year or more
consist of the following:
38
CAPITAL Operating
LEASES Leases
Fiscal year ending June 30:
2003 $ 113,419 $ 529,766
2004 85,766 563,113
2005 22,073 535,768
2006 -- 430,438
2007 -- 162,616
----------- ----------
221,258 $2,221,701
==========
Amounts representing interest 35,135
-----------
Present value of net minimum lease payment 186,123
Less current portion (88,827)
-----------
Long-term portion $ 97,296
===========
As described in more detail above, we issued an aggregate of 1,425,875
shares of common stock and 100,000 common stock purchase warrants to the other
equity holders of Authentidate International, AG in consideration of our
acquisition of all outstanding equity securities issued by Authentidate
International AG. This transaction was consummated as of March 15, 2002 and as a
result, Authentidate International AG is now our wholly-owned subsidiary.
Authentidate International AG was organized in March 2000 as a joint venture
with a German company, Windhorst New Technologies, Agi.G.,to market Authentidate
in countries outside of the Americas, Japan, Australia, New Zealand and India.
We invested DM 250,000, which was equal to approximately $124,000 and also
granted a license of the Authentidate technology to the joint venture vehicle.
Additionally, we issued 250,000 Common Stock Purchase Warrants to Windhorst in
connection with the joint venture. Windhorst contributed DM 3,000,000 to the
joint venture.
In February, 2002, we offered the holders of our Series B Common Stock
Purchase Warrants the opportunity to receive new common stock purchase warrants
upon the exercise of their Series B Warrants for cash. The Series B Warrants
were originally issued in October, 1999. The warrant holders exercising Series B
Warrants received new warrants with an exercise price of $2.00 per share, which
was above the market price of our common stock at the time of the transaction.
Holders of 1,080,000 Series B Warrants elected to exercise their Series B
Warrants and an aggregate of 1,080,000 new warrants were issued. The new
warrants expire on October 1, 2004 and do not include registration rights,
although we may elect to include the shares underlying these new warrants in any
future registration statement we may file.
Subsequent to June 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
39
at $3.26 per share for a period of five years from the date of issuance. We
received approximately an aggregate of $1,950,000 in net proceeds after payment
of expenses. The proceeds raised will be used to increase the business
development, marketing and sales efforts for the Authentidate services, along
with our general working capital needs. We agreed to file 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. In the event that we do not timely file the registration
statement, or it is not timely declared effective, the investors will be
entitled to liquidated damages equal to 2% of the purchase price for each month
that the relevant event is delayed.
We previously disclosed in our Supplement to the Proxy Statement dated
March 13, 2001, that we received notice of a potential claim from a minority
shareholder of Authentidate, Inc. relative to the conversion of Authentidate,
Inc. stock into Authentidate Holding Corp. stock. We dispute these claims and
will vigorously oppose them and we will assert various counter- claims in any
such action. However, in the event that we are unsuccessful in any proceeding
commenced to adjudicate this issue, then we may be required to issue additional
shares of our common stock and may record a non-cash expense, the amount of
which cannot be presently estimated. Management believes that the claim will not
have a material adverse impact on our financial condition, results of operations
or cash flows.
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. This proposal was also recommended to our shareholders in
connection with the decision of our Board of Directors to focus on our
Authentidate business line. Security holders owning an aggregate of 601,750
shares of Common Stock and an aggregate of 616,623 options and warrants of
Authentidate, Inc. have accepted the exchange offer and we have issued an
aggregate of 917,608 shares of our Common Stock and 940,289 options and warrants
to these security holders.
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.
We received approximately an aggregate of $5,200,000 in net proceeds after
payment of commissions and expenses. The proceeds of these transactions will be
used to increase the business development, marketing and sales efforts for the
Authentidate services, along with our general working capital needs.
40
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.
In October and November 1999, we completed three private equity offerings
for approximately $2,100,000 (approximately $1,900,000 after expenses). The
investment was structured as follows. In the first offering we sold 740,000
units for $740,000, each unit consisting of two shares of common stock and two
Series B Common Stock Purchase Warrants. Each warrant entitles the holder to
purchase one share of common stock at an exercise price of $1.375 for five
years.
In the second offering we sold 50,000 shares of Series B Convertible
Cumulative Preferred Stock for $1,250,000. Dividends on the Series B Preferred
Shares are payable at the rate of 10% per annum, semi-annually. Each of the
shares of the Series B Preferred Stock is convertible into such number of shares
of our common stock as shall equal $25 divided by the conversion price of $1.875
per shares, subject to adjustment in certain circumstances.
In November 1999, we completed the third offering by selling a 20%
interest for $100,000 in its new subsidiary, Authentidate, Inc. In addition, we
issued to the purchasers 999,999 Series C Common Stock Purchase Warrants. The
Series C Warrants are divided into three classes of 333,333 warrants per class
which have varying exercise prices, starting at $1.50 per common share and
increasing over time to $3.75 after the effectiveness of a registration
statement covering the underlying shares, subject to adjustment for stock splits
and corporate reorganizations. The registration statement was declared effective
by the Commission on February 14, 2000.
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 2002. 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
41
impact on DJS's profits.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. We adopted SFAS No. 133 on July 1, 2001. Since we have not
yet entered into any derivative instruments, the adoption of this standard has
not had a material effect on our financial condition, results of operations or
cash flows.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," was approved by the Financial Accounting Standards
Board (FASB). SFAS No. 141 requires the purchase method of accounting to be used
for all business combinations initiated after June 30, 2001. To date, the
adoption of this Standard has not had a material effect on our financial
condition, results of operations or cash flows.
One June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. We adopted SFAS No. 142 effective July 1, 2001. We
have retained a third party consultant to conduct a valuation of goodwill
related to Authentidate, Inc. and Authentidate International, AG. To date, the
adoption of SFAS 142 has not had a material impact on our financial position,
results of operations or cash flows.
PRESENT ACCOUNTING STANDARDS NOT YET ADOPTED
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We believe the adoption of this Statement will not have a
material effect on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for the Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of APB
No. 30. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposals of long-lived assets and is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years.
42
We believe the adoption of this Statement will not have a material effect on our
financial statements.
In April 2002, the Financial Accounting Standards Board (FASB) issued FAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64," Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002. This Standard
addresses a number of items related to leases and other matters. We are required
to adopt this Standard as of July 1, 2002. We do not expect the adoption of FAS
No. 145 to have material effect 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. We do not expect the adoption of FAS
No. 146 to have a material effect on our financial statements.
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
43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Our executive officers and directors are as follows:
NAME AGE OFFICE
John T. Botti 39 President, Chief Executive Officer and Chairman of
the Board
Robert Van Naarden 55 Director and Chief Executive Officer of
Authentidate, Inc.
Ira C. Whitman 39 Senior Vice-President--Research and Development,
Secretary and Director
Steven A. Kriegsman 59 Director
J. Edward Sheridan 65 Director
Charles C. Johnston 66 Director
Dennis H. Bunt 48 Chief Financial Officer
Thomas Franceski 38 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. Mr. Botti also
serves as a director of Network Specialists, Incorporated.
44
Robert Van Naarden joined AHC in July 2000. Mr. Van Naarden has more than
34 years experience in general management, marketing, sales and engineering with
computer related companies. From August 1997 until June 2000 he was Vice
President of Sales, Marketing, Business Development and Professional Services
with Sensar, Inc. From March 1996 until August 1997 he was Vice President of
Worldwide Sales of Netframe, Inc. He has also held senior positions with
Firepower Systems, Inc., Supermac Technology, Inc. and Digital Equipment Corp.
Mr. Van Naarden was also a founder of Stardent and Convergent Technologies. He
has a M.S. in Electrical Engineering from Northeastern University, an M.B.A from
the Wharton School of Business at the University of Pennsylvania and a B.S. in
Physics and Electrical Engineering from the University of Pittsburgh.
Ira C. Whitman, a co-founder, is Senior Vice-President of Research and
Development and a Director of AHC since our incorporation in August 1985. Mr.
Whitman graduated from RPI in 1984 with a B.S. in Computer and Systems
Engineering and in 1990 he earned a Masters in Engineering 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.
Steven A. Kriegsman joined the Board of Directors in December, 1997. 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.
Dennis H. Bunt has been our Chief Financial Officer since September 1992.
Mr. Bunt has more than 26 years of financial management experience, primarily
with high-technology
45
companies, including Mechanical Technology, Inc. and General Electric. Mr. Bunt
is a certified public accountant and worked for the Boston office of KPMG Peat
Marwick 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. 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 Peat Marwick.
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.
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, 2002, the Audit Committee met on one occasion.
Executive Committee. The members of the Executive Committee are John Botti
and Ira C. Whitman. 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
46
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 2002, the Executive Committee did not deem it
necessary to meet but voted by unanimous written consent on three occasions.
Compensation Committee. The members of the Compensation Committee are
Steven Kriegsman, 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,
2002, the Compensation Committee held no meetings and voted by unanimous written
consent on one occasion.
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, Steven Kriegsman 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.
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
47
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, Robert Van Naarden, the Chief Executive
Officer of Authentidate, Inc., 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, 2002, Mr.
