-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O/Tc95EEyX5HAZzRW9QcMGr38n0D+gqZqLz8ONRDMYDjNH1IVFIFl3ty65beAqF6 z2KxxNmtuXavgZgIjFeqGQ== 0000950123-02-001085.txt : 20020414 0000950123-02-001085.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950123-02-001085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTHENTIDATE HOLDING CORP CENTRAL INDEX KEY: 0000885074 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 141673067 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20190 FILM NUMBER: 02531936 BUSINESS ADDRESS: STREET 1: BLDG 50 ROTTERDAM INDUSTRIAL PK CITY: SCHENECTADY STATE: NY ZIP: 12306 BUSINESS PHONE: 5183569741 MAIL ADDRESS: STREET 1: BLDG 50 ROTTERDAM INDUSTRIAL PARK CITY: SCHENECTADY STATE: NY ZIP: 12306 FORMER COMPANY: FORMER CONFORMED NAME: BITWISE DESIGNS INC DATE OF NAME CHANGE: 19930328 10-Q 1 y57348e10-q.txt AUTHENTIDATE HOLDING CORP SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: DECEMBER 31, 2001 ------------------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ----- THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File No. 0-20190 AUTHENTIDATE HOLDING CORP. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 14-1673067 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 2165 Technology Dr., Schenectady, NY, 12308 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 346-7799 ----------------------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the issuer (1) 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 ----- ----- 16,365,424 shares of Common Stock, par value $.001 per share, were outstanding at February 5, 2002. Page 1 of 19 AUTHENTIDATE HOLDING CORP. FORM 10-Q INDEX
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets - December 31, 2001 and June 30, 2001 3 Consolidated Statements of Operations - Six and three months ended December 31, 2001 and December 31, 2000 5 Consolidated Statements of Cash Flows - Six months ended December 31, 2001 and December 31, 2000 6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16 PART II OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 5 - Other Information 18 Item 6 Reports on Form 8-K and exhibits 18 Safe Harbor Statement 18 Signatures 19
Page 2 of 19 PART I FINANCIAL INFORMATION AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited except for the June 30, 2001 balance sheet)
ASSETS December 31, June 30, 2001 2001 ----------- ----------- Current Assets: Cash and cash equivalents $ 3,971,312 $ 9,040,466 Accounts receivable, net of allowance for doubtful accounts of $532,231 at Dec. 31, 2001 and $532,241 at June 30, 2001 2,572,663 3,574,728 Due from related parties 80,467 14,825 Inventories: Finished goods 371,457 279,489 Purchased components & raw material 508,996 520,915 Prepaid expenses and other current assets 150,048 94,006 Note receivable 122,287 ----------- ----------- Total current assets 7,777,230 13,524,429 Property and equipment, net 3,605,315 3,562,372 Other assets: Software development costs, net 1,472,780 1,905,613 Excess of cost over net assets of acquired companies, net 5,156,136 5,276,136 Investment in affiliated companies 1,023,924 1,440,854 Patent costs, net 232,132 86,422 Note receivable 227,713 Due from Authentidate AG 500,000 Other assets 91,238 72,079 ----------- ----------- Total assets $20,086,468 $25,867,905 =========== ===========
See accompanying notes to the consolidated financial statements. Page 3 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited except for the June 30, 2001 balance sheet)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30, 2001 2001 ----------- ----------- Current liabilities: Accounts payable $ 1,516,334 $ 2,765,606 Accrued expenses and other liabilities 1,274,464 1,200,770 Current portion of long-term debt 29,515 32,926 Current portion of obligations under capital leases 17,716 4,970 Income taxes payable 11,416 633 ----------- ----------- Total current liabilities 2,849,445 4,004,905 Long-term debt, net of current portion 1,304,801 1,317,515 Deferred grant 1,000,000 1,000,000 Obligations under capital leases, net of current portion 33,993 7,653 ----------- ----------- Total liabilities 5,188,239 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 10 10 Series B - 38,000 shares issued and outstanding at Dec. 31, 2001 and 48,000 at June 30, 2001 3,800 4,800 Series C - 5,500 shares issued and outstanding 550 550 Common stock - $.001 par value; 40,000,000 shares authorized; shares issued and outstanding: 16,265,426 at December 31, 2001 and 16,114,093 at June 30, 2000 16,265 16,114 Additional paid-in capital 52,376,546 51,634,783 Accumulated deficit (37,009,355) (31,283,665) ----------- ----------- 15,387,816 20,372,592 Other equity (489,587) (834,760) ----------- ----------- Total shareholders' equity 14,898,229 19,537,832 ----------- ----------- Total liabilities and shareholders' equity $20,086,468 $25,867,905 =========== ===========
See accompanying notes to the consolidated financial statements. Page 4 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the 3 months ended For the 6 months ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net sales $ 4,131,286 $ 4,034,523 $ 7,394,789 $ 8,518,002 Cost of goods sold (note 1) 2,687,474 2,866,331 4,711,235 6,042,633 ----------- ----------- ----------- ----------- Gross profit 1,443,812 1,168,192 2,683,554 2,475,369 Selling, general and administrative expenses 2,755,773 2,487,974 5,469,492 4,834,389 Product development costs 783,733 334,022 1,701,607 963,812 ----------- ----------- ----------- ----------- Operating loss (2,095,694) (1,653,804) (4,487,545) (3,322,832) Other income (expense): Interest expense (27,983) (33,369) (56,167) (61,797) Interest and other income 36,254 121,220 100,872 243,280 Equity in net loss of affiliated companies (183,378) (43,563) (436,931) (43,563) ----------- ----------- ----------- ----------- Loss before income taxes (2,270,801) (1,609,516) (4,879,771) (3,184,912) Income tax expense 6,000 13,500 6,000 14,000 ----------- ----------- ----------- ----------- Net loss before minority interest (2,276,801) (1,623,016) (4,885,771) (3,198,912) Minority interest 53,846 53,846 ----------- ----------- ----------- ----------- Net loss $(2,222,955) $(1,623,016) $(4,831,925) $(3,198,912) =========== =========== =========== =========== Per share amounts basic and diluted: Net loss per common share ($ 0.16) ($ 0.11) ($ 0.35) ($ 0.22) =========== =========== =========== =========== note 1: Cost of sales excludes amortization of software development costs of: $ 252,000 $ 61,000 $ 520,000 $ 231,000
See accompanying notes to the consolidated financial statements. Page 5 of 19 AUTHENTIDATE HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For the 6 months ended December 31, December 31, 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss ($ 4,831,925) ($ 3,198,912) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities: Depreciation and amortization 763,403 509,469 Provision for doubtful accounts 66,934 64,090 Non cash stock compensation 345,174 Non cash S,G&A expense 24,168 Equity in net loss of affiliates 416,930 43,563 Changes in operating assets and liabilities: Accounts receivable and other receivables 869,489 905 Inventories (80,049) 670,134 Prepaid expenses and other current assets (56,044) 440,585 Accounts payable and other current liabilities (1,285,578) 1,064,551 Income taxes 10,783 13,900 ----------- ----------- Net cash provided by/(used in) operating activities (3,780,883) (367,547) ----------- ----------- Cash flows from investing activities: Property, plant and equipment expenditures (279,406) (360,798) Software development costs (87,579) (1,037,899) Other intangible assets (51,397) (37,232) Note receivable (350,000) Due from Authentidate AG (500,000) ----------- ----------- Net cash used in investing activities (1,268,382) (1,435,929) ----------- ----------- Cash flows from financing activities: Principle payments on long-term debt (16,125) (14,852) Capital leases, net 39,086 14,518 Payment of registration costs (42,793) (17,105) Exercise of warrants and options 52,207 684,270 Preferred stock dividends (52,264) (62,500) ----------- ----------- Net cash provided by/(used in) financing activities (19,889) 604,331 ----------- ----------- Net increase/(decrease) in cash and cash equivalents (5,069,154) (1,199,145) Cash and cash equivalents, beginning of year 9,040,466 7,965,496 ----------- ----------- Cash and cash equivalents, end of period $ 3,971,312 $ 6,766,351 =========== ===========
See accompanying notes to the consolidated financial statements. Page 6 of 19 AUTHENTIDATE HOLDING CORP. ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of management the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary for fair presentation have been included. The consolidated financial statements include the accounts of Authentidate Holding Corp. (AHC) and its subsidiaries DJS Marketing Group, Inc. (DJS), Authentidate, Inc. and Trac Medical Systems, Inc., and are referred to as the Company. 2. In the fiscal year ended June 30, 2001, the Company issued 917,608 shares of AHC common stock to acquire approximately 25% of the outstanding shares not owned by AHC of Authentidate, Inc. and as of December 31, 2001 owns approximately 98% of Authentidate, Inc. The acquisition of the minority interest was accounted for under the purchase method of accounting. 3. During the fiscal year ended June 30, 2000 the Company formed a new subsidiary, Authentidate, Inc., to provide security software services. Authentidate, Inc. has developed a product which allows users to verify the authenticity of digital documents and images by imbedding an unalterable date and time stamp into digital images. Using this software technology a customer can prove content as well as date and time authenticity of any digital document. The Company expects the Authentidate service to be used for various business applications such as sending notarized email and proving authenticity of digital documents such as contracts, human resource records, medical records and numerous other electronic documents. Sales commenced during the current fiscal year. The Company has also organized a joint venture company known as Authentidate Sports, Inc. (Sports f/k/a Authentidate Sports Edition) with Internet Venture Capital LLC, to develop a service using the Authentidate software to focus on the sports collectibles market and offer a service to prove authenticity of sports memorabilia. Sports is in the process of developing their market. The Company formed another subsidiary, Trac Medical Solutions, Inc., to utilize the Authentidate technology in the medical supplies business during the fiscal year ended June 30, 2001. This Company is in the software development stage. The Company also formed a joint venture known as Authentidate International Holdings, AG (AG), with a German partner in Europe to develop and market the Authentidate service in Europe and parts of Asia. This Company is in the market development stage. All of these businesses are related and involved in the authentication software services business. 4. The results of operations for the six and three months ended December 31, 2001 are not necessarily indicative of the results to be expected for the full year. 5. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the annual consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended June 30, 2001. 6. During the six months ended December 31, 2001; 18,000 common stock options were exercised. Page 7 of 19 7. The following represents the reconciliation of the basic and diluted loss per share amounts for the six and three months ended December 31, 2001 and 2000.
December 31, ------------ Six Month Ended Three Months Ended ---------------- ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Net income/(loss) ($ 4,831,925) ($ 3,198,912) ($ 2,222,955) ($ 1,623,016) Preferred stock dividends (893,764) (62,500) (444,139) (31,250) ------------------------------------------------------------------------- Loss applicable to common shareholders ($ 5,725,689) ($ 3,261,412) ($ 2,667,094) ($ 1,654,266) Weighted average shares 16,233,670 14,787,759 16,261,785 14,825,778 Basic and diluted EPS ($ .35) ($ .22) ($ .16) ($ .11)
The impact of options, warrants and convertible notes was antidilutive to the calculation of basic and dilutive loss per share and were accordingly excluded from the calculation. The preferred stock dividends for the six and three months ended December 31, 2001 includes amortization of the beneficial conversion feature of Series C Preferred Stock approximating $731,500 and $366,250, respectively. 8. The Company's reportable segments are separate divisions and distinct businesses which are managed separately. Included in the All Other column are operations of Authentidate, as well as Trac Medical which was insignificant, which are both in the authentication software services business. DocStar is in the document imaging software business and DJS is in the systems integration business. DocStar sells through a national network of dealers (approximately 100) and anticipates the addition of several new dealers each quarter to expand into markets not currently served. DJS's market is primarily in the Albany, New York region. Authentidate and Trac Med expect to sell their products and services on a national basis using a direct sales model. The Corporate expenses are non-operating expenses which include all public company type activities and apply to all of the Company's operating divisions and therefore should be segregated.
