AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2002
REGISTRATION NO. 333-________
================================================================================
-------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LocatePLUS Holdings Corporation
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7379
-------- ----
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
04-3332304
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(I.R.S. Employer Identification Number)
100 Cummings Center
Suite 235M
Beverly, Massachusetts 01915
(978) 921-2727
--------------
(Address and telephone number of principal executive offices and principal
place of business)
------------------
Jon R. Latorella
President and Chief Executive Officer
LocatePLUS Holdings Corporation
100 Cummings Center
Suite 235M
Beverly, Massachusetts 01915
(978) 921-2727
--------------
(Name, Address, and Telephone Number of Agent for Service)
------------------
Copy to:
Michael A. Hickey, Esq.
Kirkpatrick & Lockhart LLP
75 State Street
Boston, Massachusetts 02109
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------------------------------
CALCULATION OF REGISTRATION FEE
=============================================== ==================== ================== ====================== ===============
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES REGISTERED AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED PER SHARE(1) PRICE(1) FEE
- ----------------------------------------------- -------------------- ------------------ ---------------------- ---------------
Units, each consisting of 10,000,000 $0.30 $3,000,000 $276
(i) one share of Class B Non-Voting 10,000,000 - - -
Common Stock; and
(ii) one warrant to purchase one 10,000,000 - - -
share of Class A Voting Common Stock
Shares of Class A Voting Common Stock 10,000,000(2) $0.50 $5,000,000 $460
issuable upon exercise of warrants
underlying Units
=============================================== ==================== ================== ====================== ===============
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Pursuant to Rule 416, there are also being registered such additional
shares of Class A Voting Common Stock as may be issuable pursuant to the
anti-dilution provisions of the warrants.
----------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
----------------------------------------
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED MARCH 28, 2002
LPHC [LOGO]
LocatePLUS Holdings Corporation
10,000,000 UNITS
$0.30 PER UNIT
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions.
We are offering for sale up to 10,000,000 Units. Each Unit consists of one
share of our Class B Non-voting Common Stock and a warrant to purchase one share
of our Class A Voting Common Stock for $0.50, which we refer to as a "public
warrant." The Units will trade as a single security until 185 days after the
consummation of this offering (unless, with respect to a Unit, the public
warrant is exercised, in which case the Class B Non-voting Common Stock and
Class A Voting Common Stock purchased upon exercise will trade separately). The
public warrants will be exercisable for a period of one year from the date of
consummation of this offering.
---------------------
INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY
REVIEW THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS", WHICH BEGINS ON
PAGE 4, BEFORE YOU MAKE AN INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
AUTHORITY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR THEIR OFFER OR
SALE, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Our underwriter will sell our Units on a minimum/maximum "best efforts"
basis and will receive a commission with respect to those sales. This offering
will end on [10 days from the effective date of the Registration Statement].
Investments in our Units will be placed into escrow with our transfer agent,
Transfer Online, Inc., until a minimum of $500,000 in subscriptions is received.
If a minimum of $500,000 in subscriptions is not received by [10 days from the
effective date of the Registration Statement], subscriptions will be returned
without interest or deduction. If a minimum of $500,000 in subscriptions is
received by [10 days from the effective date of the Registration Statement], we
will close upon those funds, and issue the Units purchased, no later than [13
days from the effective date of the Registration Statement].
================================ =========================== ==================================== ====================
PUBLIC OFFERING PRICE UNDERWRITING COMMISSIONS PROCEEDS TO US
- -------------------------------- --------------------------- ------------------------------------ --------------------
Per Unit....................... $0.30 $0.021 $0.279
- -------------------------------- --------------------------- ------------------------------------ --------------------
Total if minimum sold.......... $500,000 $35,000 $465,000
- -------------------------------- --------------------------- ------------------------------------ --------------------
Total if maximum sold.......... $3,000,000 $210,000 $2,790,000
================================ =========================== ==================================== ====================
OFTRING & COMPANY, INC.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
This prospectus is dated March 28, 2002.