Botti received a Base Salary of 291,630, Mr. Van Naarden received a Base Salary
of 244,423, Mr. Bunt received a Base Salary of $126,612, and Mr. Wendenburg
received $62,438 from March 15, 2002, the commencement date of his employment
agreement, until June 30, 2002, as set forth in their respective employment
agreements.
Equity Incentives.
The compensation committee believes that stock participation aligns
officers' interests with
48
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,
2002, 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, 2002, the compensation committee did not grant stock options to
any executive officers of AHC except for Thomas Franceski, the Executive Vice
President, who was granted options to purchase 100,000 shares of common stock
and Jan Wendenburg, who was granted options to purchase 300,000 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, 2002, no executive
officers were awarded additional bonus compensation except for Mr. Franceski,
who received a $19,197 cash bonus.
Chief Executive Officer Compensation.
In the fiscal year ended June 30, 2002, Mr. John T. Botti, Chief Executive
Officer, received
49
a salary of $291,630 which represents an increase of approximately 9.9% from the
prior year. In the fiscal year ended June 30, 2001, Mr. Botti received a base
salary of $265,005, which represents a 30% increase from his base salary in the
fiscal year ended June 30, 2000. 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, 2002.
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. Edward Sheridan
Steven A. Kriegsman
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,
Steven Kriegsman 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.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 2002, our Board of Directors met on
six occasions and voted by unanimous written consent on six occasions. No member
of the Board of Directors
50
attended less than 50% 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 2002 fiscal year.
51
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, 2002, 2001 and
2000 to each of the named executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG TERM
COMPENSATION AWARDS
NO. OF
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARs
John Botti 2002 $291,630 $ 0 $ 7,910(1) 0(2) 0
Chairman, President and 2001 $265,005 $ 0 $ 7,760 0 444,668(3)
Chief Executive Officer 2000 $203,665 $60,000 $ 3,823 0 890,000
Robert Van Naarden 2002 $244,423 $ 0 $ 3,060(4) 0 0
Director and Chief 2001 $317,733 $ 0 $ 426 0 547,397(5)
Executive Officer of
Authentidate, Inc.
Dennis H. Bunt, 2002 $126,612 $ 0 $ 5,426(6) 0(7) 0
Chief Financial 2001 $105,605 $ 0 $ 5,573 0 86,849
Officer
Thomas Franceski, 2002 $146,231 $19,197 $11,634(9) 0 100,000(8)
Vice President, 2001 $ 98,125 $30,000 $ 6,552 0 105,000
- ------------------------
(1) Includes: (i) for 2002, automobile and expenses of $2,985, $2,095 for a
cells phone allowance, matching contributions to AHC's 401(k) plan of
$2,654 and payment of premium on term life insurance of $176; (ii) 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; and (iii) for 2000, an automobile and expenses of $1,500,
matching contributions to AHC's 401(k) plan of 2,121 and the payment of
premiums on term life insurance policy of $202.
(2) No restricted stock awards were granted to Mr. Botti in fiscal 2002. Mr.
Botti, however, owned 409,391 restricted shares of our Common Stock on
June 30, 2002, the market value of which was $3.31 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) Represents 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 2002, premiums on a term life insurance policy of $176
and matching contributions to AHC's 401(k) plan of $5,250 and (ii) 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.
(7) No restricted stock awards were granted to Mr. Bunt in fiscal 2002. Mr.
Bunt, however, owned 883 restricted shares of our Common Stock on June 30,
2002, the market value of which was $3.31 per share on such date, without
giving effect to the diminution in value attributed to the restriction on
such shares.
52
(8) Represents options granted during the fiscal year ended June 30, 2002.
(9) Includes (i) 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 (ii) 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 $2,750.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK
PRICE APPRECIATION FOR ALTERNATIVE TO
OPTION (f) AND (g)
INDIVIDUAL GRANTS TERM GRANT DATE VALUE
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTION/
UNDERLYING SARs GRANTED EXERCISE OF
OPTION/SARs TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED (#) IN FISCAL YEAR (S/SH) DATE 5% ($) 10% ($) PRESENT VALUE $
(a) (b) (C) (d) (c) (f) (g) (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 0 N/A N/A N/A N/A N/A
Thomas Franceski 100,000 10.2% $4.70 8/15/06 129,852 286,940
- -----------------------
No Stock Appreciation Rights were granted to any of the named executive
officers during the last fiscal year.
53
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, 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED IN-THE-MONEY
SHARES NUMBER OF UNEXERCISED OPTIONS OPTIONS
ACQUIRED VALUE AS OF JUNE 30, 2002 AT JUNE 30, 2002(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
John T. Botti 0 $0 1,543,001/16,667 837,581/0
Robert Van Naarden 0 $0 164,641/382,756 0
Dennis H. Bunt 0 $0 154,516/8,333 36,000/0
Thomas Franceski 0 $0 155,000/50,000 0
- ------------------------
(1) Based upon the closing price ($3.31 per share) of our common stock on June
28, 2002 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, expiring on January 1, 2003. The agreement
provides for (i) a base salary of $250,000 in the first year of the agreement,
increasing by 10% in each year thereafter; (ii) 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;(iii) certain insurance and severance
benefits; and (iv) automobile and expenses.
In July 2000, Authentidate entered into an employment agreement with
its new Chief Executive Officer for a three year term. The employment agreement
provides for (i) annual salary of $250,000; (ii) an annual bonus of up to
$200,000, with a minimum bonus of $80,000 during the first year; (iii) a
severance agreement equal to twelve months salary in the event employment
agreement is terminated without cause; (iv) 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 (v) 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.
In October 2000, we entered into an employment agreement with our Chief
Financial Officer which provides (i) an annual salary of $100,000 increasing to
$110,000 on January 1, 2001; (ii) annual increases every October to be
determined by the Compensation Committee of the Board of
54
Directors; (iii) eligibility for annual bonuses at the discretion of the
Compensation Committee of the Board of Directors; (iv) a severance agreement
equal to twelve months salary; (v) 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 (i) a base salary of $200,000 with annual increases of
5%; (ii) 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; (iii) a severance payment not to exceed 18 months of his base salary
or until he obtains alternative employment; and (iv) 184,000 stock options
vesting over three years at an exercise price of $4.54 per share.
COMPENSATION OF DIRECTORS
Directors were compensated for their services during the last fiscal
year in the amount of $5,000 annually. The Directors receive options to purchase
10,000 shares for each year of service under the Non-Executive Director Stock
Option Plan ("Stock Options") and are 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.
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
conversion 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 and the 1992 Plan
is 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, 2002, there were outstanding an aggregate
of 5,120,349 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
55
designated by the 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, shall be determined by the Committee.
The Board or Committee shall have full authority to interpret the 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 the 1992 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.
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.
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, pro rata, based on the
time the director has served in such capacity during the previous year. 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. The 1992
Director Plan simply provided for a blanket grant of 10,000 options per year.
The term non-executive director refers to a director of Authentidate who is not
otherwise a full-time employee of Authentidate 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.
56
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.
As of June 30, 2002, there are outstanding 160,000 options under the
1992 Director Plan and no options have been granted under the 2001 Director
Plan. The options outstanding under the 1992 Director Plan have exercise prices
ranging from $0.84 to $4.81. On September 1, 2002, we granted an aggregate of
30,000 options to our non-employee directors pursuant to the 2001 Director Plan.
These options have an exercise price of $2.25 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 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.
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.
57
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:
[LINE GRAPH]
CUMULATIVE TOTAL SHAREHOLDER RETURN
Date AHC NASDAQ Composite Index NASDAQ Software Index
- ------
6/30/98 $10,000 $10,000 $10,000
6/30/99 $ 5,346 $14,177 $16,324
6/30/00 $32,414 $20,932 $27,600
6/30/01 $24,828 $11,403 $12,760
6/30/02 $18,262 $ 7,722 $ 8,030
- -------------
Footnotes:
(1) Assumes $10,000 was invested at June 30, 1998 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, authentication/security software and computer systems
integration, for which there is no peer comparison. Therefore we have chosen the
NASDAQ Computer and Data Processing Index, which is primarily comprised of
software companies.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 17,
2002 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 and Series A Preferred Stock.
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENTAGE
TYPE OF CLASS BENEFICIAL HOLDER OF BENEFICIAL OF CLASS (*)
OWNERSHIP (1)
Common John T. Botti 1,727,342 (2) 8.1%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common Ira C. Whitman 174,386 0.87%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common Steven Kriegsman 50,000 (3) 0.25%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common Dennis Bunt 163,682 (4) 0.81%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common J. Edward Sheridan 60,000 (5) 0.29%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common Charles Johnston 138,570 (6) 0.67%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
Common Robert Van Naarden 164,641(7) 0.82%
c/o Authentidate, Inc.
2 World Financial Center
225 Liberty St., 43rd Floor
New York, NY 10281
Common Thomas Franceski 155,000(8) 0.77%
c/o Authentidate Holding Corp.
2165 Technology Drive
Schenectady, NY 12308
59
Series A John T. Botti 100 (9) 100%
Preferred c/o Authentidate Holding Corp.