SEGMENT INFORMATION FOR THE SIX MONTHS ENDED: DECEMBER 31, 2001: DocStar DJS All Other Totals - ------------------ ------- --- --------- ------ Revenues from external customers $ 3,290,113 $ 4,079,432 $ 25,244 $ 7,394,789 Intersegment revenues 35,449 35,449 Segment profit/(loss) 135,165 62,808 (2,449,804) (2,251,831) DECEMBER 31, 2000: Revenues from external customers $ 3,198,806 $ 5,318,638 $ 558 $ 8,518,002 Intersegment revenues 225,746 225,746 Segment profit/(loss) (31,254) 209,660 (1,932,400) (1,753,994)
RECONCILIATION: December 31, 2001 December. 31, 2000 Total revenues from segments $ 7,430,238 $ 8,743,748 Elimination of intersegment revenues (35,449) (225,746) ----------- ----------- Total consolidated revenues $ 7,394,789 $ 8,518,002 =========== =========== Total pre-tax loss of segments ($ 2,251,831) ($ 1,753,994) Product development expenses (1,701,607) (963,812) Corporate expenses (939,760) (463,227) Elimination of intersegment profits 13,427 (3,879) ----------- ----------- Loss before income taxes ($ 4,879,771) ($ 3,184,912) =========== ===========
Page 8 of 19 9. The components of Other Equity include non-cash compensation expense to be amortized over the next three months ($172,587) and a secured loan to a shareholder/officer ($317,000). 10. There's a three month delay in recording the results of operations from the Company's European joint venture Authentidate AG (AG). So AG's results for the quarter ending September 30, 2001 are included in the December 31, 2001 consolidated financial statements. The delay is due to the fact that AG subcontracts certain accounting functions and because of certain translation issues. The Company owns 39% of AG and records net income or loss on the equity basis and the delay is not material to the Company's consolidated financial statements. 11. 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 Effective July 1, 2001, the Company adopted SFAS 141 and SFAS 142. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill nor was there any change in useful lives of intangible assets upon adoption of SFAS 142. During the first half of fiscal 2002, no goodwill was acquired, impaired or written off. The changes in the carrying amount of goodwill for the quarter ended December 31, 2001, are as follows:
DJS Authentidate Total Balance June 30, 2001 $ 1,173,665 $ 4,102,471 $ 5,276,136 Reclass to patents based on valuation (120,000) (120,000) ----------- ----------- ----------- Balance December 31, 2001 $ 1,173,665 $ 3,982,471 $ 5,156,136
Amortization expense of goodwill totaled $0 and $40,644 for the six months ended December 31, 2001 and 2000, respectively and had no effect on basic or diluted loss per share. The DJS segment has achieved operating results which are consistent with prior periods. The Authentidate segment is a new segment with a limited operating history. Based on forecasts and expectations, the Company does not believe there is an impairment issue at this point in time with regard to Authentidate and will continue to review this issue each quarter. Intangible asset amortization expense for the six months ended December 31, 2001 was $6,804.
June 30, 2001 December 31, 2001 ------------------------------------ ------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization Patents $95,885 $ (9,463) $246,458 $(14,326) Trademarks 77,945 (10,313) 99,044 (12,254)
Page 9 of 19 No significant residual value is estimated for these intangible assets. Patent and trademark amortization expense is expected to be immaterial the remainder of fiscal 2002 as well as 2003, 2004, 2005 and 2006. 12. During the six months ended December 31, 2001 the Company incurred a net loss of $4,831,925. Cash used in operating activities totaled $3,780,883 for the six months ended December 31, 2001 compared to $1,391,651 used in operating activities for the year ended June 30, 2001. The Company's cash balance decreased from $9,040,466 to $3,971,312 from June 30, 2001 to December 31, 2001. To date the Company has been largely dependent on its ability to sell additional shares of its common stock to obtain 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 its products and the Company's ability to reduce overhead costs. Authentidate and it's related businesses, Trac Med, AG and Sports are currently cash flow negative and along with Corporate operations were responsible for the negative cash flow from operations for the six months ended December 31, 2001. If the Company is unable to attain projected sales levels for Authentidate and related products, or is unable to implement cost reduction strategies, 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. 13. As described in our report on Form 10-K for the fiscal year ended June 30, 2001, we are involved in the following pending and threatened legal proceedings. We are 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. We are currently involved in settlement negotiations with Shore. Management believes that the claim will not have a material adverse impact on our financial condition, results of operations or cash flow. 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 be reached and will not have a material adverse impact on our financial condition, results of operations or cash flow. 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 or results of operations. 14. No statement of comprehensive income has been included in the accompanying financial statements since the Company does not have any material amounts of comprehensive income to report. 15. New 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 impact 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 Page 10 of 19 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 is currently reviewing this statement to determine its effect on the Company's financial statements. 16. On December 14, 2001, AHC announced that it entered into a letter of intent with the majority shareholders of Authentidate International, AG (AG), to purchase all the outstanding shares of common stock of AG not held by AHC. If the transaction is consummated, AG would become a wholly-owned subsidiary of AHC. The transaction contemplates that AHC will repurchase all of the outstanding shares of AG in exchange for a maximum of 1,500,000 shares of AHC common stock and warrants to purchase 100,000 shares of AHC common stock. The transaction is subject to various terms and conditions, including the completion of due diligence and the execution of a definitive agreement. Accordingly, there can be no assurance that the transaction will be consummated. The following information is extracted from the AG's unaudited financial information for the three months ended September 30, 2001: Current assets $ 616,957 Long-term assets (primarily fixed assets) 83,506 --------- Total assets $ 700,463 ========= Current liabilities $ 99,339 Long-term liabilities 72,957 Stockholders equity 528,167 --------- Total liabilities and stockholders equity $ 700,463 ========= Net sales $ 178,300 Net loss (280,751)
The collectibility of the $500,000 advance to AG will be dependent upon AG's ability to achieve profitability. There can be no assurances that AG will achieve profitability. On January 9, 2002, AHC announced that it has 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 contemplates that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. The precise number of shares to be issued as the purchase price will be determined prior to closing. Pursuant to the letter of intent, AHC has loaned an aggregate principle amount of $500,000 as of February 5, 2002 (of which $350,000 was loaned as of December 31, 2001), which loan is collateralized by all of the assets of Zylab, including its intellectual property. The loan may be converted into 25% of the outstanding shares of Zylab at the option of the Company at any time. The acquisition is subject to various terms and conditions, including the completion of the due diligence investigation by AHC, the negotiation of a definitive agreement and the approval of the respective boards and Zylab's shareholders. Accordingly, there can be no assurance that the transaction will be consummated. The following information is extracted from the Zylab unaudited financial information for the five months ended November 30, 2001: Current assets $335,300 Long-term assets (primarily fixed assets) 68,900 -------- Total assets $404,200 ========
Page 11 of 19 Zylab-continued Current liabilities $ 1,114,400 Long-term liabilities 17,500 Stockholders deficit (727,700) ----------- Total liabilities and stockholders deficit $ 404,200 =========== Net sales $ 650,400 Net loss (21,500)
The collectibility of the $500,000 notes receivable from Zylab will be dependent upon Zylab's ability to achieve profitability and/or raise additional funds through an equity or debt financing. There can be no assurances that Zylab will achieve profitability or raise additional funds. 17. Included in sales the Company realized service sales of $798,760 and cost of service sales of $367,297 for the six months ended December 31, 2001. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is involved in the sales and marketing of document imaging products (DocStar), systems integration services and products (DJS) and security software services (Authentidate and Trac Medical Solutions). Revenues during the current fiscal year have been derived primarily from DocStar and DJS. Our DocStar document imaging system enables users to scan paper documents and retrieve those documents electronically. Our computer integration services are carried out by DJS. As a systems integrator, DJS configures various computer hardware and software to meet the needs of business/organization customers. The Authentidate security software service is designed to accept and store a digital code used to prove authenticity of content, date and time via the Internet of any electronic document or image. Trac Medical uses the Authentidate service in the medical supply industry to assist in the processing of certificates of medical necessity. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's consolidated financial statements and notes contained elsewhere in this Form 10-Q. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based on its 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 the Company 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, the Company evaluates its 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. The Company bases its 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. The Company believes the following critical accounting policies require more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company maintains allowances for doubtful accounts for estimated Page 12 of 19 losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company loaned $500,000 to an unrelated company, Zylab International, Inc., (detailed in footnote 16) which has a working capital and shareholders' deficit. The collectibility of the loan will be dependent upon Zylab's ability to achieve profitability and/or raise additional funds through an equity or debt financing. There can be no assurances that Zylab will achieve profitability or raise additional funds. The Company writes down its 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. The Company holds minority interests in companies having operations or technology in areas within its strategic focus, none of which are publicly traded. The Company monitors the financial condition and results of such companies; 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. The Company has capitalized software development costs related to a newly launched product (Authentidate) for which the recoverability of such capitalized costs 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 may be impaired and require an impairment charge in the future. RESULTS OF OPERATIONS THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2000. The Company realized a consolidated net loss of $4,831,925 ($.35 per share) and $2,222,955 ($.16 per share) for the six and three months ended December 31, 2001, respectively. This compares to a consolidated net loss of $3,198,912 ($.22 per share) and $1,623,016 ($.11 per share) for the six and three months ended December 31, 2000, respectively. As reported under Footnote 8 (Segment Information), the losses increased as a result of losses incurred primarily by the Company's Authentidate subsidiary. Authentidate, Inc. has incurred significant sales, marketing, development and general administrative expenses this year in an effort to generate sales. The Company's DocStar Division realized a segment profit for the six months ended December 31, 2001 in the amount of $135,165 which compares to a segment loss of $31,254 for the same period last year. The improvement is due to an increase in gross profit margins and also an increase in sales. The DJS subsidiary realized a segment profit of $62,808 compared to the prior year of $209,660. The Company had consolidated net sales of $7,394,789 and $4,131,286 for the six and three months ended December 31, 2001, respectively. This compares with consolidated net sales of $8,518,002 and $4,034,523 for the six and three months ended December 31, 2000, respectively. The major reason for the decrease was due to a reduction in sales in DJS (a decrease of $1,239,206) which realized fewer direct hardware sales but saw an increase in indirect sales where DJS earns a fee from the Page 13 of 19 computer hardware manufacturer or distributor. The increase in indirect sales however did not generate enough gross profit to offset the decrease in direct sales for the six months ended December 31, 2001 as gross profit decreased by $208,185 on a consolidated basis. DJS has seen a general decrease this fiscal year in demand for computer hardware across its market area due to recessionary pressures in it's market area. However, DJS has been able to remain profitable as a result of strong integration services revenue. DocStar sales increased by $91,307. DocStar launched a new version of it's software called Version 3.0 during the second quarter of the current fiscal year. As a result of this product launch sales increased by $392,143 in the second quarter compared to the first quarter and segment profit increased $215,251 in the second quarter compared to the first quarter. Authentidate did not have significant sales during the six months ended December 31, 2001. Consolidated gross profit for the six and three months ended December 31, 2001 was $2,683,554 and $1,443,812, respectively compared to $2,475,369 and $1,168,192 for the same periods last year. The increases on a year to year basis and also on a quarter to quarter basis is due to DocStar and its new 3.0 software product line. The consolidated gross profit margin was 36.3% and 34.9% for the six and three months ended December 31, 2001, respectively. The consolidated gross profit margin was 29.1% and 29% for the six and three months ended December 31, 2000, respectively. Both DocStar and DJS realized an improvement of profit margins this year compared to last year. DocStar's gross profit margin was 54.1% and DJS's gross profit margin was 24.9% for the six months ended December 31, 2001 compared to 41.3% and 22.2% for DocStar and DJS, respectively for the six months ended December 31, 2000. DocStar improved due to the release of Version 3.0 and DJS sales also improved as a result of an increase in integration services revenue of $170,159 compared to the six months ended December 31, 2000. Gross profit margin is defined as gross profit as a percentage of sales. Selling, general and administrative expenses (S,G&A) consist of all other Company expenses except product development costs and interest. S,G&A expenses amounted to $5,469,492 and $2,755,773 for the six and three months ended December 31, 2001 compared to $4,834,389 and $2,487,974 for the same periods last year. The increase is mainly due to DocStar which incurred additional sales and marketing expenses (an increase of $302,851 for the six months ended December 31, 2001 compared to the prior year) and also Corporate expenses which increased by $363,884 for the six months ended December 31, 2001 compared to the prior year. Corporate expenses include all public company type expenses and included a non-cash compensation expense of $345,174 related to the conversion of Authentidate, Inc. common stock for Authentidate Holding Corp. common stock in March 2001. The unamortized, unearned compensation of $172,587 will be fully amortized during the current fiscal year. As a percentage of sales, S,G&A costs were 74% and 67.2% for the six and three months ended December 31, 2001, respectively, compared to 56.8% and 61.7% for the same periods a year ago. This statistic is really not meaningful because 30%-36% of S,G&A costs are being incurred by Authentidate and sales are not yet significant. Interest expense was $56,167 and $27,983 for the six and three months ended December 31, 2001, respectively, compared to $61,797 and $33,369 for the same periods last year. Product development expenses, excluding capitalized costs and including amortization of capitalized costs, relate to software development for Authentidate, Page 14 of 19 primarily. These costs totaled $1,701,607 and $783,733 for the six and three months ended December 31, 2001, respectively, compared to $963,812 and $334,022 for the same periods last year. The increase is due to product development of the Authentidate software product. The Company has a policy of capitalizing qualified software development costs after technical feasibility has been established and amortizing those costs over three years as product development expense. The amortization expense of software development costs amounted to $520,412 for the six months ended December 31, 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's 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 December 31, 2001 totaled $1,334,316 all of which relates to a mortgage loan on the Company's principle office located in Schenectady, NY. Property, plant and equipment expenditures totaled $279,406 and capitalized software development expenditures totaled $87,579 for the six months ended December 31, 2001, respectively. There are no significant purchase commitments outstanding. In June 1999, the Company 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 the Company is obligated to achieve certain annual employment levels between January 2002 and January 2006 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 expects to achieve such levels by 2006. No assurances can be given that such employment levels will be achieved by 2006 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 the Company will either seek refinancing from a financial institution, sell the building or pay the grant off out of cash reserves. The Company's cash balance at December 31, 2001 was $3,971,312 and total assets were $20,086,468. Management believes existing cash and short-term investments should be sufficient to meet the Company's operating requirements for the next twelve months provided Authentidate starts to generate material sales. In the event the Authentidate subsidiary does not increase its sales materially then the Company will either need to obtain outside financing or reduce expenses or a combination of both. During the six months ended December 31, 2001 the Company incurred a net loss of $4,831,925. Cash used in operating activities totaled $3,780,883 for the six months ended December 31, 2001 compared to $1,391,651 used in operating activities for the year ended June 30, 2001. The Company's cash balance decreased from $9,040,466 to $3,971,312 from June 30, 2001 to December 31, 2001. To date the Company has been largely dependent on its ability to sell additional shares of its common stock to obtain 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 its products and the Company's ability to reduce overhead costs. Authentidate and it's related businesses, Trac Med, AG and Sports are currently cash flow negative and along with Corporate operations were responsible for the negative cash flow from operations for the six months ended December 31, 2001. If the Company is unable to Page 15 of 19 attain projected sales levels for Authentidate and related products, or is unable to implement cost reduction strategies, 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. The Company has engaged an investment banking firm to assist the Company in arranging private financing as well as providing general advisory services to the Company. If the Company is successful in raising additional capital it intends to use the capital to further develop the Authentidate technology and to fund the sales and marketing efforts of this product and related products such as Trac Medical, Sports and Authentidate AG as well as general working capital purposes. The agreement is not a commitment to provide financing and there can be no assurances that the Company will be successful in securing any equity or debt investments in the future. Below is a chart disclosing future minimum operating lease payments and aggregate principle maturities of long-term debt as of December 31, 2001, for the next five years.