TABLE OF CONTENTS
-----------------
Prospectus Summary .............................. 1
Risk Factors .................................... 4
Forward-Looking Statements ...................... 14
Use of Proceeds ................................. 14
Determination of Offering Price ................. 15
Dividend Policy ................................. 15
Capitalization .................................. 15
Dilution ........................................ 17
Selected Consolidated Financial Data ............ 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations ... 20
Business ........................................ 27
Executive Officers and Directors ................ 33
Organization Within the Past Five Years ......... 39
Certain Transactions ............................ 40
Principal Stockholders .......................... 42
Description of Capital Stock .................... 44
Plan of Distribution ............................ 46
Shares Eligible for Future Sale ................. 47
Transfer Agent and Registrar .................... 48
Legal Matters ................................... 48
Experts ......................................... 48
Additional Information .......................... 48
Index to Financial Statements ................... F-1
* * *
IMPORTANT NOTICES
-----------------
Until [90 days from the date of effectiveness], all dealers effecting
transactions in these securities may be required to deliver a prospectus. This
is in addition to the obligations of dealers to deliver a prospectus when acting
as underwriters.
Please read this prospectus carefully. It describes our business, products
and services, and financial condition and results of operations.
We have prepared this prospectus so that you will have the information
necessary to make an informed investment decision. You should rely only on the
information contained in this prospectus. The information contained in this
prospectus is accurate only as of its date, regardless of the time this
prospectus is delivered or that the Units are sold.
In this prospectus, the terms "the Company," "we," "us," and "our" refer to
LocatePLUS Holdings Corporation, a Delaware corporation. Unless otherwise
indicated, we use the term "common stock" to refer collectively to our Class A
Voting Common Stock and our Class B Non-voting Common Stock.
We are offering to sell our Units and seeking offers to buy our Units only
in jurisdictions where such offers and sales are permitted.
We have registered the trademark LOCATEPLUS.COM(R) with the United States
Patent and Trademark Office. We maintain the trademarks LOCATEPLUS(TM) and
WORLDWIDE INFORMATION(TM) as proprietary trademarks for our products.
The trademark RIM BLACKBERRY(R) is a registered trademark of Research in
Motion Limited, with which we have no affiliation.
* * *
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION IN THIS PROSPECTUS REGARDING US (INCLUDING THE RISKS ASSOCIATED WITH
PURCHASING OUR UNITS).
OUR COMPANY
-----------
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions.
Since 1996, we have sold a CD-ROM-based product, which we refer to as
Worldwide Information(TM), that enables pre-screened users to search certain
motor vehicle records and drivers' license information in multiple states
through a dynamic search engine, using complete or partial information.
Since March 1, 2000, we have maintained a database that is accessible
through the Internet, known as LocatePLUS(TM). Our LocatePLUS(TM) database
currently contains searchable and cross-referenced public information about
individuals throughout the United States, including individuals' names,
addresses, dates of birth, bankruptcies, social security numbers, prior
residences and probable acquaintances and, in certain circumstances, real estate
holdings, liens, judgments, drivers' license information and motor vehicle
records. Information in our LocatePLUS(TM) database is integrated in a manner
that allows users to access it rapidly and efficiently.
We recently developed another version of our LocatePLUS(TM) database that
is accessible through the use of certain wireless devices manufactured by third
parties, such as personal digital assistants and the RIM Blackberry(R). We refer
to this new product as LocatePLUS Pocket(TM). We have not yet realized any
revenue from LocatePLUS Pocket(TM). We are currently testing a pre-production or
"beta" version of LocatePLUS Pocket(TM), and we anticipate that the commercial
launch of LocatePLUS Pocket(TM) will take place in the first half of 2002.
Our products are primarily marketed and sold to federal, state and local
government agencies (including law enforcement agencies), private investigators,
human resource professionals and the legal profession. Our products are used in:
o crime and terrorism prevention and investigation;
o detection of criminal and civil fraud;
o "skip tracking" (I.E., the location of debtors and individuals in
violation of parole or bail restrictions); and
o background checks.