Stock 2165 Technology Drive
Schenectady, NY 12308
Directors/Officers as a group 2,633,621 11.9%
(2)(3)(4)(5)(6)(7)(8)
- --------------------
(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.
(2) Includes vested stock options to purchase 1,318,001 shares of Common Stock
and excludes non-vested option to purchase 16,667 shares of Common Stock.
(3) Includes vested options to purchase 50,000 shares of Common Stock.
(4) Includes vested options to purchase 162,849 shares of Common Stock and
excludes nonvested options to purchase 8,333 shares of Common Stock. Also
excludes non-vested options to purchase 25,000 shares of Common Stock granted
subsequent to the fiscal year end covered by this Report on Form 10-K.
(5) Includes vested options to purchase 60,000 shares of Common Stock.
(6) Includes vested options to purchase 80,000 shares of Common Stock. Excludes
6,631 shares of common stock owned by CCJ Trust.
(7) Includes vested options to purchase 164,641 shares of Common Stock and
excludes 382,756 non-vested options.
(8) Includes vested options to purchase 155,000 shares of Common Stock and
excludes 50,000 non-vested options.
(9) See footnote (2). Each share of Series A Preferred Stock is entitled to ten
(10) votes per share.
* Based on 19,972,480 shares of Common Stock outstanding as of September 17,
2002.
60
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, 2002, 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."
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE WEIGHTED AVERAGE EQUITY COMPENSATION
OF OUTSTANDING OPTIONS EXERCISE PRICE OF PLANS EXCLUDING SECURITIES
AND RIGHTS OUTSTANDING OPTIONS REFLECTED IN COLUMN (a)
PLAN CATEGORY (a) (b) (c)
======================================================================================================================
Equity Compensation
Plans Approved by
Stockholders ............... 5,280,349(1) $4.43 1,960,393(2)
Equity Compensation
Plans Not Approved by
Stockholders ............... N/A N/A N/A
Total ...................... 5,280,349(1) $4.43 1,960,393(2)
- --------------------------
1. Includes 1,810,742 options issued pursuant to our 1992 Employee Stock
Option Plan, as amended; 160,000 options issued pursuant to our 1992
Director Stock Option Plan, as amended; and 3,309,607 options issued
pursuant to our 2000 Employee Stock Option Plan; but does not include
30,000 options issued pursuant to our 2001 Director Stock Option Plan on
September 1, 2002.
2. Consists of 1,690,393 options available for issuance pursuant to our 2000
Employee Stock Option Plan and 270,000 options which may be issued
pursuant to our 2001 Director Stock Option Plan. 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 270,000 options to our
non-employee directors under the 2001 Director Stock Option Plan.
61
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.
We have 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.
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 bears interest at the rate of
9% per annum and is due on January 5, 2003. The 2002 Loan bears interest at the
rate of 6% per annum and is 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 has 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
extends to any proceeds realized by Mr. Botti from the sale of the pledged
securities. Mr. Botti has provided information demonstrating that the pledged
assets are sufficient to cover his outstanding obligations to us.
We have been advised that the proceeds of both loans have been applied
in full in order to satisfy indebtedness incurred by Mr. Botti to these
financial institutions. The 2001 Loan was necessitated by primarily a decline in
the market price of the common stock of AHC. The 2002 Loan was primarily
necessitated by the need for Mr. Botti to repay certain indebtedness arising out
of private business investments. The loans were made following a determination
that they were in the best interests of AHC and our shareholders in order to
avoid the adverse effects of a substantial forced sale of Mr. Botti's stock in
AHC by his creditors. The determination for the 2002 loan was made by the
Compensation Committee as a result of the pressure on our stock price, margin
calls faced by Mr. Botti and other considerations. The 2001 loan was approved by
the Board of Directors.
62
As of June 30, 2002, the aggregate outstanding principal balance on our
loans to Mr. Botti was $507,431. As of September 26, 2002, the aggregate
outstanding balance on our loans to Mr. Botti was $446,183.
For information concerning employment agreements with, and compensation
of, our executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
ITEM 14. CONTROLS AND PROCEDURES.
Not applicable.
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 Accountants;
- Consolidated Balance Sheets as of June 30, 2002 and 2001;
- Consolidated Statements of Operations for the years ended
June 30, 2002, 2001 and 2000;
- Consolidated Statements of Shareholders' Equity for the years
ended June 30, 2002, 2001 and 2000;
- Consolidated Statements of Cash Flows for the years ended June
30, 2002, 2001 and 2000; 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, 2002 is included pursuant to item 14
(d):
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
During the quarter ended June 30, 2002 we filed the following reports:
1. Form 8-K/A filed on May 10, 2002 reporting Item 2 and Item 7
and filing financial statements pertaining to our acquisition
of Authentidate International,
63
AG.
(c) 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. Section 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. Certain
portions of exhibits marked with the symbol (++++) have been omitted and are
subject to our request for confidential treatment by the Securities and Exchange
Commission. Such portions have been omitted and filed separately with the
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).
3.2 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).
64
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 Note dated as of December 24, 2001 between Authentidate Holding Corp. and Zylab
International, Inc. (Exhibit 4.1 to Form 10-Q dated February 8, 2002).
4.8 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).
4.9 Form of Note, dated as of February 5, 2002, between Authentidate Holding Corp. and Zylab
International, Inc. (Exhibit 4.1 to Form 10-Q dated May 15, 2002).
4.10* Form of Note, dated as of January 5, 2001, between Authentidate Holding Corp. and John T. Botti.
4.11 Form of Note, dated as of February 14, 2002, between Authentidate Holding Corp. and John T. Botti
(Exhibit 4.2 to Form 10-Q dated May 15, 2002).
4.12* Form of Warrant issued in connection with Unit Offering.
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
65
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)
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 Pledge and Security Agreement dated January 5, 2001 between Authentidate Holding Corp. and John
T. Botti. (Exhibit 10.1 to Form 10-Q dated February 8, 2002).
10.17 Pledge and Security Agreement dated December 24, 2001 between Authentidate Holding Corp. and
Zylab International, Inc. (Exhibit 10.2 to Form 10-Q dated February 8, 2002).
10.18 2001 Non-Executive Director Stock Option Plan (filed as Exhibit A to Proxy Statement dated
December 18, 2001, as filed with the Commission).
10.19 Amended Pledge and Security Agreement dated as of February 14, 2002 between Authentidate
Holding Corp. and John T. Botti (filed as Exhibit 10.1 to Form 10-Q dated May 15, 2002).
10.20 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).
10.21* Form of Unit Purchase Agreement entered into between Authentidate Holding Corp. and certain
investors.
10.22* Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain
investors.
10.23++++ Strategic Alliance Agreement between Authentidate Holding Corp., Authentidate, Inc. and United
States Postal Service dated as of July 31, 2002.
21* Subsidiaries of Registrant
23* Consent of PricewaterhouseCoopers LLP
99.1* Certification of John T. Botti pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2* Certification of Dennis H. Bunt pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
66
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
President, Chairman of the Board
and Chief Executive Officer
Dated: September 30, 2002
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 President, Chairman September 30, 2002
- ------------------------ of the Board and Chief ------------------
John T. Botti Executive Officer
/s/Ira C. Whitman Senior Vice President September 30, 2002
- ------------------------ and Director ------------------
Ira C. Whitman
/s/Robert Van Naarden Director and September 30, 2002
- ------------------------ Chief Executive Officer ------------------
Robert Van Naarden of Authentidate, Inc.
/s/Steven A. Kriegsman Director September 30, 2002
- ---------------------- ------------------
Steven A. Kriegsman
/s/J. Edward Sheridan Director September 30, 2002
- ---------------------- ------------------
J. Edward Sheridan
/s/Charles C. Johnston Director September 30, 2002
- ---------------------- ------------------
Charles C. Johnston
/s/Dennis H. Bunt Chief Financial September 30, 2002
- ------------------------ Officer and Principal ------------------
Dennis H. Bunt Accounting Officer
/s/ Thomas Franceski Vice President- September 30, 2002
- ---------------------- Technology Products Group ------------------
Thomas Franceski
67
CERTIFICATIONS
I, John T. Botti, Chief Executive Officer of Authentidate Holding Corp.
certify that:
1. I have reviewed this annual report on Form 10-K of Authentidate Holding
Corp.;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report.
Date: September 30, 2002
/s/ John T. Botti
- --------------------------
John T. Botti
Chief Executive Officer
Authentidate Holding Corp.
68
CERTIFICATIONS
I, Dennis H. Bunt, Chief Financial Officer of Authentidate Holding Corp.
certify that:
1. I have reviewed this annual report on Form 10-K of Authentidate Holding
Corp.;
2. Based on my knowledge, this annual 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report.
Date: September 30, 2002
/s/ Dennis H. Bunt
- ---------------------------
Dennis H. Bunt
Chief Financial Officer
Authentidate Holding Corp.