Long-term debt Operating leases -------------- ---------------- For fiscal year ending June 30, 2002 $ 16,801 $ 159,497 2003 35,747 305,446 2004 38,810 317,873 2005 42,136 319,342 2006 45,747 229,474 Thereafter 1,155,075 0
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 impact 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 is currently reviewing this statement to determine its effect on the Company's financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not believe that any of our financial instruments have significant risk associated with market sensitivity. We are not exposed to significant financial market risks from changes in foreign currency exchange rates and 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. Page 16 of 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: As described in our report on Form 10-K for the fiscal year ended June 30, 2001, we are involved in the following pending and threatened legal proceedings. We are 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. 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 flow. 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 flow. 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 or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Authentidate held its Annual Meeting of shareholders on January 24, 2002. As of the record date of December 3, 2001, there were 16,265,426 shares outstanding and eligible to vote at the Annual Meeting. At the Annual Meeting, shareholders approved the following actions: 1. Election of Directors: Shareholders were requested to vote on the election of the following seven directors, each of whom were elected by the shareholders:
Nominee Votes Cast in Votes Percentage Favor Against in Favor John T. Botti 13,468,330 298,493 98% Ira C. Whitman 13,331,650 435,173 97% Steven Kriegsman 13,265,452 501,371 96% Charles C. Johnston 13,478,302 288,521 98% J. Edward Sheridan 12,294,300 472,523 97% Robert Van Naarden 13,451,810 315,013 98%
2. Adoption of 2001 Non-Executive Director Stock Option Plan: Shareholders were requested to approve the adoption of the 2001 Non-Executive Director Stock Option Plan to provide for the grant to non-employee directors of (a) 20,000 options to purchase AHC common stock upon joining the Board and (b) 10,000 options to purchase AHC common stock each September 1 thereafter, pro rata, based on the time the director has served in such capacity during the previous year.
Votes Cast in Favor Votes Against Votes Abstaining Non-Votes 2,534,522 603,870 58,447 10,569,984
Page 17 of 19 ITEM 5 OTHER INFORMATION: On December 14, 2001, AHC announced that it entered into a letter of intent with the majority shareholders of Authentidate International, AG (AG), to purchase all the outstanding shares of common stock of AG not held by AHC. If the transaction is consummated, AG would become a wholly-owned subsidiary of AHC. The transaction contemplates that AHC will repurchase all of the outstanding shares of AG in exchange for a maximum of 1,500,000 shares of AHC common stock and warrants to purchase 100,000 shares of AHC common stock. Pursuant to the letter of intent, AHC provided a $500,000 loan to AG. The transaction is subject to various terms and conditions, including the completion of due diligence and the execution of a definitive agreement. Accordingly, there can be no assurance that the transaction will be consummated. On January 9, 2002, AHC announced that it has 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 contemplates that the purchase price will range between a minimum of 725,000 and a maximum of 1,000,000 shares of AHC common stock. The precise number of shares to be issued as the purchase price will be determined prior to closing. Pursuant to the letter of intent, AHC has loaned an aggregate principle amount of $500,000 as of February 5, 2002 (of which $350,000 was loaned as of December 31, 2001), which loan is collateralized by all of the assets of Zylab, including its intellectual property. The acquisition is subject to various terms and conditions, including the completion of the due diligence investigation by AHC, the negotiation of a definitive agreement and the approval of the respective boards and Zylab's shareholders. Accordingly, there can be no assurance that the transaction will be consummated. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits 4.1 Form of Note dated as of December 24, 2001 between AHC and Zylab 10.1 Pledge and Security Agreement dated January 5, 2001 between AHC and John T. Botti 10.2 Pledge and Security Agreement dated December 24, 2001 between AHC and Zylab (b) Reports on Form 8-K (1) Date of Report - November 27, 2001 Item(s) Reported - Item 5 - Other events. Disclosure of engagement of banking firm to arrange private financing. SAFE HARBOR STATEMENT Certain statements in this Form 10-Q, including information set forth under Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). The Company desires to avail itself of certain "safe harbor" provisions of the Act and is therefore including this special note to enable the Company to do so. Forward-looking statements in this Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or Page 18 of 19 operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to risks associated with the market acceptance of the DocStar, Authentidate and related product lines, competition, pricing, technological changes, technological implementation of the Authentidate business plan and other risks as discussed in the Company's filings with the Securities and Exchange Commission, in particular its Annual Report on Form 10-K for the year ended June 30, 2001, the Registration Statement on Form S-3 declared effective on July 30, 1996, the Registration Statement on Form SB-2 declared effective February 14, 2000 and the Registration Statement on Form S-3 declared effective January 5, 2001 all of which risk factors could adversely affect the Company's business and the accuracy of the forward-looking statements contained herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTHENTIDATE HOLDING CORP. February 8, 2002 /s/ John T. Botti - ---------------- --------------------------------------- DATE JOHN T. BOTTI PRESIDENT & CHIEF EXECUTIVE OFFICER /s/ Dennis H. Bunt --------------------------------------- DENNIS H. BUNT CHIEF FINANCIAL OFFICER Page 19 of 19 EX-4.1 3 y57348ex4-1.txt FORM OF NOTE EXHIBIT 4.1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING SUCH SECURITIES UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS NOTE REASONABLY SATISFACTORY TO THE ISSUER STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT. ZYLAB INTERNATIONAL, INC. SECURED CONVERTIBLE PROMISSORY NOTE $350,000 December 24, 2001 FOR VALUE RECEIVED, Zylab International, Inc., a Virginia corporation (the "Company" or the "Payor"), with an address at 12800 Middlebrook Road, Suite 410 Germantown, MD 20874 promises to pay to the order of Authentidate Holding Corp. (the "Payee" or the "Holder"), the principal amount of THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000) of principal and interest in six (6) quarterly installments of $61,433.83 each commencing on June 30, 2002 with a final installment due and payable on November 30, 2003 (the "MATURITY DATE"). Interest shall accrue and be payable at the rate of 6% per annum (except as provided in Section 1.4), calculated for the actual number of days the Principal is outstanding and interest is accrued and unpaid based on a 360-day year, in accordance with the terms hereof. Payments of principal and interest shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public or private debts at such address of the Holder as set forth herein or that the Holder shall hereafter give to the Payor by written notice made in accordance with the provisions hereof. 1. Terms of Repayment 1.1 All payments received on account of this Note shall be applied first to the payment of accrued interest on this Note and then to the reduction of the unpaid principal balance of this Note. Interest shall be computed on the basis of a year of 360 days, for the actual number of days elapsed. Payor may prepay principal and interest on this Note upon 10 days prior notice to the Holder. 1.2 If payment of the outstanding principal amount of this Note, together with accrued unpaid interest thereon at the applicable rate of interest (as set forth herein), is not made on the earlier to occur of (i) the Maturity Date (as such date may be extended pursuant to the extension options set forth in Section 4 hereof) and (ii) the Accelerated Maturity Date (defined below), then interest shall accrue on the outstanding principal amount due under this Note and on any unpaid accrued interest due on this date of the payment in full of such amounts (including from and after the date of the entry of judgment in favor of the Holder in an action to collect this Note) at an annual rate equal to the lesser of 18% or the maximum rate of interest permitted by applicable law. 1.3 Notwithstanding anything to the contrary contained in this Note, Payor shall not be obligated pay, and the Holder shall not be entitled to charge, collect, or receive, interest in excess of the maximum rate allowed by applicable law. During any period of time in which the interest rate specified herein exceeds such maximum rate, any amounts of interest collected by the Holder in excess of such maximum rate shall be deemed to apply to principal and all payments of interest and principal shall be recalculated to allow for such characterization. 1.4 In the event that the date for the payment of any amount payable under this Note falls due on a Saturday, Sunday or public holiday under the laws of the State of New York, the time for payment of such amount shall be extended to the next succeeding business day and interest shall continue to accrue on any principal amount so effected until the payment thereof on such extended due date. 2. Security. This Holder of this Note is entitled to the rights as set forth in that certain Security Agreement between the Company and Authentidate Holding Corp. of even date herewith (the "Security Agreement"), pursuant to which the Holder has been granted a first priority security interest in the assets of the Company. This Note is the direct obligation of the Company and is secured by all of the Collateral contemplated by the Security Agreement. In order to effectuate the purposes of the Security Agreement and this Note, certain of the Collateral contemplated by the Security Agreement shall be deposited with an escrow agent pursuant to the terms of the escrow agreement as provided in the Security Agreement. A copy of the Security Agreement and escrow agreement are available for inspection at the Company's principal office. Reference to the Security Agreement and escrow agreement shall in no way impair the absolute and unconditional obligation of the Company to pay both principal and interest hereon as provided herein. All capitalized terms not defined herein shall have the meanings ascribed thereto in the Security Agreement and Escrow Agreement. 3. Conversion Rights 3.1 The Holder shall have the right prior to the date on which this Note is paid in full, to convert at any time as provided below, from time to time, any part of the outstanding principal amount of this Note into fully paid and non-assessable shares of the Common Stock, no par value per share ("Conversion Shares"), of Payor (the "CONVERSION RIGHTS") at the Conversion Ratio (as defined below in Section 3.2) determined as provided in this Section 3. Promptly after the surrender of this Note, accompanied by a Notice of Conversion of Convertible Note in the form 2 attached hereto as Exhibit A, properly completed and duly executed by the Holder (a "CONVERSION NOTICE"), Payor shall issue and deliver to or upon the order of the Holder that number of shares of Common Stock for the balance of this Note converted as shall be determined in accordance herewith. This Note shall be convertible, at the option of the Holder commencing on the date which is the earlier of (i) the date of termination of the Letter of Intent between the Company and Authenticate Holding Corp dated as of December 14, 2001 unless the Letter of Intent has been superceded by a definitive agreement between the Company and Authenticate Holding Corp. providing for the acquisition of the Company by Authenticate Holding Corp. or (ii) 90 days from the date hereof. 3.2 Conversion Ratio. The principal amount of this Note outstanding may be converted, at the option of the Holder at any time, into shares of Common Stock of Payor (or any successor entity). The number of shares of Payor's Common Stock to be delivered to Payee upon conversion of the entire original principal amount of this Note shall equal seventeen and one half (17.5%) of the outstanding Common Stock of Payor, determined on a fully diluted basis, as of the date of Conversion ("CONVERSION RATIO"). If less then the total principal amount of this Note is converted by the Holder, the number of shares to be delivered shall be reduced pro rata by the ratio by which the principal amount to be converted bears to $350,000. Upon conversion, in whole or in part, all accrued interest due and owing as of the date of conversion shall be paid in full on the next scheduled quarterly installment date. 3.3 Subdivision. If the Company, at any time while Note remains outstanding, shall (i) subdivide the Common Stock (or effect a similar transaction), the Conversion Ratio shall be proportionately reduced or (ii) effect a reverse stock split or similar transaction, the Conversion Ratio shall be proportionately increased, as the case may be, as of the effective date of such subdivision, reverse stock split or similar transaction, or, if the Company shall take a record of holders of its Common Stock for the purpose of any such transaction, as of such record date, whichever is earlier (provided if such transaction does not actually occur, such adjustment shall not be made). 3.4 Stock Dividends. If the Company at any time while the Note is outstanding shall pay a dividend in shares of, or make other distribution of shares of, the Common Stock, then the Conversion Ratio shall be adjusted, as of the date the Company shall take a record of the holders of its Common Stock for the purpose of receiving such dividend or other distribution (or if no such record is taken, as at the date of such payment or other distribution), to that price determined by multiplying the Conversion Ratio in effect immediately prior to such payment or other distribution by a fraction (a) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. 3.5 Reclassification, Consolidation or Merger. At any time while this Note remains outstanding, in case of any reclassification or change of Common Stock (other than a change in par value, or from par value to no par value per share, or from no par value per share to par value or as a result of a subdivision or combination of Common Stock) or in case of any consolidation or 3 merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is a continuing corporation and which does not result in any reclassification or change, other than a change in par value, or from par value to no par value per share, or from no par value per share to par value, or as a result of a subdivision or combination Common Stock), or in the case of any sale or transfer to another corporation of the property of the Company as an entirety or substantially as an entirety, the Company, or such successor or purchasing corporation, as the case may be, shall, without payment of any additional consideration therefor, execute new notes providing that the holders of the Note shall have the right to exercise such new notes (upon terms not less favorable to the holders than those then applicable to the Note) and to receive upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of the Note, the kind and amount of shares of stock, other securities, money or property receivable upon such reclassification, change, consolidation, merger, sale or transfer by the Holder of one share of Common Stock issuable upon exercise of the Note had the Note been converted immediately prior to such reclassification, change, consolidation, merger, sale or transfer. Such new notes shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this Section 3.5 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and transfers. 3.6 Method of Conversion. Except as otherwise provided in this Note or agreed to by the Holder, this Note may be converted by the Holder in whole or in part as permitted herein (provided such partial conversion is at least $20,000) from time to time by (i) submitting to the Company a Conversion Notice (by facsimile dispatched on the Conversion Date and confirmed by U.S. mail or overnight mail service sent within two business days thereafter) and (ii) surrendering this Note with the mailed confirmation of the Conversion Notice at the principal office of the Company. Upon partial exercise of the Conversion Rights, a new note containing the same date and provisions as this Note shall be issued by the Company to the Holder for the balance due hereunder which shall not have been converted. 3.7 Restrictions on Shares. This Note has been issued by the Company pursuant to the exemption from registration under the Securities Act of 1933 (the "ACT"). The shares of Common Stock issuable upon conversion of this Note may not be offered, sold or otherwise transferred unless (i) they first shall have been registered under the Act and applicable state securities laws or (ii) the Company shall have been furnished with an opinion of legal counsel (in form, substance and scope reasonably acceptable to the Company) to the effect that such sale or transfer is exempt from the registration requirements of the Act. Each certificate for shares of Common Stock issuable upon conversion of this Note that have not been so registered and that have not been sold pursuant to an exemption that permits removal of the applicable legend, shall bear a legend substantially in the following form, as appropriate: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND 4 TRANSFERS ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. Upon the request of a holder of a certificate representing any shares of Common Stock issuable upon conversion of this Note, the Company shall remove the foregoing legend from the certificate or issue to such Holder a new certificate therefor free of any transfer legend, if (i) with such request, the Company shall have received an opinion of counsel, reasonably satisfactory to it in form, substance and scope, to the effect that any such legend may be removed from such certificate or (ii) a registration statement under the Act covering the resale of such securities is in effect. 3.8 Reservation of Shares. The Company shall at all times have authorized and reserved, for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the issuance of shares of Common Stock underlying the then outstanding aggregate Principal amount of the Note. In the event that at any time commencing on the date hereof that the Company does not have an adequate and sufficient number of authorized shares of Common Stock available to provide for issuance to Holder for the full conversion of this Note as provided herein, then (i) the principal officers and/or shareholders of the Company shall deliver to Holder, to be held in escrow (until an Event of Default as provided in this Note), such number of shares representing the number of shares by which the Company is deficient (the "Deficiency Shares"), together with undated and executed stock powers, which shall be held in escrow until the Company is able to deliver the fully authorized Deficiency Shares and (ii) the Company and the officers and directors of the Company shall deliver written and binding agreements by which each of them agree to use their best efforts to obtain shareholder approval as soon as possible to authorize additional shares of Common Stock of the Company and agree to vote all shares owned by them (beneficially and of record) at the next meeting of shareholders (or by written consent) in favor of authorizing a sufficient number of additional shares of Common Stock to provide for at least the Deficiency Shares. The Company shall procure a Certificate of Amendment to its Certificate of Incorporation providing for the increase in its authorized capital and deliver such Certificate of Amendment to the Holder no later than ten days from the date hereof. 4. Covenants. The Company covenants and agrees that for so long as any portion of the indebtedness evidenced by this Note, whether principal, accrued and unpaid interest or any other amount at any time due hereunder, remains unpaid: 4.1 Negative Covenants. The Company will not, without the prior written consent of the Holder: (a) Sell, transfer or in any other manner dispose of, or purchase or acquire, any business, assets, capital stock or other property, except (i) in the ordinary course of its business, or (ii) if (A) the transaction is a bona fide transaction in which fair market value is received by the Company, (B) no Event of Default or Default (each defined hereinafter) has occurred and is continuing or would occur after giving effect to such transaction, and (C) payment of the principal amount of the Notes and accrued and unpaid interest thereon through the date of such payment shall have been made or provided for from the net proceeds of such transaction. 5 (b) Make any loan or advance to any person who is or hereafter becomes an officer, director or shareholder of the Company or any affiliate of any such person, other than for reasonable advances for expenses to be incurred by officers, directors, employees and consultants of the Company in the ordinary course of the business of the Company. (c) Purchase or otherwise redeem any Common Stock or other equity securities of the Company or declare or pay any dividends in cash or other assets on any of its Common Stock or other equity securities. (d) Issue, create, incur, assume, permit, guarantee or suffer to exist any indebtedness or other obligations for money borrowed or capital lease obligations, except for (i) indebtedness under the Note and any extension, renewal or refinancing thereof; (ii) trade indebtedness incurred in the ordinary course of business; (iii) indebtedness or other obligations for money borrowed which are subordinated in all respects, including, but not limited to, priority upon liquidation, to the Note and (iv) account receivable financing in an amount not to exceed $150,000 principal amount, and which account receivable financing is secured by no other assets of the Company. (e) Pay (other than in accordance with the terms thereof), or voluntarily prepay, any amounts under any indebtedness or other obligations for money borrowed, or capital lease obligations, whenever incurred or created and whether or not such indebtedness becomes due, past due or accelerated, except for (i) the Note, (ii) trade indebtedness incurred in the ordinary course of business or (iii) regularly scheduled payments in connection with account receivables financing which the Company may obtain in an amount not to exceed $150,000. (f) (i) Amend its certificate or articles of incorporation or by-laws in any manner which would impair or reduce the rights of the holders of the Note, (ii) effect a merger or consolidation in which the Company is not the surviving entity or (iii) liquidate, wind up its affairs or dissolve. (g) Create, permit or suffer to exist any lien, charge or security interest in any of its assets, except for (i) the security interest created by the Security Agreement; and (ii) Permitted Liens. As used herein, "Permitted Liens" means any of the following: (a) liens for taxes, assessments and governmental charges or levies (i) not yet in default or (ii) that are being contested in good faith and by appropriate proceedings diligently conducted, provided that in the case of liens under this clause (ii), reserves or other appropriate provisions shall have been established therefor in accordance with generally accepted accounting principles ("GAAP") and enforcement of any such liens shall have been effectively stayed or fully bonded pending the final determination of such proceeding, (b) liens imposed by law, such as materialmen's, mechanics' carriers', workmen's and repairmen's liens and other similar liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 60 days or which, if overdue, are being contested in good faith and by appropriate proceedings diligently conducted, provided that reserves or other appropriate provisions shall have been established therefor in accordance with GAAP and enforcement of any such lien is effectively stayed or fully bonded pending the final determination of such proceeding, (c) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure 6 public or statutory obligations; (d) easements, zoning restrictions or other restrictions, rights-of-way, minor encroachments, covenants or encumbrances on real property imposed by law or arising in the ordinary course of business that do not arise out of the incurrence of any indebtedness and that do not and could not reasonably be expected to materially detract from the value of the affected property or interfere materially with the ordinary conduct of business of the Company or materially impair the use thereof to the indebtedness; (e) judgments and other similar liens arising in connection with court proceedings in an amount not in excess of $50,000, provided the execution or other enforcement of such liens is effectively stayed or fully bonded pending the final determination of the proceeding referred to below and the claims secured thereby are being contested in good faith and by appropriate proceedings; and (f) liens (other than liens created or imposed under the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tender, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive in any case of obligations incurred in connection with the borrowing of money or the obtaining of advances or credit). (h) Directly or indirectly, enter into any transaction with or for the benefit of an affiliate (other than the reasonable compensation of an affiliate for services as an officer, director or employee). 4.2 Affirmative Covenants. The Company will: (a) Pay and discharge all lawful taxes, assessments and governmental charges or levies imposed upon it, upon its income and profits or upon any of its assets, before the same shall become in default, as well as all lawful claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon such properties or any part thereof, provided, however, that the Company will not be required to pay and discharge any such tax, assessment, charge, levy or claim so long as (i) the validity, applicability and/or the amount thereof shall be contested in good faith by appropriate proceedings, (ii) the Company, shall have set aside on its books adequate reserves in accordance with GAAP with respect to any such tax, assessment, charge, levy or claim so contested, and (iii) enforcement of any lien on any assets of the Company associated with any such taxes, assessments, charges, levies or claims shall have been effectively stayed or fully bonded pending the final determination of any such proceedings. (b) Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises and to comply in all material respects with all laws, regulations and orders of each governmental authority having jurisdiction over the Company (it being acknowledged that the Company may nevertheless effectuate its Reincorporation). (c) Promptly following the occurrence of a Default (as defined herein), furnish to the Holder and the Secured Party a statement of the Company's President or Chief Financial Officer setting forth the details of such Default and the action which the Company proposes to take with respect thereto. 7 (d) At all times maintain true and complete records and books of account in which all of the financial transactions of the Company are duly recorded in conformance with GAAP. (e) Within 90 days of the date hereof, at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon conversion of this Note, such number of shares of Common Stock as shall be issuable upon the conversion of this Note.; (f) Take all action which may be necessary or expedient to assure that, upon conversion of this Note, all Conversion Shares issuable upon such conversion will be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. (g) Use the proceeds from the sale of the Notes primarily for working capital requirements and for repayment of debt payable to third parties, but not debt to officers or directors or their affiliates, except as follows: an aggregate amount of $25,000 may be paid to Jonathan Karlin in repayment for loans made by Mr. Karlin to the Company; and fifty percent of an aggregate of $99,787 payable for salary deferred by certain officers of the Company, not including any federal tax payable thereon, may be paid upon the Company's receipt of the proceeds from the sale of the Notes and the remaining fifty percent of such deferred salaries may be paid in equal installments over the three month period commencing on the date hereon in accordance with the Company's regular payroll periods; provided however, that, if the closing of the sale of assets contemplated in the Letter of Intent dated December 14, 2001, between the Company and Authentidate Holding Corp. shall occur prior to the expiration of the aforementioned three month period, then the Company may use the proceeds from the sale of the Notes to pay all deferred salary of the Company's officers simultaneously with said closing. (h) Commencing on December 31, 2001, provide the Holder with monthly financial statements prepared in accordance with generally accepted accounting principals consistently applied including a balance sheet and statements of income and cash flow, as well as detailed aging of accounts receivable and accounts payable. (i) Furnish to the Payee such reports as to the Collateral (as defined in the Security Agreement) for the Notes as the Holder may reasonably request from time to time. (j) Cooperate with the Holder and execute such further instruments and documents as the Holder shall reasonably request to carry out to their satisfaction the transactions contemplated by this Note. (k) Permit the Holder to visit and inspect any of the properties of the Company to examine the books of account of the Company (and to make copies thereof and extracts therefrom), and to discuss the affairs, finances and accounts of the Company with, and to be advised as to the same by, its and their officers, at all such reasonable times and intervals as the Holder may reasonably request. 8 (l) Comply in all material respects with (i) the applicable laws and regulations wherever its business is conducted, (ii) the provisions of its charter documents and by-laws, (iii) all agreements and instruments by which it or any of its properties may be bound and (iv) all applicable decrees, orders and judgements. (m) Continue to retain Jonathan Karlin as the [Chairman and Chief Executive Officer] of the Company. (n) Cause any Subsidiary organized after the date of the Note to be bound by the terms hereof and the Security Agreement to the same extent as the Company. (o) Deliver to the Holder, upon request, a detailed statement reflecting the number of shares of Common Stock outstanding and the number of all convertible securities with the terms of such conversion. (p) Submit, within 45 days of the date hereof, for approval of shareholders, a resolution to approve an increase in the authorized common stock of the Company or obtain written consents for such approval within 45 days of the date hereof. (q) Along with Jonathan Karlin, use commercially reasonable efforts to obtain a term life insurance policy on the life of Mr. Karlin, for the benefit of Holder in the amount of $500,000. Such policy may be made payable to the Company only if the Company collaterally assigns such proceeds to the Holder sufficient proceeds, up to $500,000, to satisfy any outstanding Notes (as defined in the Security Agreement dated December 24, 2001, between Company and Authentidate Holding Corp.), which proceeds shall be applied to repay said Notes. 