69
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS SCHEDULE II
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions Charged
Balance at Additions to Other Accounts
Beginning Charged To ----------------- Balance At End
Description of Period Expense (a) Deductions (b) Of Period
----------- --------- ------- ---------- ---------
Allowance for doubtful accounts
Year ended June 30:
2002 . . . . . . . $532,241 $ 53,965 $54,289 $ (31,310) $609,185
2001 . . . . . . . 410,761 152,711 (31,231) 532,241
2000 . . . . . . . 421,018 175,799 (186,056) 410,761
Reserve for slow moving or obsolete
inventory
Year ended June 30:
2002 . . . . . . . $788,151 $234,976 $(595,082) $458,045
2002 . . . . . . . 736,926 314,937 (263,712) 788,151
2000 . . . . . . . 275,634 593,001 (131,709) 736,926
Allowance for Note Receivable
Year ended June 30:
2002 . . . . . . . $ 0 $100,000 $ 0 $100,000
70
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. Section 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 Commission. Such portions were omitted and filed
separately with the Commission. Certain portions of exhibits marked with the
symbol (++++) have been omitted and are subject to our request for confidential
treatment by the Commission. Such portions have been omitted and filed
separately with the 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).
3.2 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 Note dated as of December 24, 2001 between Authentidate Holding Corp. and Zylab International, Inc.
(Exhibit 4.1 to Form 10-Q dated February 8, 2002).
4.8 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).
4.9 Form of Note, dated as of February 5, 2002, between Authentidate Holding Corp. and Zylab International, Inc.
(Exhibit 4.1 to Form 10-Q dated May 15, 2002).
4.10* Form of Note, dated as of January 5, 2001, between Authentidate Holding Corp. and John T. Botti.
4.11 Form of Note, dated as of February 14, 2002, between Authentidate Holding Corp. and John T. Botti (Exhibit 4.2 to
Form 10-Q dated May 15, 2002).
71
4.12* Form of Warrant issued in connection with Unit Offering.
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)
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 Pledge and Security Agreement dated January 5, 2001 between Authentidate Holding Corp. and John T. Botti. (Exhibit
10.1 to Form 10-Q dated February 8, 2002).
10.17 Pledge and Security Agreement dated December 24, 2001 between Authentidate Holding Corp. and Zylab
International, Inc. (Exhibit 10.2 to Form 10-Q dated February 8, 2002).
10.18 2001 Non-Executive Director Stock Option Plan (filed as Exhibit A to Proxy Statement dated December 18, 2001,
72
as filed with the Commission).
10.19 Amended Pledge and Security Agreement dated as of February 14, 2002 between Authentidate Holding Corp. and
John T. Botti (filed as Exhibit 10.1 to Form 10-Q dated May 15, 2002).
10.20 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).
10.21* Form of Unit Purchase Agreement entered into between Authentidate Holding Corp. and certain investors.
10.22* Form of Registration Rights Agreement entered into between Authentidate Holding Corp. and certain investors.
10.23++++ Strategic Alliance Agreement between Authentidate Holding Corp., Authentidate, Inc. and United States Postal Service
dated as of July 31, 2002.
21* Subsidiaries of Registrant
23* Consent of Pricewaterhouse Coopers, LLP
99.1* Certification of John T. Botti pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Dennis H. Bunt pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
73
AUTHENTIDATE HOLDING CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (AND REPORT OF
INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONTENTS
PAGE(S)
-------
REPORT OF INDEPENDENT ACCOUNTANTS........................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets..................................................... 2
Statements of operations and comprehensive loss.................... 3
Statements of shareholders' equity................................. 4-5
Statements of cash flows........................................... 6
Notes to consolidated financial statements......................... 7-34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Authentidate Holding Corp. and Subsidiaries:
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, 2002 and June 30, 2001, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedules listed
in the index appearing under Item 15 (a)(2) present 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 schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules 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.
PricewaterhouseCoopers LLP
Albany, New York
August 29, 2002
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
ASSETS 2002 2001
Current assets
Cash and cash equivalents $ 2,269,353 $ 9,040,466
Accounts receivable, net of allowance for doubtful accounts of
$609,185 and $532,241 at June 30, 2002 and 2001 4,222,472 3,574,728
Due from related parties 27,444 14,825
Inventories 479,702 800,404
Note receivable 197,287 --
Prepaid expenses and other current assets 123,766 94,006
------------ ------------
Total current assets 7,320,024 13,524,429
Property and equipment, net 4,008,925 3,562,372
Other assets
Software development costs, net of accumulated amortization of
$2,556,824 and $1,469,531 on June 30, 2002 and 2001 1,161,650 1,905,613
Goodwill 12,439,145 5,276,136
Investment in affiliated companies 294,427 1,440,854
Patent costs, net 235,789 86,422
Other intangible assets 258,766 67,632
Note receivable 302,713 --
Other assets 30,547 4,447
------------ ------------
Total assets $ 26,051,986 $ 25,867,905
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,899,786 $ 2,765,606
Accrued expenses and other current liabilities 1,932,034 1,200,770
Current portion of obligations under capital leases 88,827 4,970
Current portion of long-term debt 35,747 32,926
Line of credit 1,753,394 --
Income taxes payable 17,800 633
------------ ------------
Total current liabilities 5,727,588 4,004,905
Long-term debt, net 1,281,768 1,317,515
Deferred grant 1,000,000 1,000,000
Obligations under capital leases, net of current portion 97,296 7,653
------------ ------------
Total liabilities 8,106,652 6,330,073
------------ ------------
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
and June 30, 2001 10 10
Series B - 28,000 shares issued and outstanding at June 30, 2002
and 48,000 shares issued and outstanding at June 30, 2001 2,800 4,800
Series C - 4,000 shares issued and outstanding at June 30, 2002,
and 5,500 shares issued and outstanding at June 30, 2001 400 550
Common stock, $.001 par value; 40,000,000 shares authorized;
19,308,594 shares issued at June 30, 2002 and
16,114,093 shares issued at June 30, 2001 and 19,309 16,114
Additional paid-in capital 61,376,632 51,634,783
Accumulated deficit (42,999,497) (31,283,665)
------------ ------------
18,399,654 20,372,592
Currency translation adjustment 53,111 --
Other equity (507,431) (834,760)
------------ ------------
Total shareholders' equity 17,945,334 19,537,832
------------ ------------
Total liabilities and shareholders' equity $ 26,051,986 $ 25,867,905
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
2
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
Net sales:
Product sales $ 15,135,663 $ 16,472,754 $ 14,182,181
Service sales 1,507,241 1,387,790 1,107,557
------------ ------------ ------------
Total net sales 16,642,904 17,860,544 15,289,738
------------ ------------ ------------
Cost of sales:
Products 11,398,458 13,536,309 11,865,290
Services 692,077 647,137 545,128
------------ ------------ ------------
Total cost of sales 12,090,535 14,183,446 12,410,418
------------ ------------ ------------
Gross profit 4,552,369 3,677,098 2,879,320
------------ ------------ ------------
Selling, general and administrative expenses 11,470,073 11,950,719 8,016,192
Product development expenses 2,170,173 1,221,639 179,696
------------ ------------ ------------
Total operating expenses 13,640,246 13,172,358 8,195,888
------------ ------------ ------------
Loss from operations (9,087,877) (9,495,260) (5,316,568)
------------ ------------ ------------
Other income (expense):
Interest and other income 180,360 399,996 311,493
Interest expense (124,824) (124,816) (299,994)
Equity in net loss of affiliated companies (958,788) (104,023) (5,715)
------------ ------------ ------------
(903,252) 171,157 5,784
------------ ------------ ------------
Loss before income taxes (9,991,129) (9,324,103) (5,310,784)
Income tax (expense)/benefit (14,119) (16,000) 102
------------ ------------ ------------
Loss before minority interest (10,005,248) (9,340,103) (5,310,682)
Minority interest 53,846 -- 36,639
------------ ------------ ------------
Net loss $ (9,951,402) $ (9,340,103) $ (5,274,043)
============ ============ ============
Per share amounts:
Basic and diluted loss per common share $ (.69) $ (.63) $ (.49)
============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
PREFERRED STOCK COMMON STOCK
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT
--------- -------- ----------- ---------- ------------ -------------
Balance, June 30, 1999 200 $ 20 7,410,745 $ 7,411 $19,846,126 $(16,441,133)
Warrants issued for non-employee services 390,221
Private equity offering 50,000 5,000 1,480,000 1,480 1,890,466
Conversion of debt to equity 1,223,075 1,223 3,384,484
Exercise of stock warrants 3,753,922 3,754 10,780,447
Warrants issued for interest in Authentidate
International AG 1,119,814
Stock issued for non-employee services 72,750 73 105,641
Exercise of stock options 481,266 481 1,297,559
Investment in Authentidate, Inc. 98,861
Costs of registration (79,945)
Dividends (93,403)
Net loss (5,274,043)
--------- -------- ----------- ---------- ------------ -------------
Balance, June 30, 2000 50,200 5,020 14,421,758 14,422 38,740,271 (21,715,176)
Exercise of stock warrants 459,516 459 1,584,087
Exercise of stock options 316,626 317 198,775
Retire treasury shares (28,082) (28) 28 (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
Private equity offerings 5,500 550 5,204,308
Retire preferred shares (100) (10) 10
Warrants for non-employee services 204,042
Costs of registration (32,474)
Stock option compensation 1,380,694