5. Events of Default. If any of the following events (each an "Event of Default") shall occur: 5.1 The Company fails to pay the principal of, any installment of principal and/or interest accrued on, or any other amount at anytime owing under, the Note, as and when the same becomes due and payable hereunder or thereunder and/or under the Security Agreement; or 5.2 The Company defaults in the due observance or performance of or breach any of its covenants contained in this Note or the Security Agreement, (other than a Default involving the payment of money due under this Note), and such default is not cured within 10 business days after the occurrence of such default; or 5.3 The Company or any Subsidiary thereof shall (i) becomes insolvent, (ii) apply for or consent to the appointment of, or the taking of possession by, a receiver, trustee or similar official of or for itself or of or for all or a substantial part of its property, (iii) make an assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code, as now or hereafter in effect (the "Code"), (v) file a petition seeking to take advantage of any other bankruptcy, insolvency, moratorium, reorganization or other similar law of any jurisdiction ("Other 9 Laws"), (vi) acquiesce as to, or fail to controvert in a timely or appropriate manner, an involuntary case filed against the Company or such Subsidiary under the Code, or (vii) take any corporate action in furtherance of any of the foregoing; or 5.4 A proceeding or involuntary case shall be commenced, without the application or consent of the Company or any Subsidiary thereof, in any court of competent jurisdiction (i) under the Code, (ii) seeking liquidation, reorganization, dissolution, winding up or composition or readjustment of its debts under any Other Laws, or (iii) seeking the appointment of a trustee, receiver or similar official for it or for all or any substantial part of its assets, and any such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 60 days; or 5.5 A final judgment for the payment of money shall be rendered by a court of competent jurisdiction against the Company or any Subsidiary thereof, and the Company or such Subsidiary shall not discharge the same, or procure a stay of execution thereof within 30 days from the date of entry thereof and within such 30 day period or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment, together with all other judgments against the Company (including all subsidiaries), shall exceed in the aggregate $50,000 in excess of any insurance as to the subject matter of such judgments, as to which coverage has not been declined or the underlying claim rejected by the applicable insurer; or 5.6 The liquidation or dissolution of the Company or any Subsidiary thereof or any vote in favor thereof by the board of directors and shareholders of the Company; or 5.7 A proceeding is commenced to foreclose a security interest in or lien on any asset of the Company or any Subsidiary thereof as a result of a default in the payment or performance of any indebtedness of the Company or such Subsidiary; or 5.8 An attachment or garnishment is levied against the assets of the Company or any Subsidiary thereof involving an amount in excess of $25,000 and the lien created by such levy is not vacated, bonded or stayed within 10 business days after such lien has attached to such assets; or 5.9 The Company or any Subsidiary thereof defaults in the payment (regardless of amount) when due of the principal of, interest on, or any other liability on account of, any indebtedness of the Company or such Subsidiary (other than the Notes) having an unpaid principal amount in excess of $50,000, or a default occurs in the performance or observance by the Company or any Subsidiary thereof of any covenant or condition (other than for the payment of money) contained in any note (other than this Note) or agreement evidencing or pertaining to any such indebtedness, which causes the maturity of such indebtedness to be accelerated or permits the holder or holders of such indebtedness to declare the same to be due prior to the stated maturity thereof; 5.10 Any representation, warranty or statement of fact made by the Company in this Note, or the Security Agreement or in any certificate or financial statement delivered by the 10 Company to the Holder at any time proves to be false or misleading in any material respect when made or deemed made by the Company; 5.11 The Company or any of its Subsidiaries sells all or substantially all of its assets or merges or is consolidated with another corporation in which the Company or such Subsidiary, as the case may be, is not the surviving corporation; 5.12 The Company grants a security interest in any of its assets while any principal or interest on this Note remains outstanding provided, however, the Company may grant a security interest of up to $150,000 with respect to account receivable financing; or 5.13 The Company fails to obtain shareholder approval to amend its certificate of incorporation within 90 days of the date hereof to provide for an increase in the number of authorized shares of Common Stock in an amount at least equal to the number of shares issuable upon conversion of this Note. then, and in any such event the Holder of this Note may by written notice to the Company declare the entire unpaid principal amount of this Note outstanding together with accrued interest thereon due and payable, and the same shall, unless such default be cured within ten (10) days after such notice, forthwith become due and payable upon the expiration of such ten (10) day period, without presentment, demand, protest, or other notice of any kind, all of which are expressly waived. As used in this Note, "Accelerated Maturity Date" means any date prior to the Maturity Date on which the principal of and any accrued and unpaid interest on this Note is declared to be, or becomes, due pursuant to this Section 4 and "Default" means any event that is or, with the passage of time or the giving of notice or both, would be, an Event of Default. 6. Suits for Enforcement and Remedies. If any one or more Events of Default shall occur, the Holder may proceed to (i) protect and enforce Holder's rights either by suit in equity or by action at law, or both, whether for the specific performance of any covenant, condition or agreement contained in this Note or in any agreement or document referred to herein or in aid of the exercise of any power granted in this Note or in any agreement or document referred to herein, (ii) enforce the payment of this Note, or (iii) enforce any other legal or equitable right of the Holder. No right or remedy herein or in any other agreement or instrument conferred upon the Holder of this Note is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 7. Restriction on Transfer. This Note has been acquired for investment and has not been registered under the securities laws of the United States of America or any state thereof. Accordingly, neither this Note nor any interest therein may be offered for sale, sold or transferred in the absence of registration and qualification of this Note under applicable federal and state 11 securities laws or an opinion of counsel of the Holder reasonably satisfactory to the Company that such registration and qualification are not required. 8. Prepayment. The principal of and accrued interest on this Note may be prepaid in full at any time without premium or penalty. 9. Holder Deemed Owner. The Company may deem and treat the registered Holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Company, for the purpose of receiving payment hereof or thereof or on account hereof and for all other purposes) and the Company shall not be affected by notice to the contrary. 10. Corporate Obligation. It is expressly understood that this Note is solely a corporate obligation of the Company, and that any and all personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every promoter, subscriber, incorporator, shareholder, officer, or director, as such, are hereby expressly waived and released by the Holder hereof by the acceptance of this Note and as a part of the consideration for the issue hereof. 11. Miscellaneous 11.1 The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. No provision of this Note shall alter or impair the obligations of the Company hereby. 11.2 If, following the occurrence of an Event of Default, the Holder of this Note shall seek to enforce the collection of any amount of principal and/or accrued interest on this Note, there shall be immediately due and payable by the Company, in addition to the then unpaid principal of, and accrued unpaid interest on, this Note, all costs and expenses incurred by the Holder of this Note in connection therewith, including, without limitation, reasonable attorneys' fees and disbursements. 11.3 No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver or as an acquiescence in any Default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 11.4 This Note may not be modified or discharged (other than by payment), except by a writing duly executed by the Company and Holder. 12 11.5 The headings of various sections and subsections of this Note are for convenience of reference only and shall in no way modify any of the terms or provisions of this Note. 11.6 All notices required to be given to any of the parties hereunder shall be in writing and shall be deemed to have been sufficiently given for all purposes when presented personally to such party, sent by telecopier (with the original timely mailed), or sent by registered, certified or express mail, return receipt requested, to such party at its address set forth below: If to the Company, to: With a copy to: Zylab International, Inc. Gorham S. Clark, Esq. 12800 Middlebrook Road Foust & Clark, P.C. Suite 410 8345-A Greensboro Drive Germantown, MD 20874 McLean, Virginia 22102 Attn: John Karlin Telecopier No.: (703) 893-7907 Telecopier No.: (301) 428-3307 If to the Payee, to: With a copy to: Dennis H. Bunt, Chief Financial Officer Brian C. Daughney, Esq. Authentidate Holding Corp. Goldstein & DiGioia, LLP 2165 Technology Drive 369 Lexington Avenue-18th Floor Schenectady, NY 12308 New York, NY 10017 Telecopier: (518) 346-3644 Telecopier No.: (212) 557-0295 or hereafter given to the other party hereto pursuant to the provisions of this Note. 11.7 The Company may not delegate its obligations under this Note and such attempted delegations shall be null and void. The Holder may assign, pledge or otherwise transfer this Note without prior written consent of the Company. This Note inures to the benefit of Payee, its successors and its assignee of this Note and binds the Company, and its successors and assigns, and the terms "Payee" and "the Company" whenever occurring herein shall be deemed and construed to include such respective successors and assigns. 11.8 This Note shall continue to be effective or be reinstated, as the case may be, if at any time any payment made pursuant to it is rescinded or must otherwise be returned by the Holder upon bankruptcy or reorganization or otherwise of the Company, all as though such payment had not been made. 11.9 THE COMPANY AND THE HOLDER EACH (I) AGREES THAT ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE INSTITUTED EXCLUSIVELY IN THE APPROPRIATE STATE COURT, COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, (II) WAIVES ANY OBJECTION WHICH THE COMPANY MAY HAVE NOW OR HEREAFTER BASED UPON FORUM NON CONVENIENS OR TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND (III) IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE COURT, COUNTY OF NEW YORK, NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK IN ANY SUCH SUIT, 13 ACTION OR PROCEEDING. THE COMPANY AND THE HOLDER EACH FURTHER AGREES TO ACCEPT AND ACKNOWLEDGE SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE COURT, COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND AGREES THAT SERVICE OF PROCESS UPON THE COMPANY OR THE HOLDER, MAILED BY CERTIFIED MAIL TO THEIR RESPECTIVE ADDRESSES, SUCH SERVICE TO BECOME EFFECTIVE THREE BUSINESS DAYS AFTER SUCH MAILING, WILL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE COMPANY OR THE HOLDER, AS THE CASE MAY BE, IN ANY SUIT, ACTION OR PROCEEDING. FURTHER, BOTH THE COMPANY AND THE HOLDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION TO ENFORCE THIS NOTE AND IN CONNECTION WITH ANY DEFENSE, COUNTERCLAIM OR CROSSCLAIM ASSERTED IN ANY SUCH ACTION. 11.10 This Note is exchangeable, without expense, upon the surrender hereof by the Holder at the principal executive office of the Company, for two or more new Notes of like tenor and date (except for the principal amounts thereof) representing in the aggregate the same principal amount as this Note, in such denominations as shall be designated by the Holder thereof at the time of such surrender, provided that such new Notes shall be issuable in minimum denominations of $10,000 and integral multiples thereof. 11.11 This Note shall be construed in accordance with and governed by the laws of the State of New York without regard to principles of conflicts of law, and cannot be changed, discharged or terminated orally but only by an instrument in writing signed by the party against whom enforcement of any change, discharge or termination is sought. 11.12 Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Note, if mutilated, the Company will make and deliver a new Note of like date and tenor, in lieu hereof. 11.13. Payor may not delegate its obligations under this Note and such attempted delegations shall be null and void. The Payor may assign, pledge or otherwise transfer this Note without prior written consent of Payor. This Note inures to the benefit of Payee, its successors and its assignee of this Note and binds Payor, and its successors and assigns, and the term "Payee"whenever occurring herein shall be deemed and construed to include such respective successors and assigns. 11.14. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. No provision of this Note shall alter or impair the obligations of the Payor hereby. 11.15. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver or as an acquiescence in any Event of Default, nor 14 shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. PAYOR: ZYLAB INTERNATIONAL, INC. By:______________________________ Jonathan Karlin, President 15 EXHIBIT 1 NOTICE OF CONVERSION OF CONVERTIBLE NOTE TO: [______________________] (A) Pursuant to the terms of the attached Convertible Note (the "Note"), the undersigned hereby elects to convert $ principal amount of the Note into shares of Common Stock of Zylab International, Inc. (the "Maker"). Capitalized terms used herein and not otherwise defined herein have the respective meanings provided in the Note. (B) Please issue a certificate or certificates for the number of shares of Common Stock into which such principal amount of the Note is convertible in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: ---------------------- ------------------------- Name Name ---------------------- ------------------------- Address Address ---------------------- ------------------------- SS or Tax ID Number SS or Tax ID Number (C) In the event of partial exercise, please reissue an appropriate Note(s) for the balance that shall not have been converted. (D) The undersigned represents and warrants that (i) all of the requirements of the Securities Act of 1933, as amended (the "ACT"), applicable to the undersigned have been complied with by the undersigned and (ii) the undersigned has not engaged in any transaction or series of transactions that is a part of or a plan or scheme to evade the registration requirements of the Act. - ---------------- --------------------------- Date Signature of Registered Holder (Must be signed exactly as name appears in the Note. The signature must be notarized.) 16 EX-10.1 4 y57348ex10-1.txt PLEDGE AND SECURITY AGREEMENT EXHIBIT 10.1 SECURITY AND PLEDGE AGREEMENT SECURITY AND PLEDGE AGREEMENT, dated as of January 5, 2001, between John T. Botti on the one hand (referred to herein as "Pledgor"), intending to be liable under this security and pledge agreement (this "Agreement"), with an address as indicated below his signature, and Bitwise Designs, Inc., on the other hand, having its principal office at 2165 Technology Drive, Schenectady, New York 12308 (the "Pledgee"). W I T N E S S E T H : WHEREAS, Pledgee has made a loan to Pledgor in the principal amount of $317,000 (the "Loan") as evidenced by that certain Promissory Note (the "Note") of even date herewith; and WHEREAS, the Pledgor owns 409,341 shares of the Common Stock of Bitwise Designs, Inc., and has been granted options to purchase 1,065,000 shares of the Common Stock of Bitwise Designs, Inc., all of which are fully vested; and WHEREAS, the 409,341 shares of Common Stock of Bitwise Designs owned by Pledgor are held in account no. ________ with Bear Stearns (the "Bear Stearns Account"); and WHEREAS, the Pledgor and Pledgee have agreed that the aforementioned shares of Common Stock of Bitwise Designs, Inc., the options to purchase the shares of Common Stock of Bitwise Designs, Inc., the proceeds of any sales of the such securities and the Bear Stearns Account will secure the obligations represented by the Note; and WHEREAS, in connection with and prior to the making of the Loan, the Pledgee is requiring that the Pledgor shall have executed and delivered this Agreement and granted to it the security interest contemplated hereby; NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, and to induce the Pledgee to make the Loan, it is agreed as follows: 1. Pledge. (a) In order to secure the payment or performance, as the case may be, in full of the obligations of the Pledgor under the Note, the Pledgor hereby pledges, assigns, transfers, delivers, deposits, sets over and confirms as a second priority pledge unto the Pledgee, and its successors and assigns, (i) 409,341 Shares of Common Stock of Bitwise owned (beneficially and of record) by the Pledgor (the "Pledged Shares"), (ii) options to purchase 1,065,000 shares of the Common Stock of Bitwise Designs, Inc. (the "Pledged Options") (the Pledged Shares and the Pledged Options may be collectively referred to herein as the "Pledged Securities"), (iii) all proceeds of, including cash or other securities delivered in exchange for, the Pledged Securities, and (iv) the Bear Stearns Account. (b) All of the Pledged Securities collectively owned by the Pledgor are free and clear of all liens, claims, encumbrances, rights of third parties, and any and all lockup agreements, except that the Pledged Shares are subject to a first priority lien held by Bear Stearns (the "First Lien"). Further, all restrictions on the Pledged Securities, and all restrictive legends on the share certificates and option certificates representing the Pledged Securities, have been removed or may be removed pursuant to the Securities Act of 1933, as amended. (c) Certificates representing the Pledged Securities are currently held by Bear Stearns under the First Lien and may not be delivered to the Pledgee until such time as the First Lien is satisfied or the earlier consent of Bear Stearns to such delivery is obtained by Pledgee. 2 (d) Certificates representing the Pledged Options, accompanied by proper instruments of assignment duly executed in blank by the Pledgor are herewith delivered to Pledgee. (e) The Pledgor agrees that he has delivered herewith to the Pledgee (i) proper instruments of assignment duly executed in blank by the Pledgor together with the certificates representing any additional shares of capital stock of Pledgee hereafter acquired, subject to the First Lien; and (ii) a duly executed financing statements covering the Bear Stearns Account. 2. Pledgor and Pledgee's Rights. Subject to the First Lien, unless an Event of Default under this Agreement shall have occurred: (i) the Pledgor shall be entitled to receive and retain non-cash dividends and other distributions with respect to the Pledged Securities, other than any such distributions of securities of Pledgee which shall be forthwith delivered by Pledgor to the Pledgee, upon the execution and delivery of this Agreement; (ii) the Pledgor shall be entitled to receive all cash dividends and distributions in respect of the Pledged Securities declared and paid by Bitwise Designs; (iii) Pledgor shall have all voting rights with respect to the Pledged Securities; (iv) Pledgee shall have, with respect to the Pledged Securities, the rights and obligations of a secured party under Article 9 of the Uniform Commercial Code; (v) the Pledgee may file Financing Statements and continuations thereof relating to the Pledgor in various filing offices to perfect the Pledgee's security interest in the Bear Stearns Account, and Debtor agrees to execute copies thereof; and (vi) Pledgee may contact the holder of the First Lien, at any time, for the purpose of, among other things, inquiring about the status of the First Lien and to arrange for the delivery of the Pledged Shares to Pledgee. If any distribution in respect of the Pledged Securities is paid, in whole or in part, in voting securities or capital interests of Bitwise Designs, the certificates for such securities shall be delivered by the Pledgor, subject to the First Lien, to the Pledgee and shall constitute a part of 3 the Pledged Securities. 3. Representations and Warranties: Pledgor represents and warrants that he owns the Pledged Securities, that the shares are not subject to any lien, pledge, charge, encumbrance, security interest, lockup agreement effecting the Pledgor's ability to sell the shares, or a right or action on the part of any third person to purchase or require such shares or any part of such share, except as disclosed in Paragraph 1 of this Agreement. Further, the undersigned Pledgor executing this Agreement has been authorized to execute and deliver to Pledgee this Agreement and any other documents required to consummate the transactions contemplated by this Agreement. 4. Authority. Pledgor has the power and authority to execute, deliver and perform its obligations under this Agreement and this Agreement constitutes the legal, valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its terms, except as limited by equitable principles, bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditor's rights. 5. Covenants. (a) The Pledgor covenants and agrees that, unless the prior written consent of the Pledgee to the contrary is obtained, from and after the date hereof until the payment and performance in full of all obligations of the Pledgor under the Note, Pledgor shall defend the title to the Pledged Securities and the lien of Pledgee thereon against the claim of any third party claiming against or through the Pledgor and shall maintain and preserve such lien so long as this Agreement shall remain in effect. (b) The Pledgor further covenants and agrees that (i) Bear Stearns, as holder of the First Lien, may deliver the Pledged Shares to Pledgee without the requirement of any further consent or 4 writing on the part of Pledgor; and (ii) Pledgor shall, concurrently herewith, cause Bear Stearns, as holder of the First Lien to execute and deliver to Pledgee an Acknowledgment and Consent regarding this Security and Pledge Agreement in the form and substance of that attached hereto as Exhibit A. 6. Defaults and Remedies. (a) Subject to the rights of the First Lien, upon the occurrence of an Event of Default as herein defined, the Pledgee is hereby authorized and empowered and shall have the right, at its election, to transfer and register in its name the whole or any part of the Pledged Securities, to exercise all voting rights with respect thereto, to collect and receive all cash dividends and other distributions made thereon, to sell in one or more sales after five (5) business days' notice (which notice the Pledgor agrees is commercially reasonable) but without any previous notice or advertisement, the whole or any part of the Pledged Securities and otherwise to act with respect to the Pledged Securities as though the Pledgee were the outright owner thereof, the Pledgor hereby irrevocably constituting the Pledgee in such regard as his proxy and attorney-in-fact, with full power of substitution to do so; provided, however, that the Pledgee shall not have any duty to exercise any such right or to preserve the same and shall not be liable for any failure to do so or for any delay in doing so. Any sale shall be made at a public or private sale at the Pledgee's place of business, or at any public building in the State of New York to be named in the notice of sale, either for cash or upon credit or for future delivery at such price as the Pledgee may deem fair, and the Pledgee may be the purchaser of the whole or any part of the Pledged Securities so sold and hold the same thereafter in its own right free from any claim of the Pledgor or any right of redemption, which right is hereby expressly waived. Each sale shall be made to the highest bidder, but the Pledgee reserves the right to reject any and all bids at such sale which, in its sole discretion, it shall deem inadequate. 5 Demands of performance, except as otherwise herein specifically provided for, notices of sale, advertisements and the presence of property at sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of the Pledgee. (b) If, at the original time or times appointed for the sale of the whole or any part of the Pledged Securities, the highest bid, if there be but one bid, shall be inadequate to discharge in full all of the obligations of the Pledgor under the Promissory Note, or if the Pledged Securities be offered for sale in lots, if at any of such sales, the highest bid for the lot offered for sale would indicate to the Pledgee, in its sole discretion, the unlikelihood of the proceeds of the sales of the whole of the Pledged Securities being sufficient to discharge all of such obligations, the Pledgee may, on one or more occasions, postpone any of said sales by public announcement at the time of such sale. In the event of any such postponement, the Pledgee shall give the Pledgor notice of such postponement or postponements of sale. (c) In the event of any sale(s) under this Section 6, the Pledgee shall, after deducting all costs or expenses of every kind (including attorneys fees and disbursements) for care, safekeeping, collection, sale, delivery or otherwise, apply the residue of the proceeds of the sale(s) to the payment or reduction, either in whole or in part, of the obligations of the Pledgor under the Promissory Note, whether or not then due, returning the surplus (including any Pledged Securities not sold by the Pledgee), if any, to the Pledgor. (d) In view of the fact that federal and state securities laws may impose certain restrictions on the method by which a sale of the Pledged Securities may be affected, the Pledgor recognizes that the Pledgee may be unable to effect a public sale of all or part of the Pledged Securities, and may be compelled to resort to one or more private sales to a restricted group of 6 purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at places and on terms less favorable to the Pledgee than if sold at public sales. The Pledgor agrees that any such private sales shall not be deemed to have been made in other than a commercially reasonable manner because such Pledged Securities shall not have been registered and that the Pledgee has no obligation to delay sale of any such securities for the period of time necessary to permit the issuer of such securities to register such securities for public sale. (e) The Pledgor agrees that he will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of the whole or any part of the Pledged Securities or the possession thereof by any purchaser at any sale hereunder, and the Pledgor waives the benefit of all such laws to the extent he lawfully may do so. The Pledgor agrees that he will not interfere with any right, power or remedy of the Pledgee provided for in this Agreement or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise or beginning of the exercise by the Pledgee of any one or more of such rights, powers or remedies. No failure or delay on the part of the Pledgee to exercise any such right, power or remedy, and no notice or demand which may be given to or made upon the Pledgor by the Pledgee with respect to any such remedies shall operate as a waiver thereof, or limit or impair the Pledgee's right to take any action or to exercise any power or remedy hereunder without notice or demand, or prejudice its rights as against the Pledgor in any respect. (f) Each and every right granted to the Pledgee hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative 7 and may be exercised from time to time. (g) In addition to all other rights and remedies granted to the Pledgee hereunder, the Pledgee shall have all the rights granted to creditors generally under the Uniform Commercial Code as in effect in the State of New York. (h) For purposes herein, Event of Default shall be defined to mean the occurrence of any of the following: (i) an Event of Default under the Note; and (ii) the failure to comply by Pledgor with any term or provision of this Agreement which failure to comply has not been cured by the Pledgor within five (5) days of such failure to comply or breach. 7. Waiver. No failure or delay on the Pledgee's part in exercising any power of sale, lien, option or other right hereunder, and no notice or demand which may be given to or made upon the Pledgor by the Pledgee with respect to any power of sale, lien, option or other right hereunder, shall constitute a waiver thereof, or limit or impair the Pledgee's right to take any action or to exercise any power of sale, lien, option or any other right hereunder, without notice or demand, or prejudice the Pledgee's rights as against the Pledgor in any respect, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. 8. Termination. Upon the payment and performance in full of all of the obligations of the Pledgor under the Note, the Pledgee shall deliver to the Pledgor the Pledged Securities which are subject to this Agreement at such time and all instruments of assignment executed in connection therewith, free and clear of the lien hereof and, except as otherwise provided herein, all of the Pledgor's obligations hereunder shall, upon such payment and performance, terminate. 9. Renewal or Extensions: No renewal or extension of the Note, and no delay in the 8 enforcement or exercise of the rights granted the Pledgee under this Agreement shall constitute a waiver or affect the rights of the Pledgee with respect to the shares of stock or any part of such stock. 10. Additional Documents: Pledgor stipulates that he will execute and deliver to Pledgee any and all additional documents that may be necessary to perfect the security interest given to the Pledgee under this Agreement. These documents, include, but are not limited to, stock and/or option certificates representing the Pledged Securities, Rule 144 paperwork, attorney opinion letters, signed and medallion guaranteed stock powers, duly executed waivers of any applicable lockup agreements, etc., signed by the Pledgor. 