Warrants issued to joint venture partner 111,849
Cash dividends to Series B preferred shareholders (151,667)
Loan to shareholder
Net loss (9,340,103)
--------- -------- ----------- ---------- ------------ -------------
TOTAL
OTHER TREASURY TRANSLATION SHAREHOLDERS'
EQUITY STOCK ADJUSTMENT EQUITY
--------- --------- ----------- -------------
Balance, June 30, 1999 $(76,719) $ 3,335,705
Warrants issued for non-employee services 390,221
Private equity offering 1,896,946
Conversion of debt to equity 3,385,707
Exercise of stock warrants 10,784,201
Warrants issued for interest in Authentidate
International AG 1,119,814
Stock issued for non-employee services 105,714
Exercise of stock options 1,298,040
Investment in Authentidate, Inc. 98,861
Costs of registration (79,945)
Dividends (93,403)
Net loss (5,274,043)
--------- --------- ----------- -------------
Balance, June 30, 2000 (76,719) 16,967,818
Exercise of stock warrants 1,584,546
Exercise of stock options 199,092
Retire treasury shares 76,719 -
Convert preferred stock to common -
Purchase of an equity interest in -
Authentidate Inc. 4,243,937
Private equity offerings 5,204,858
Retire preferred shares -
Warrants for non-employee services 204,042
Costs of registration (32,474)
Stock option compensation (517,760) 862,934
Warrants issued to joint venture partner 111,849
Cash dividends to Series B preferred shareholders (151,667)
Loan to shareholder (317,000) (317,000)
Net loss (9,340,103)
--------- --------- ----------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
PREFERRED STOCK COMMON STOCK
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN ACCUMULATED OTHER
SHARES VALUE SHARES VALUE CAPITAL DEFICIT EQUITY
--------- -------- ---------- --------- ------------ ------------- ----------
Balance June 30, 2001 53,600 $5,360 16,114,093 16,114 $51,634,783 $(31,283,665) $(834,760)
Exercise of stock warrants 1,109,517 1,110 1,574,520
Exercise of stock options 31,999 32 80,296
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
Warrants for services 74,572
Cost to register common shares (66,943)
Stock option compensation 517,760
Cash and stock dividends to Series B and
Series C preferred shareholders 50,847 51 219,947 (300,428)
Loan to executive (190,431)
Currency translation adjustment
Beneficial conversion 1,464,002 (1,464,002)
Net loss (9,951,402)
Comprehensive loss
--------- -------- ---------- --------- ------------ ------------- ----------
Balance June 30, 2002 32,100 $3,210 19,308,594 $19,309 $61,376,632 $(42,999,497) $(507,431)
========= ======== ========== ========= ============ ============= ==========
TOTAL COMPREHENSIVE
TREASURY TRANSLATION SHAREHOLDERS' INCOME
STOCK ADJUSTMENT EQUITY (LOSS)
-------- ----------- ------------- --------------
Balance June 30, 2001 $ -- $19,537,832 $ --
Exercise of stock warrants 1,575,630
Exercise of stock options 80,328
Convert preferred stock to
common stock -
Purchase of Authentidate AG 6,395,307
Warrants for services 74,572
Cost to register common shares (66,943)
Stock option compensation 517,760
Cash and stock dividends to Series B and
Series C preferred shareholders (80,430)
Loan to executive (190,431)
Currency translation adjustment 53,111 53,111 53,111
Beneficial conversion --
Net loss (9,951,402) (9,951,402)
Comprehensive loss
-------- ----------- ------------- --------------
Balance June 30, 2002 $ -- $53,111 $17,945,334 $(9,898,291)
======== =========== ============= ==============
The accompanying notes are an integral part of the consolidated financial
statements.
5
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
Cash flows from operating activities
Net loss $ (9,951,402) $ (9,340,103) $ (5,274,043)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,690,382 1,814,278 916,532
Provision for doubtful accounts receivable 53,965 152,711 175,799
Equity in net loss of affiliated companies 958,788 104,023 --
Non-cash dividends 219,998 --
Non-cash compensation and other 763,061 1,066,976 173,405
Changes in operating assets and liabilities,
net of business acquired
Accounts receivable and due from related parties (642,299) 539,750 731,458
Inventories 320,702 1,551,983 1,472,000
Prepaid expenses and other current assets 87,618 516,000 (122,928)
Accounts payable, accrued expenses
and other current liabilities 478,702 2,186,627 (3,147,656)
Income taxes 17,169 16,104 (3,341)
Other -- -- 100
------------ ------------ ------------
Net cash used in operating activities (6,003,316) (1,391,651) (5,078,674)
------------ ------------ ------------
Cash flows from investing activities
Purchases of property and equipment (556,598) (893,181) (358,554)
Trademarks acquired (42,673) (27,114) (23,331)
Patent costs (174,240) (47,985) (30,796)
Software development costs (346,331) (2,764,678) (485,293)
Note receivable (500,000) -- --
Investment in affiliated companies (385,568) (250,000) (230,961)
Acquisition of business, net of cash acquired 58,078 -- --
Other (33,678) (4,149) --
------------ ------------ ------------
Net cash used in investing activities (1,981,010) (3,987,107) (1,128,935)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from private equity offering -- 5,204,858 1,896,946
Stock warrants exercised 1,575,630 1,584,546 10,784,201
Stock options exercised 80,328 199,092 1,298,040
Dividends (104,525) (151,667) (93,403)
Outside investment in Authentidate, Inc. -- -- 98,861
Costs of conversion of debt to equity -- -- (10,000)
Principal payments on obligations under capital leases (47,920) (3,300) --
Loan to shareholder, net of repayments (190,431) (317,000) --
Payment of registration costs (66,943) (32,474) (79,945)
Net payments under line of credit -- -- (1,274,779)
Proceeds from borrowings on long-term debt -- -- 165,152
Principal payments on long-term debt (32,926) (30,327) (18,876)
Receipt of deferred revenue from economic development grant -- -- 857,811
------------ ------------ ------------
Net cash provided by financing activities 1,213,213 6,453,728 13,624,008
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (6,771,113) 1,074,970 7,416,399
Cash and cash equivalents, beginning of period 9,040,466 7,965,496 549,097
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,269,353 $ 9,040,466 $ 7,965,496
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BUSINESS CONTINUITY
Authentidate Holding Corp. (AHC) and its subsidiaries Authentidate, Inc.,
Authentidate International (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 products and
proprietary software. 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. AHC was formerly known as
Bitwise Designs, Inc. The name change was approved by the shareholders in
March 2001 as the Company has become more focused on software with
DocStar and security software services through Authentidate, AG and Trac
Med.
In June 1999, AHC established a majority owned subsidiary Authentidate,
Inc. (Authentidate), to engage in a new software service 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.
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. The Company
contributed $250,000, while the outside partners contributed in the
aggregate $250,000 of equipment and other consideration to Sports. The
Company is required to contribute an additional $750,000 subject to
certain conditions being met as defined in the joint venture agreement.
The Company is accounting for the activities of the joint venture under
the equity method of accounting. The Company's share of net losses in
this joint venture in 2002 approximated $334,000.
7
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DESCRIPTION OF BUSINESS AND BUSINESS CONTINUITY, CONTINUED
During the fiscal year ended June 30, 2002 the Company incurred a net
loss of $9,951,402, and cash used in operating activities totaled
$6,003,316. The Company's available cash balance at June 30, 2002 totaled
approximately $2,269,000. 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 and the Company's
ability to reduce overhead costs. 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 and meet its
obligations. There is no assurance that such funding will be available,
if needed. If the Company is unable to raise additional capital necessary
to fund operations for 2003 and is unable to attain projected sales
levels for Authentidate and related products then it will implement cost
reduction strategies in early fiscal 2003, including the possible
shutdown or reduction of operations at Authentidate, AG, or Trac Med.
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
sellers have agreed to place 300,000 common shares of AHC in escrow for 6
months as security for potential unrecorded liabilities. Also, as part of
the acquisition, the Company issued 151,500 vested employee stock options
to three executives of AG with an exercise price of $.01 share. The
acquisition was recorded under the purchase method of accounting. The
operations of AG have been included in the statement of operations since
the acquisition date of March 15, 2002. Below is a table summarizing what
the Company's operating results would have been if AG's operating results
were included with the Company's consolidated statement of operations for
the years ended June 30, 2002 and 2001.
2002 2001
---- ----
Consolidated sales including AG $ 16,915,413 $ 17,994,088
Consolidated net loss including AG (11,136,075) (10,005,292)
Per share (.76) (.68)
Summary of assets acquired, liabilities assumed and purchase price paid
for 61% of the outstanding shares of AG:
8
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PURCHASE 100% INTEREST OF AUTHENTIDATE, INTERNATIONAL, AG., CONTINUED
Fair market value of common stock issued $ 5,629,355
Fair market value of common stock warrants and options issued
net of warrants returned 765,953
--------------
Total purchase price paid 6,395,308
Liabilities assumed 877,416
Fair value of assets acquired (562,923)
--------------
Net liabilities assumed 314,493
--------------
Goodwill $ 6,709,801
==============
PURCHASE 100% INTEREST OF AUTHENTIDATE, INTERNATIONAL, AG., CONTINUED
The assets acquired of $562,923 are comprised of approximately $126,000
in cash and $117,000 in prepaids and other current assets, in addition to
other various assets. Accounts payable makes up approximately $153,000 of
the liabilities assumed, while the remaining balance relates to accrued
expenses.
Summary of Goodwill and other intangible assets recorded:
Goodwill recognized $ 7,283,009
Other intangible assets recognized:
Completed technologies 59,400
Accreditation 121,800
--------------
Total $ 7,464,209
==============
The fair market value of common stock warrants and options was determined
using the "Black Scholes Model". The value of intangible assets
recognized was determined by an independent valuation firm.
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, 2002, 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 "New accounting pronouncements").
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.
9
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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,
2002 and 2001, 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 2002 and 2001 amounted to $347,829
and $2,764,678, respectively. Amortization expense related to software
development costs for the years ended June 30, 2002, 2001 and 2000 was
$1,087,293, $1,033,646 and $485,837, respectively. These expenses were
included in product development expenses in prior years. However, the
Company has reclassified these costs as cost of sales which is more
consistent with industry standards. As a result, the Statements of
Operations for the years ended June 30, 2001 and 2000 were adjusted to
reflect the transfer of $1,033,646 and $485,837 from product development
expenses to cost of goods sold for the years ended June 30, 2001 and
2000, respectively.
10
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
GOODWILL
Goodwill was amortized on a straight-line basis over periods ranging from
5 to 20 years through June 30, 2001. However, beginning in the fiscal
year ending June 30, 2002, the Company applied SFAS No. 142 (see new
accounting pronouncements under footnote 1).
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. In connection with adoption of FAS
142, the Company completed an initial transaction impairment test, as
well as an annual impairment test as required. These tests did not result
in any impairment charges. The amortization charged against earnings in
2001 and 2000 was $222,753 and $86,287, respectively, which did not have
a material impact on net loss per basic and diluted share in 2001 and
2000. Accumulated amortization at June 30, 2002 and 2001 was $758,789.
The changes in the carrying amount of goodwill for the year ended June
30, 2002 are as follows:
DJS AUTHENTIDATE AG TOTAL
----------- -------------- ------------ -------------
Balance, June 30, 2001 1,173,665 $ 4,102,471 $ $ 5,276,136
Reclass to patents based on (120,000) (120,000)
Purchase 61% of AG 6,709,801 6,709,801
Reclassification of 39% of AG 573,208 573,208
----------- -------------- ------------ -------------
June 30, 2002 1,173,665 $ 3,982,471 $ 7,283,009 $ 12,439,145
=========== ============== ============ =============
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.
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.
11
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. The Company adopted SFAS
No. 133 on July 1, 2001. Since the Company has not yet entered into any
derivative instruments, the adoption of this standard has not had a
material effect on the Company's financial condition, results of
operations or cash flows.
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," was approved by the Financial Accounting
Standards Board (FASB). SFAS No. 141 requires the purchase method of
accounting to be used for all business combinations initiated after June
30, 2001. To date, the adoption of this Standard has not had a material
effect on its financial condition, results of operations or cash flows.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets"
was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The Company
adopted SFAS No. 142 effective July 1, 2001. To date the adoption of SFAS
142 has not had a material effect on its financial position, results of
operations or cash flows.
PRESENT ACCOUNTING STANDARDS NOT YET ADOPTED
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the
period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. The Company believes the
adoption of this Statement will not have a material effect on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB No. 30. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposals of long-lived assets and is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The Company believes the adoption of
this Statement will not have a material effect on its financial
statements.
In April 2002, the Financial Accounting Standards Board (FASB) issued FAS
No. 145, "Rescission of FASB Statements No. 4, 44 and 64," Amendment of
FASB Statement No. 13, and Technical Corrections as of April 2002. This
Standard addresses a number of items related to leases and other matters.
The Company is required to adopt this Standard as of July 1, 2002. The
Company does not expect the adoption of FAS No. 145 to have material
effect on its financial statements.
12
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRESENT ACCOUNTING STANDARDS NOT YET ADOPTED, CONTINUED
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
Company does not expect the adoption of FAS No. 146 to have a material
effect on its financial statements.
ADVERTISING EXPENSES
The Company recognizes advertising expenses as incurred. Advertising and
promotion expense for 2002, 2001 and 2000 was approximately $454,000,
$835,000 and $1,363,000, respectively.
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:
2002 2001 2000
------------ ------------ ------------
Net loss $ (9,951,402) $ (9,340,103) $ (5,274,043)
Preferred stock dividends (1,764,430) (151,667) (93,403)
------------ ------------ ------------
Net loss applicable to common
shareholders $(11,715,832) $ (9,491,770) $ (5,367,446)
============ ============ ============
Weighted average shares 17,035,030 15,013,135 10,953,284
Basic and diluted loss per
Common share (.69) (.63) (.49)
Options (5,280,000), warrants (2,685,000) and convertible preferred stock
(1,190,000) were antidilutive to the calculation of dilutive loss per
share, and were accordingly excluded from the calculation.
13
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. INVENTORIES
Inventories related to DocStar and DJS only at June 30, 2002 and 2001
consist of:
2002 2001
Purchased components and raw materials $317,772 $520,915
Finished goods 161,930 279,489
-------- --------
$479,702 $800,404
======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 and 2001 consist of the
following:
ESTIMATED
USEFUL LIFE
2002 2001 IN YEARS
Building $1,618,640 $1,614,611 40
Land 698,281 698,281 N/A
Machinery and equipment 3,467,848 2,478,377 3-6
Demonstration and rental computers 125,732 125,732 5-6
Furniture and fixtures 272,447 229,882 5-7
Leasehold improvements 48,893 17,613 5
Vehicles -- 15,090 5
---------- ----------
6,231,841 5,179,586
Less accumulated depreciation and
Amortization (2,222,916) (1,617,214)
---------- ----------
$4,008,925 $3,562,372
========== ==========
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. As of June 30, 2000, $1,000,000 had been
received and is recorded as deferred revenue. 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 (See Note 6).
Depreciation and amortization expense on property and equipment for the
years ended June 30, 2002, 2001 and 2000 was $553,615, $377,832 and $274,148,
respectively.
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. LINE OF CREDIT
In May 2002 the Company's subsidiary DJS had secured a new revolving
line of credit in the amount of $2 million, with a Financial
institution of which approximately $1,753,000 was outstanding at June
30, 2002. The interest rate is prime plus 1.75% (8.75% at June 30,
2002) with a minimum prime rate of 7%. DJS may borrow on this line
based on a formula of qualified accounts receivable and inventory.
Based upon this formula, $247,000 was available for use at June 30,
2002. 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. At June
30, 2002, DJS was in default of certain covenants but obtained a waiver
of default from the financial institution.
6. LONG-TERM DEBT
Long-term debt at June 30, 2002 and 2001 consists of the following:
2002 2001
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, 2002), payable in monthly installments through October 2019
The mortgage is collateralized by a first mortgage lien on the Company's
headquarters. $ 1,317,515 $ 1,350,441
Less current portion (35,747) (32,926)
----------- -----------
Long-term debt, net of current portion $ 1,281,768 $ 1,317,515
=========== ===========
The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter are as follows:
2003 $ 35,747
2004 38,810
2005 42,136
2006 45,747
2007 49,668
Thereafter 1,105,407
--------------
$ 1,317,515
==============
15
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 2002 and 2001
consists of currently payable state and local income taxes.
At June 30, 2002, the Company has federal net operating loss
carryforwards for tax purposes approximating $36,000,000. 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 and 2022-$8,000,000.
Because of significant changes in ownership during the prior years, the
use of net operating loss carryforwards may be subject to limitation.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
2002 2001 2000
Computed expected tax benefit $(3,396,984) $(3,170,195) $(1,805,666)
Increase in valuation allowance 3,125,204 3,008,814 1,550,443
Nondeductible goodwill amortization -- 136,770 27,638
Adjustment to prior years' taxes 261,280 24,871 220,104
State income taxes, net of federal benefit 9,319 10,560 (67)
Other nondeductible expenses 15,300 9,180 7,446
----------- ----------- -----------
$ 14,119 $ 20,000 $ (102)
=========== =========== ===========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 2002 and 2001 are
presented below:
2002 2001
Deferred income tax asset:
Allowance for doubtful accounts $ 207,123 $ 180,162
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory reserves 196,558 363,784
Other liabilities 540,224 214,235
Deferred revenue -- 15,786
Net operating loss carryforward 12,268,900 9,548,781
------------ ------------
Total gross deferred tax assets 13,212,805 10,322,748
Less valuation allowance (12,779,735) (9,654,531)
------------ ------------
Net deferred tax asset 433,070 668,217
Deferred income tax liability:
Software development costs (394,961) (647,108)
Equipment, principally due to differences in
depreciation methods (38,109) (21,109)
------------ ------------
Net deferred income taxes $ -0- $ -0-
============= ============
16
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INCOME TAXES, CONTINUED
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 July 1, 2002 and 2001 was $12,779,735 and
$9,654,531, respectively. The net change in the total valuation
allowance for the years ended June 30, 2002 and 2001 was an increase of
$3,125,204 and $3,008,814, respectively.