11. Miscellaneous. (a) No Waiver. Neither the failure by Pledgee to, nor the delay on the part of Pledgee in, the exercise of any power or right granted to it hereunder, or with respect to any agreement or instrument executed and delivered pursuant to this Agreement, shall constitute a waiver of such power or right or prevent Pledgee's exercise or partial exercise of any other right, power or privilege, it being understood that the rights and remedies of Pledgee under and in respect of this Agreement and the other documents referred to herein are cumulative and shall be in addition to any and all other rights and remedies now or hereafter existing in law or in equity. No modification or waiver of any provision of this Agreement nor consent to any departure herefrom by any party shall, in any event, be effective unless such waiver or modification shall be in writing signed by the party against whom enforcement of the waiver or modification is sought and then shall be effective only for the period and on the conditions, and for the specific instance and purpose, for which given. No notice to or demand on Pledgor in any case shall entitle Pledgor to any other or further notice or demand in similar or other circumstances. This Agreement may not be changed or terminated orally. 9 (b) Entire Agreement. This Agreement, together with the other documents executed and delivered in connection herewith, contains the sole and entire understanding and agreement of Pledgor and Pledgee with respect to the subject matter hereof and all prior negotiations, discussions, commitments, representations, agreements and understandings heretofore between Pledgor and Pledgee with respect thereto are merged herein. (c) Amendment or Modification: This Agreement may not be amended or modified except in writing, executed and signed by the parties. (d) Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. Pledgor may not assign this Agreement without Pledgee's written consent, and any such attempted assignment without such consent shall be null and void. (e) Binding Effect: This Agreement shall be binding on the parties and their representatives, heirs, successors, and assigns. (f) Notices. All notices, requests, demands, consents or other communications provided for herein shall be in writing and shall be deemed to have been given or made when received or three days following deposit for mailing by first-class registered or certified mail, return receipt requested, to the address of the other party set forth below or to such other address as may be specified by notice given in accordance with this Section 11: If to Pledgor, to: John T. Botti Bitwise Designs, Inc. 2165 Technology Drive Schenectady, NY 12308 If to Pledgee, to: Bitwise Designs, Inc. 2165 Technology Drive Schenectady, NY 12308 Attention: Dennis H. Bunt (g) APPLICABLE LAW: SERVICE OF PROCESS; APPOINTMENT OF PROCESS 10 AGENT. THIS AGREEMENT SHALL BE DEEMED TO BE MADE AND TO BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PROVISIONS OF CHOICE OF LAW THEREUNDER. PLEDGOR HEREBY IRREVOCABLY CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK OR OF ANY FEDERAL COURT LOCATED WITHIN SCHENECTADY COUNTY, NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON- CONVENIENS OR ANY SIMILAR BASIS. PLEDGOR SHALL NOT BE ENTITLED IN ANY SUCH ACTION OR PROCEEDING TO ASSERT ANY DEFENSE GIVEN OR ALLOWED UNDER THE LAWS OF ANY STATE OTHER THAN THE STATE OF NEW YORK. NOTHING IN THIS SECTION SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY EXTENT THE RIGHT OF PLEDGEE TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST PLEDGOR IN ANY JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. (h) Waiver of Jury Trial. To the fullest extent permitted by law, Pledgor hereby waives trial by jury in any litigation in any court with respect to, in connection with, or arising out of this Agreement, or any instrument, document or guaranty delivered pursuant to this Agreement, or the validity, protection, interpretation, collection or enforcement hereof, or any other claim or dispute hereunder. (i) Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole 11 but this Agreement shall be construed and enforced only to such extent as shall be permitted by law. (j) Captions. The captions of the various sections of this Agreement have been inserted only for the purposes of convenience; such captions are not a part of this Agreement and shall not be deemed, in any manner, to modify, explain, enlarge or restrict any of the provisions of this Agreement. (k) Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and both of which shall constitute a single instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. PLEDGOR: -------------------------------- John T. Botti PLEDGEE: BITWISE DESIGNS, INC. By: -------------------------------- Dennis H. Bunt, Chief Financial Officer 12 EX-10.2 5 y57348ex10-2.txt PLEDGE AND SECURITY AGREEMENT EXHIBIT 10.2 SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") dated as of December 24, 2001 is made by Zylab International, Inc., a Virginia corporation with its principal address at 12800 Middlebrook Road, Suite 410, Germantown, MD 20874 ("the Company") and Authentidate Holding Corp., a Delaware corporation with its principal address at 2165 Technology Drive, Schenectady, NY 12308 (the "Secured Party"). RECITALS WHEREAS, the Secured Party has agreed to provide loans to the Company in the principal amount of up to $500,000 evidenced by certain secured promissory notes (collectively the "Notes"); WHEREAS, to induce the Secured Party to make the loans evidenced by the Notes, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company has agreed to pledge, assign and grant a security interest in the Collateral, as defined below, as security for the Secured Obligations. NOW, THEREFORE, in consideration of the mutual obligation herein contained, the parties here agree as follows: 1. Definitions and Interpretation. 1.1 Certain Defined Terms. The following terms shall have the following meanings under this Agreement: "BASIC DOCUMENT" shall mean the Notes and this Agreement. "CODE" or "UCC" shall mean the Uniform Commercial Code as in effect in the State of Virginia from time to time or, by reason of mandatory application, any other applicable jurisdiction. "COLLATERAL" shall mean (a) All inventory, accounts, equipment, and other tangible assets the Company now has or hereafter may acquire an interest, wherever located, and all substitutions, renewals and replacements thereof, together with all rights to payment and other rights accruing to the Company, as the case may be, by reason of its interest therein; (b) All general intangibles and other property the Company now has or hereafter acquires an interest including, but not limited to, goodwill, patents (including, without limitation, the patents described on Schedule A annexed hereto), licenses, trade names or styles, trademarks, service marks, source code to software, customer lists, location rights, correspondence files and credit records with customers and suppliers, accounts receivable records, books and records not otherwise described herein, and all computer software or other data processing material on which such information may be maintained; (c) All cash and non-cash proceeds of all of the foregoing and all rights to the payment of money, including, but not limited to, the proceeds of any policy or policies of insurance, tax refund claims and commissions; and (d) all cash proceeds and all rights to the payment of money payable on any life insurance policy on the life of Jonathan Karlin. "DEFAULT" shall mean any default described in the Notes. "EVENT OF DEFAULT" shall mean event of Default as described in the Notes. "HOLDERS" means the holder or holders of the Notes. "LIEN" shall mean, with respect to any property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such property or any agreement to give, or notice of, any of the foregoing. "MAJORITY HOLDERS" means holders of a majority of the principal amount of the outstanding Notes. "SECURED OBLIGATIONS" shall mean any and all obligations of the Company for the performance of its agreements, covenants and undertakings under or in respect of the Notes, including the payment of all amounts of principal and interest thereunder. 1.2 Interpretation. In this Agreement, unless otherwise indicated, the singular includes the plural and plural the singular; words importing either gender include the other gender; references to statutes or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to articles, sections (or subdivisions of sections), exhibits, annexes or schedules are to this Agreement; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments, extensions and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of any such document); and references to persons or entities including their respective permitted successors and assigns. 2. Collateral 2.1 Grant. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) and performance of the Secured Obligations, the Company hereby pledges, assigns and grants to the Secured Party a security interest in all of the Company's right, title and interest in and to the Collateral. 2 2.2 Perfection. Concurrently with the execution and delivery of this Agreement, the Company shall (i) file such financing statements and other documents in such offices as the Secured Party may reasonably request in writing to perfect and establish the Lien granted by this Agreement, and (ii) take all such other actions as shall be necessary or as the Secured Party may request to perfect and establish the priority of the Lien granted by this Agreement. 2.3 Preservation and Protection of Security Interests The Company shall: (a) upon the acquisition after the date of this Agreement by the Company of any instrument or chattel paper evidencing all or any part of the interests constituting the Collateral, promptly deliver and pledge to the Secured Party all such instruments or chattel paper, endorsed or accompanied by such instruments of assignment and transfer in such form and substance as the Secured Party may reasonably request; and (b) give, execute, deliver, file or record any and all financing statements, notices, contracts, agreements or other instruments, obtain any and all governmental approvals and take any and all steps that may be necessary or as the Secured Party may request to create, perfect, establish the priority of, or to preserve the validity, perfection or priority of, the Lien granted by this Agreement or to enable the Secured Party to exercise and enforce its rights, remedies, powers and privileges under this Agreement with respect to such Lien. 2.4 Rights and Obligations (a) The Company shall remain liable to perform its duties and obligations under the contracts and agreements included in the Collateral in accordance with their respective terms to the same extent as if this Agreement had not been executed and delivered. The exercise by the Secured Party of any right, remedy, power or privilege in respect of this Agreement shall not release the Company from any of its duties and obligations under such contracts and agreements. The Secured Party shall not have any duty, obligation or liability under such contracts and agreements by reason of this Agreement or any other Basic Document, nor shall the Secured Party be obligated to perform any of the duties or obligations of the Company under any such contract or agreement or to take any action to collect or enforce any claim under any such contract or agreement. (b) No Lien granted by this Agreement in the Company's right, title and interest in any contract or agreement shall be deemed to be a consent by the Secured Party to any such contract or agreement. (c) No reference in this Agreement to proceeds or to the sale or other disposition of Collateral shall authorize the Company to sell or otherwise dispose of any Collateral. 3 (d) The Secured Party shall not be required to take steps necessary to preserve any rights against prior parties to any part of the Collateral. (e) So long as no Default shall have occurred and be continuing, the Company shall have the right to exercise all powers of ownership pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement. (f) If any Default shall have occurred and be continuing, and the Secured Party exercises its right to declare any Secured Obligation due and payable or seeks or pursues any other right, remedy, power or privilege available to it under applicable law, this Agreement or any other Basic Document, all payments and other distributions on the Collateral shall be paid directly to the Secured Party and applied as set forth in Section 4.4. (g) The holders of the Notes as Secured Party(s) shall share ratably in the distribution of benefits and any expenditures relating to this Agreement based on the ratio of the principal amount of their respective Notes to the total loan amount represented by all of the Notes. (h) The Secured Party may exercise their rights with respect to the Collateral without resort or regard to other collateral or sources of reimbursement for liability. The Secured Party shall not be deemed to have waived any of their rights with respect to the Secured Obligations or the Collateral unless such waiver be in writing and signed by the Secured Party. No delay or omission on the part of the Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or any future occasion. All rights and remedies of the Secured Party with respect to the Secured Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised separately or concurrently. 3. Representations, Warranties and Covenants. As of the date of this Agreement, the Company represents, warrants and covenants to the Secured Party as follows: 3.1 Title. The Company is the sole beneficial owner of the Collateral in which it purports to grant a Lien pursuant to this Agreement, and such Collateral is free and clear of all Liens. The Lien granted by this Agreement in favor of the Secured Party has attached and constitutes a perfected security interest in all of such Collateral. The Company shall pay, when due, the Secured Obligations and any other obligations owing under the Notes or hereunder. The Company shall defend title to the Collateral against the claims and demands of all persons. 3.2 Sales and Other Liens. So long as any portion of the Notes remains unpaid, the Company shall not create or incur any Liens upon any of the Collateral except for: (i) Liens granted to the Holders; (ii) Liens being contested in good faith by the Company; (iii) purchase money Liens on newly acquired assets in connection with the establishment or acquisition of, or investment or participation in, any business, which Liens shall extend solely to the assets so acquired; (iv) Liens on any assets of the Company granted in connection with the purchase or lease 4 of new capital equipment and the incurrence of the obligations or indebtedness related thereto; (v) Liens securing account receivable financing which do not exceed $150,000 principal amount are limited solely to accounts receivables of the Company (and Authentidate Holding Corp hereby agrees to subordinate any lien and security interest under this Security Agreement to the provider of account receivable financing) and (vi) Liens junior in right to those created by this Security Agreement. Until the occurrence of an Event of Default under this Security Agreement, the Company may use, sell or exchange the Collateral in the ordinary course of business without the written consent of the Holders, if such sales or exchanges are in accordance with the Company's usual customary practices and if, with regard to equipment, such transaction results (a) in the acquisition of a substitute item of at least comparable value; or (b) from the disposition of obsolete or worn out equipment. 3.3 Preservation of the Collateral; Inspection. The Company shall use reasonable care in the custody and preservation of the Collateral, and shall comply with all legal and insurance requirements permitted with respect to its use. The Company shall permit the Holders from time to time during regular business hours, to enter upon the premises where the Collateral is located and examine it. 3.4 Principal Place of Business. The Company's chief executive office and principal place of business is located at the address set forth below. 3.5 Further Assurances; Attorney in Fact. At any time and from time to time, upon the written request of a Holder, at the sole expense of the Company, the Company will promptly and duly execute and deliver such further instruments and documents and take such further action as the Holder may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the UCC in effect in any jurisdiction with respect to the liens created hereby. The Company hereby authorizes the Holders to file any such financing or continuation statement without the signature of the Company, as the case may be, to the extent permitted by applicable law, and the Holders agree to use reasonable efforts to provide the Company with a copy of any such statement filed by them, but shall have no liability to the Company for its failure to do so, and hereby appoints the Holders as the Company's attorney-in-fact for the purpose of signing the Company's names to any such financing and continuation statements. A carbon, photograph or other reproduction of this Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 3.6 Inspection Rights. The Company hereby grants to the Holders and its employees, representatives and agents the right to visit, during reasonable hours upon prior reasonable written notice to the Company, any of the Company's properties and/or facilities holding, utilizing and/or representing any of the Collateral, and to inspect the records relating thereto upon reasonable written notice to the Company and as often as may be reasonably requested. 3.7 Additional Covenants and Warranties. The Company represents, warrants, covenants and agrees as follows: 5 (a) Performance of this Agreement does not conflict with or result in a breach of any agreement to which the Company is bound. (b) The Company will not (a) change the location of its chief executive office or other places of business or remove its books and records from such location, or (b) remove any equipment or inventory from any location in which it may be located (except for sales in the ordinary course of business), (c) change its identity or corporate structure to such an extent that any financing statement filed by or on behalf of the Holders would become misleading, unless, in each of the foregoing cases the Company shall have given the Holders at least 30 days prior written notice thereof and shall do all things necessary to maintain the first priority status (subject only to the holders of senior indebtedness) of the Holders' security interest. (c) If any Event of Default (as defined in the Notes) shall occur, the Holders may exercise any and all rights and remedies of a Secured Party after default under the UCC. (d) No security agreement or financing statement with respect to all or any part of the Collateral is on file or of record in any public office. When appropriate financing statements have been filed by or on behalf of the Secured Party against the Company, the security interest granted pursuant to this Agreement will constitute a perfected security interest (to the extent such liens can be perfected by filing) on the Collateral in favor of the Secured Party, which security interest will be prior to all other liens on the Collateral created by the Company and in existence on the date hereof and which security interests are enforceable as such against all creditors of the Company. (e) The Company agrees to pay, and to hold the Secured Party harmless from, any and all liabilities, costs and expenses (including without limitation, reasonable legal fees and expenses) (i) with respect to fees, taxes or other costs incurred with respect to recording financing statements under the Code and (ii) in connection with any of the transactions contemplated by this Agreement or the enforcement of the Secured Party' rights hereunder, except those liabilities, costs and expenses arising out of the willful misconduct of the Secured Party. In any suit, proceeding or action brought by the Secured Party under any account for any sum owing thereunder, or to enforce any provisions of any account for any sum owing thereunder, or to enforce any provisions of any account or contract, the Secured Party shall be indemnified by the Company from and against all expense, loss or damage suffered by the Secured Party in any such action, except for expenses, loss or damage arising out of the willful misconduct of the Secured Party (in the case of indemnified amounts which would otherwise be owing to the Secured Party); (f) The Company shall keep, or cause the Collateral to be kept, insured against such risks, including fire, casualty and public liability, as are usually insured against by persons engaged in the same or similar business in the same location in at least such amounts as such insurance is usually carried by persons engaged in the same or similar businesses. The Company will use its best efforts to cause the Secured Party to be added as an additional insured to all policies insuring the Collateral; 6 (g) The Company shall pay promptly when due all taxes and assessments upon the Collateral or for its use or operation; and (f) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects. 4. Escrow of ZyLAB Source Code. Simultaneously herewith, the Company is delivering to Fort Knox Escrow Services, Inc., as escrow agent ("Escrow Agent"), to hold in escrow, the source code known as HAPI32 and ZDK (the "Source Code"). The Escrow Agent shall hold the source in escrow and shall not release except upon an Event of Default as provided herein. Neither the Escrow Agent not the Secured Party shall make use, in any manner, of the Source Code pending release pursuant to the terms hereof. Upon payment in full of the Notes, Escrow Agent shall return the Source Code to the Company. 5. Remedies 5.1 Events of Default. If any Event of Default shall have occurred and be continuing, and without limiting the generality of the remedies available to the Holders, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law), to or upon the Company, all and each of which demands, presentments, protests, advertisements and notices are hereby waived: (a) The Holders in their discretion may make any reasonable compromise or settlement they deem desirable with respect to any of the Collateral and may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, all or any part of the Collateral; (b) The Holders in their discretion may, in their name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for all or any part of the Collateral, but shall be under no obligation to do so; (c) The Holders in their discretion may with respect to all or any part of the Collateral which shall then be or shall thereafter come into the possession, custody or control of the Holders in their discretion or any of their agents, sell, lease or otherwise dispose of all or any part of such Collateral, at such place or places as the Holders in their discretion deems best, upon such terms and conditions as they deem advisable and at such prices as they may deem best, for cash, for credit or for future delivery (without thereby assuming any credit risk) and at public or private sale, without demand of performance or notice of intention to effect any such disposition or of time or place of any such sale, and the Holders in their discretion or any other person or entity may be the purchaser, lessee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale) and thereafter hold the same absolutely, free from any claim 7 or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Company, any such demand, notice and right or equity being hereby expressly waived and released. The Holders in their discretion may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned (if any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.) The Company further agrees, at the Holders' request, to assemble the Collateral and make it available to the Holders, at the place which the Holders shall reasonably select, whether at the Company's premises or elsewhere. (d) The Holders shall have, and in their discretion may exercise, all of the rights, remedies, powers and privileges with respect to the Collateral of a secured party under the Code (whether or not the Code is in effect in the jurisdiction where such rights, remedies, powers and privileges are asserted) and such additional rights, remedies, powers and privileges to which a secured party is entitled under the laws in effect in any jurisdiction where any rights, remedies, powers and privileges in respect of this Agreement or the Collateral may be asserted, including the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Secured Party were the sole and absolute owner of the Collateral (and the Company agrees to take all such action as may be appropriate to give effect to such right). The proceeds of, and other realization upon, the Collateral by virtue of the exercise of remedies under this Section 4.1 shall be applied in accordance with Section 4.4. 5.2 Deficiency. If the proceeds of, or other realization upon, the Collateral by virtue of the exercise of remedies under Section 5.1 are insufficient to cover the costs and expenses of such exercise and the payment in full of the other Secured Obligations, the Company shall remain liable for any deficiency. 5.3 Private Sale (a) The Secured Party shall incur no liability as a result of the sale, lease or other disposition of all or any part of the Collateral at any private sale pursuant to Section 4.1 conducted in a commercially reasonable manner. The Company hereby waives any claims against the Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations, even if the Secured Party accepts the first offer received and does not offer the Collateral to more than one offeree. (b) The Company recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933 and applicable state securities laws, the Secured Party may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, 8 among other things, to acquire the Collateral for their own account, for investment and not with a view to distribution or resale. The Company acknowledges that any such private sales may be at prices and on terms less favorable to the Secured Party than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agree that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit a public sale. 5.4 Application of Proceeds. Except as otherwise expressly provided in this Agreement and except as provided below in this Section 5.1, the proceeds of, or other realization upon, all or any part of the Collateral by virtue of the exercise of remedies under Section 5.1 and any other cash at the time held by the Secured Party under this Agreement, shall be applied as follows: First, to the payment of the costs and expenses of such exercise of remedies, including reasonable out-of-pocket costs and expenses of the Secured Party, the fees and expenses of its agents and counsel and all other expenses incurred and advances made by the Secured Party in that connection, as provided in this Agreement and/or the Note; Next, to the payment in full of the remaining Secured Obligations in such manner as the Secured Party may determine; and Finally, to the payment to the Company, or its respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 5, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, Collateral, including any property received under any bankruptcy, reorganization or other similar proceeding as to the Company or any issuer of, or account debtor or other obligor on, any of the Collateral. 6. Miscellaneous 6.1 Waiver. No failure on the part of the Secured Party to exercise and no delay in exercising, and no course of dealing with respect to, any right, remedy, power or privilege under this Agreement shall operate as a waiver of such right, remedy, power or privilege, nor shall any single or partial exercise of any right, remedy, power or privilege under this Agreement preclude any other or further exercise of any such right, remedy, power or privilege or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges provided in this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 6.2 Notices. All notices and communications to be given under this Agreement shall be given or made in writing to the intended recipient at the address specified below or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly 9 given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case, given or addressed as provided in this Section 5.2: To the Company: Zylab International, Inc. 12800 Middlebrook Road Suite 410 Germantown, MD 20874 Attn: John Karlin With a copy to: Gorham S. Clark, Esq. Foust & Clark, P.C. 8345-A Greensboro Drive McLean, Virginia 22102 Attn: Rory Clark, Esq. To the Secured Party: Authentidate Holding Corp. 2165 Technology Center Schenectady, NY 12308 Attn: John T. Botti, Pres. With a copy to: Goldstein & DiGioia, LLP 369 Lexington Avenue New York, New York 10017 Fax No.: (212) 557-0295 Attn: Victor J. DiGioia, Esq. 6.3 Expenses. The Company agrees to pay or to reimburse the Secured Party for all costs and expenses (including reasonable attorney's fees and expenses) that may be incurred by the Secured Party in any effort to enforce any of the provisions of Section 4 or any of the obligations of the Company in respect of the Collateral or in connection with (a) the preservation of the Lien of, or the rights of the Secured Party under this Agreement or (b) any actual or attempted sale, lease, disposition, exchange, collection, compromise, settlement or other realization in respect of, or care of, the Collateral, including all such costs and expenses (and reasonable attorney's fees and expenses) incurred in any bankruptcy, reorganization, workout or other similar proceeding relating to the Company. 6.4 Amendments. Any provision of this Agreement may be modified, supplemented or waived only by an instrument in writing duly executed by the Company and the Secured Party. Any such modification, supplement or waiver shall be for such period and subject to such conditions as shall be specified in the instrument effecting the same and shall be binding upon the Secured Party, each holder of any of the Secured Obligations and the Company, and any such waiver shall be effective only in the specific instance and for the purposes for which given. 10 6.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, the Secured Party and each holder of any of the Secured Obligations and their respective successors and permitted assigns. The Company shall not assign or transfer its rights under this Agreement without the prior written consent of the Secured Party. 6.6 Survival. All representations and warranties made in this Agreement or in any certificate or other document delivered pursuant to or in connection with this Agreement shall survive the execution and delivery of this Agreement or such certificate or other document (as the case may be) or any deemed repetition of any such representation or warranty. 6.7 Agreements Superseded. This Agreement and the Notes and subscription documents executed in connection therewith, supersede all prior agreements and understandings, written or oral, among the parties with respect to the subject matter of this Agreement. 6.8 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 6.9 Continuing Effect. All agreements, representations and warranties herein made by Debtor shall be continuing as long as the Note remains outstanding and unpaid. 6.10 Headings. Section headings are for reference purposes only. 6.11 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which, when taken together, shall constitute but one agreement, and shall become effective when copies which, when taken together, bear the signature of each of the parties hereto shall have been delivered to Secured Party and Debtor. 6.12 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAW. THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. Zylab International, Inc. By ------------------------------------- John Karlin, President SECURED PARTY Authentidate Holding Corp. By ------------------------------------- John T. Botti, President 12 Schedule A ZyLAB International Inc. owns no patents 13 -----END PRIVACY-ENHANCED MESSAGE-----