8. 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, 2002, future minimum payments by year, and in the
aggregate, noncancelable operating leases with initial terms of one
year or more consist of the following:
CAPITAL OPERATING
LEASES LEASES
Fiscal year ending June 30:
2003 $ 113,419 $ 529,766
2004 85,766 563,113
2005 22,073 535,768
2006 - 430,438
2007 - 162,616
---------- ----------
221,258 $2,221,701
==========
Amounts representing interest 35,135
----------
Present value of net minimum lease payments 186,123
Less current portion (88,827)
----------
Long-term portion $ 97,296
==========
Rental expense was approximately $344,903, $272,000 and $69,000 for the
years ended June 30, 2002, 2001 and 2000, respectively. The amount of
accumulated amortization for capital leases at June 30, 2002 was
$29,513. The equipment financed by these capital leases may be
purchased at the end of the lease for a bargain purchase amount.
9. 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.
17
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. PREFERRED STOCK, CONTINUED
The Board of Directors has designated 200 shares of preferred stock as
Series A Preferred stock, of which 100 shares have been issued to the
chairman/chief executive officer of the Company. The holder of the
Series A Preferred Stock has the right to elect a majority of the Board
of Directors as long as the holder remains, subject to certain
conditions, an officer, director and at least 5% shareholder of the
Company. To date, the holder of the Series A Preferred Stock has not
exercised such right. The holder of the Series A Preferred Stock has a
preference on liquidation of $1.00 per share and no dividend or
conversion rights. See Footnote 17.
10. 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 expired in 2002 and shareholder approval would have been
required to increase the number of shares subject to the 1992 Plan. 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").
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
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.
18
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
A) 2000 AND 1992 EMPLOYEES STOCK OPTION PLANS, CONTINUED
The 1992 Plan expired May 2002 and the 2000 Plan will expire in the
year 2010.
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------------- ---------------
Outstanding at July 1, 1999 1,984,870 $ 2.99
Options granted equal to market price 1,337,000 1.39
Options exercised (801,529) 2.93
Options canceled or surrendered (334,168) 3.48
---------------
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 cancelled or surrendered (507,732) 7.50
Options exercised (21,999) 2.27
---------------
Outstanding at June 30, 2002 5,120,349 4.48
===============
The following is a summary of the status of employee stock options at
June 30, 2002:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------- ------------------------
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
EXERCISE PRICE CONTRACTUAL AVERAGE EXERCISE
RANGE NUMBER LIFE EXERCISE PRICE NUMBER PRICE
-------------- ------ ----------- -------------- ------ --------
$.01-4.99 3,398,274 2.9 $3.70 1,797,789 $2.90
$5.00-9.125 1,722,075 3.3 $6.03 1,042,333 $6.27
As of June 30, 2002 and 2001, 2,840,122 shares and 2,112,997 shares,
respectively, were exercisable under the 2000 and 1992 Employees Stock
Option Plan.
19
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
B) 2001 and 1992 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 Option 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 an option to purchase 20,000 shares upon joining
the Board of Directors and an 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.
20
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
B) NON-EXECUTIVE DIRECTOR STOCK OPTION PLAN, CONTINUED
A schedule of director stock option activity is as follows:
WEIGHTED
AVERAGE
NUMBER OPTION
OF PRICE
SHARES PER SHARE
----------- -----------
Outstanding June 30, 1999 130,000 $ 2.54
Options granted equal to market price 50,000 0.89
Options cancelled or surrendered (10,000) 5.13
Options exercised (40,000) 1.83
-----------
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
===========
The options range in exercise price from $.84 to $4.81 per share and
have a weighted average remaining contractual life of 1.9 years.
21
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
C) COMMON STOCK WARRANTS
A schedule of common stock warrant activity is as follows:
NUMBER WARRANT
OF PRICE
SHARES PER SHARE
---------- ----------
Outstanding June 30, 1999 2,898,995 $ 3.88
Warrants granted equal to market price 970,000 4.67
Warrants granted greater than market price 2,949,999 2.44
Warrants granted lower than market price 25,000 3.00
Warrants cancelled or surrendered (30,000) 5.00
Warrants exercised (3,788,517) 3.11
----------
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 greater than market 1,217,500 2.28
Warrants granted equal to market price 109,868 5.00
Warrants exercised (1,125,000) 1.48
Warrants cancelled or surrendered (425,000) 8.15
----------
Outstanding June 30, 2002 2,685,818 3.81
==========
In connection with an agreement entered into subsequent to June 30, 2002
between the Company and a third party, the Company entered into an
agreement whereby the Company may issue to the strategic partner warrants
to purchase 225,000 shares of common stock at a per share exercise price
of $3.65. The warrants would be exercisable for five years from date of
issuance and are issuable in three tranches of 75,000 warrants on each of
the first three anniversary dates of the agreement. If the agreement is
terminated for any reason, the third party will not be able to exercise
such option to acquire the warrants.
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. See footnote 19.
22
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
C) COMMON STOCK WARRANTS, CONTINUED
In May 2001, the Company issued 114,000 common stock purchase warrants
to two foreign institutions and 150,000 common stock purchase warrants
to investment bankers as professional fees related to two private
equity financings further described in Footnote 17.
In October 1999, the Company issued 2,479,999 detachable common stock
purchase warrants in connection with a private equity financing further
described in Footnote 17. Other warrants issued during the years ended
June 30, 2002, 2001 and 2000 were generally to various firms and
individuals providing services to the Company.
The following is a summary of the status of common stock warrants at June
30, 2002:
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
----------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
-------------------- ---------- ----------------- ---------- ---------- ---------
$1.00 - 4.00 1,660,503 3.9 $1.98 1,660,503 $1.98
$4.01 - 13.04 1,025,315 2.8 $6.78 1,025,315 $6.78
D) OPTION VALUATION
The weighted average fair value of each option granted under the
Company's option plans during fiscal 2002, 2001 and 2000 was $2.89,
$2.90 and $5.21, 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 2002 and 2001. The expected volatility was
based on the historic stock prices. The expected volatility was 89.6%
and 91.6% for 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 4.4% to 5.1% in 2002, 5.1% in 2001, and ranged from 6.3% to
6.5% in 2000, 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 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 SFAS 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:
23
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
2002 2001 2000
Net loss
As reported $ (9,951,402) $ (9,340,103) $ (5,274,043)
Pro forma (14,431,727) (12,869,273) (5,599,269)
Basic and diluted loss per share
As reported (.69) (.63) (.49)
Pro forma (.95) (.86) (.51)
The effects of applying SFAS 123 on providing pro-forma disclosures are
not necessarily likely to be representative of the effects on reported
net income for future years.
11. COMMITMENTS - EMPLOYMENT AGREEMENTS AND CONTINGENCIES
In January, 2000, the Company entered into a new three year employment
agreement with its Chief Executive Officer, expiring on January 1,
2003. The agreement provides for (i) a base salary of $250,000 in the
first year of the agreement increasing by 10% in each year thereafter;
(ii) a bonus equal to 3% of the Company's pre-tax net income, with such
additional bonuses as may be awarded in the discretion of the Board of
Directors, (iii) certain insurance and severance benefits; and (iv)
automobile and expenses.
In July 2000, Authentidate, Inc. entered into an employment agreement
with its new Chief Executive Officer for a three year term. The
employment agreement provides for (i) annual salary of $250,000, (ii)
annual bonus up to $200,000 with a minimum bonus of $80,000 paid with
the regular payroll during the first year, (iii) a severance agreement
equal to 12 months salary in the event the Company terminates this
agreement without cause, (iv) the award of Authentidate Inc. common
shares equal to 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 (v) the award
of employee stock options to purchase 200,000 Authentidate Holding
Corp. common shares vesting in equal amounts over a four-year period,
at an exercise price of $6.3125 per share.
In October 2000, the Company entered into an employment agreement with
its Chief Financial Officer which provides for (i) annual salary of
$100,000 increasing to $110,000 on January 1, 2001 (ii) annual
increases every October to be determined by the Compensation Committee
(iii) eligible for annual bonuses at the discretion of Compensation
Committee (iv) a severance agreement equal to 12 months' salary and (v)
the award of Authentidate Inc. stock options equal to 1.25% of the
stock outstanding convertible in AHC stock options at such time that
the shareholders approve such conversion, which occurred in March 2001.
In March 2002, Authentidate AG entered into a three-year employment
contract with its Chief Executive Officer providing for (i) a base
salary of $200,000 with annual increases of 5%, (ii) options to
purchase 184,000 shares of AHC common stock at $4.54 per share, (iii) a
bonus of up to 50% of the base salary in the event AG achieves its
operating targets approved by the Compensation Committee and (iv) a
severance agreement not to exceed 18 months of his base salary or until
he obtains alternative employment.
24
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS - EMPLOYMENT AGREEMENTS AND CONTINGENCIES, CONTINUED
The Company is the defendant in a third party complaint filed by Shore
Venture Group, LLC in the Federal District Court for the Eastern District
of Pennsylvania. The third party complaint was filed on May 7, 2001.
Shore Venture is the defendant to an action commenced by Berwyn Capital.
The third party complaint alleges a claim of breach of contract and seeks
indemnification. We moved to dismiss the third party complaint and the
motion was recently denied by the Court. This matter is currently in the
discovery stage, which is expected to be completed by the end of
September 2002. We are currently involved in settlement negotiations with
Shore Venture. 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 Common Stock of our subsidiary, Authentidate, Inc.
This claim is not before the court in the third-party litigation
previously discussed. We are conducting settlement negotiations with
Shore Venture and believe that a settlement will not have a material
adverse impact on our financial condition, results of operations or cash
flows. No formal action has been commenced in connection with this claim
and the settlement negotiations are being held at this juncture in an
effort to avoid resorting to litigation on this issue.
We are engaged in no other litigation the effect of which would be
anticipated to have a material adverse impact on our financial condition,
results of operations or cash flows.
12. CASH FLOWS - SUPPLEMENTAL INFORMATION
CASH FLOWS
The Company paid interest in the amounts of $115,378, $115,323 and
$364,954 for the years ended June 30, 2002, 2001 and 2000, respectively.
Income taxes paid aggregated $1,912, $230 and $133 for the years ended
June 30, 2002, 2001 and 2000, respectively.
NONCASH INVESTING AND FINANCING ACTIVITIES
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 footnote 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. 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.
During the fiscal year ended June 30, 2000, the Company issued 1,223,075
common shares of the Company's stock pursuant to the conversion of
$3,975,000 of convertible debt into common stock.
25
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 $134,640, $111,869 and $25,878 to the plan during the
years ended June 30, 2002, 2001 and 2000, respectively.
14. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
JUNE 30, 2002 JUNE 30, 2001
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED USEFUL LIFE
AMOUNT AMORTIZATION AMOUNT AMORTIZATION IN YEARS
------ ------------ ------ ------------ --------
Patents $260,581 $ 24,792 $ 95,885 9,463 17
Trademarks 106,803 15,654 77,945 10,313 20
Completed
technologies 59,400 7,425 -- -- 2
Accreditation 121,800 15,225 -- -- 2
Licenses 13,600 4,533 -- --
-------- -------- -------- ------
Total $562,184 $ 67,629 $173,830 19,776
======== ======== ======== ======
Also refer to footnote 1 with regard to Completed Technologies and
Accreditation. The Company amortizes intangible assets under a straight
line method. Intangible amortization expense is expected to be immaterial
for the next five fiscal years.
15. 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, 2002, there was one customer whose accounts receivable
balance exceeded 10% of total accounts receivable. At June 30, 2001,
accounts receivable from one customer approximated 31% of total accounts
receivable.
26
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FINANCIAL INSTRUMENTS, CONTINUED
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
The remaining balance of long-term debt approximates fair value based on
its discounted face amount. Consequently, the carrying value of the
borrowings under long-term debt approximates fair value.
16. SEGMENT REPORTING
SFAS 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 are non-operating expenses
which include all public company type expenses and applies to all of the
Company's operating segments and therefore should be segregated.
27
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT REPORTING, CONTINUED
AUTHENTIDATE
SEGMENT INFORMATION: DOCSTAR DJS RELATED TOTALS
-------------------- ------- --- ------- ------
2002
Revenues 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
Revenues 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 profit/(loss) (295,680) 385,283 (4,954,729) (4,865,126)
Segment assets 5,454,528 3,372,212 3,746,305 12,573,045
2000
Revenues from external customers $ 5,589,830 $ 9,699,764 $ 144 $ 15,289,738
Intersegment revenues 249,943 249,943
Interest and other revenue 13,084 87 13,171
Interest expense 292,600 7,394 299,994
Depreciation and amortization 358,478 48,858 124,867 532,203
Segment profit/(loss) (1,177,239) 231,357 (2,342,198) (3,288,080)
Segment assets 8,237,551 2,637,368 1,827,971 12,702,890
28
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT REPORTING, CONTINUED
RECONCILIATIONS 2002 2001 2000
---- ---- ----
Revenues
Total revenues for reportable segments $ 16,731,481 $ 18,289,032 $ 15,539,681
Elimination of intersegment revenues (88,577) (428,488) (249,943)
--------------- ---------------- -----------------
Total consolidated revenues $ 16,642,904 $ 17,860,544 $ 15,289,738
=============== ================ =================
Profit or (loss)
Total profit or loss for reportable segments $ (5,338,395) $ (4,865,126) $ (3,288,080)
Product development expenses (2,170,173) (2,255,284) (665,533)
Corporate expenses and other (2,494,793) (2,188,413) (1,358,311)
Elimination of intersegment profits 12,232 (15,280) 1,140
--------------- ---------------- -----------------
Loss before income taxes $ (9,991,129) $ (9,324,103) $ (5,310,784)
=============== ================ =================
Assets
Total assets for reportable segments $ 12,306,851 $ 12,573,045 $ 12,702,890
Corporate assets 13,760,530 13,322,487 8,437,792
Elimination of intersegment profit (15,395) (27,627) (12,347)
--------------- ---------------- -----------------
Consolidated total assets $ 26,051,986 $ 25,867,905 $ 21,128,335
=============== ================ =================
17. PRIVATE EQUITY OFFERINGS
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
1,500 Series C preferred shares were converted into 309,598 common
shares. The Company intends to continue to seek additional funds which
may be raised through public or private financing and may include debt or
equity securities.
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AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. PRIVATE EQUITY OFFERINGS, CONTINUED
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, 2002, 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.
As of June 30, 2002, 22,000 Series B preferred shares have been converted
leaving 28,000 shares outstanding which are convertible in 373,333 common
shares.
Commencing 34 months after the Closing, 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.
30
17. PRIVATE EQUITY OFFERING, CONTINUED
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. 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.
As of June 30, 2002 all of the Series C warrants have been exercised.
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.
31
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. PRIVATE EQUITY OFFERING, CONTINUED
Subsequent to year end, 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. The proceeds will be used for business development, sales
and marketing of Authentidate along with general working capital needs of
the Company.
18. LOAN - RELATED PARTY
The Company has entered into certain loan and security arrangements
involving Mr. John T. Botti and 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 have 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. As of 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 bears interest at the
rate of 9% per annum and is due on January 5, 2003. The 2002 Loan bears
interest at the rate of 6% per annum and is being repaid in bi-weekly
installments of $5,000. In connection with the transactions described
above, Mr. Botti pledged to the Company the shares of AHC stock currently
owned by him or that he may later acquire upon the exercise of options.
AHC's interest has 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
extends to any proceeds realized by Mr. Botti from the sale of the
pledged securities. Mr. Botti has provided information demonstrating that
the pledged assets are sufficient to cover his outstanding obligations to
the Company.
32
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LOAN - RELATED PARTY, CONTINUED
The Company has been advised that the proceeds of both loans have been
applied in full in order to satisfy indebtedness incurred by Mr. Botti to
certain financial institutions. The 2001 Loan was necessitated by
primarily a decline in the market price of the common stock of AHC. The
2002 Loan was primarily necessitated by the need for Mr. Botti to repay
certain indebtedness arising out of private business ventures. The loans
were made following a determination that they were in the best interests
of AHC and its shareholders in order to avoid the adverse effects of a
substantial forced sale of Mr. Botti's stock in AHC by his creditors. The
determination for the 2002 Loan was made by the Compensation Committee as
a result of the pressure on our stock price, margin calls faced by Mr.
Botti and other considerations. The 2001 Loan was approved by the Board
of Directors. At June 30, 2002, the cumulative loan balance of $507,431
is recorded as a reduction to shareholder equity.
19. 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
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.
20. QUARTERLY DATA FINANCIAL (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Fiscal year ended June 30, 2002
Net sales $ 3,263,503 $ 4,131,286 $ 3,592,159 $ 5,655,956
Gross profit 972,142 1,190,999 961,126 1,428,102
Net loss (2,608,970) (2,222,955) (2,533,384) (2,586,093)
Loss per share (.19) (.16) (.18) (.16)
Fiscal year ended June 30, 2001
Net sales $ 4,483,479 $ 4,034,523 $ 4,383,397 $ 4,959,145
Gross profit 1,246,677 996,892 644,332 789,197
Net loss (1,575,896) (1,623,016) (2,976,080) (3,165,111)
Loss per share (0.11) (0.11) (0.20) (0.21)
33
AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. NOTE RECEIVABLE
On January 9, 2002, AHC announced a letter of intent to acquire Zylab
International Inc., a privately owned company in the document imaging and
retrieved business. In connection with that letter of intent, the Company
loaned Zylab $500,000 collateralized by certain assets of Zylab including
the intellectual property and software code. In June 2002, the Company
was offered $400,000 by Zylab to pay off the loan in full, $350,000 in
cash and $50,000 in prepaid license fees for a product DocStar licenses
from Zylab plus 18% of future net income of Zylab or a successor company
after a $75,000 threshold. In addition, the planned acquisition of Zylab
by the Company would be cancelled. The Company accepted this proposal
subsequent to June 30, 2002 and received payment of $350,000. The Company
has recorded a loan loss reserve of $100,000 in June 2002.
34