As of December 31, 2001, there were 4,185 pre-screened users of our
LocatePLUS(TM) database and approximately 2,700 pre-screened purchasers of our
Worldwide Information(TM) CD-ROM product.
HOW TO CONTACT US
-----------------
Our executive offices are located at 100 Cummings Center, Suite 235M,
Beverly, Massachusetts 01915. Our phone number is (978) 921-2727.
Our website is HTTP://WWW.LOCATEPLUS.COM. Information on our website is not
intended to be incorporated into this prospectus.
1
THE OFFERING
------------
Securities offered.............. 10,000,000 Units for $0.30 per Unit.
Each Unit consists of one share of our Class B
Non-voting Common Stock and a public warrant
to purchase one share of our Class A Voting
Common Stock for $0.50. The public warrant
will be exercisable for a period of one year
from the date of the consummation of this
offering. The Units will trade as a single
security, and each public warrant will not
detach from the share of Class B Non-voting
Common Stock to which it is attached, until
185 days from the date of consummation of this
offering (unless the public warrant is
exercised, in which case the Class B
Non-voting Common Stock and Class A Voting
Common Stock so purchased will trade
separately upon exercise).
Use of proceeds................. The proceeds from this offering will be used
to launch LocatePLUS(TM) Pocket, to acquire
additional datasets for our LocatePLUS(TM)
product and for working capital. We have not
determined the specific allocation of the
anticipated proceeds among these planned uses.
Investment process.............. We are offering Units on a "best efforts"
minimum/maximum basis through our underwriter.
Subscriptions for our Units will be deposited
into escrow with our transfer agent, Transfer
Online, Inc., until a minimum of $500,000 of
subscriptions have been received.
In the event that we do not receive a minimum
of $500,000 in such subscriptions by [ten days
after the effective date of this registration
statement], escrowed funds will be released to
subscribers without interest or deduction.
In the event that a minimum of $500,000 in
subscriptions is received by Transfer Online
by [ten days after the effective date of this
registration statement], we will close on
those funds and issue the Units purchased no
later than [thirteen days after the effective
date of this registration statement].
2
The following table outlines our capital stock immediately following the
consummation of this offering, assuming the maximum number of Units are sold in
this offering:
Units offered for sale................................... 10,000,000
Class A Voting Common Stock outstanding after
this offering......................................... 54,666,793(1)(2)
Class B Non-voting Common Stock outstanding
after this offering.................................... 66,640,726(3)
- --------------
(1) Includes shares issued in connection with the mandatory conversion of
certain convertible promissory notes (and accrued interest) into 1,558,213
shares of Class A Voting Common Stock upon the consummation of this
offering.
(2) Assuming no exercise or conversion of:
o warrants to purchase up to 10,798,633 shares of Class A Voting Common
Stock (including 10,000,000 public warrants offered hereby);
o options to purchase up to 14,995,000 shares of Class A Voting Common
Stock under our equity compensation plan; or
o debt convertible into 44,444 shares of Class A Voting Common Stock at
the election of one debtholder.
(3) Assuming no exercise or conversion of warrants and options to purchase
3,728,477 shares of Class B Non-voting Common Stock.
SUMMARY OF CERTAIN RISK FACTORS
-------------------------------
There are a variety of risks associated with an investment in LocatePLUS
Holdings Corporation. These risks include the following, each of which (as well
as other risks) are described in detail in the section titled "Risk Factors",
beginning on page 4. You should closely review that section before purchasing
any of our securities.
o We have incurred significant net losses since our inception. We
incurred net losses of approximately $5.8 million in 2000 and $4.4
million in 2001. Our accumulated deficit as of December 31, 2001 was
approximately $14.3 million. To achieve profitability, we will need to
generate substantially more revenue than we have in prior years, of
which we can give no assurance.
o Our industry is intensely competitive and we expect competition to
continue to increase from both existing competitors and new market
entrants. Many of the companies that currently compete with us, as
well as other companies with whom we may compete in the future, are
national or international in scope and have far greater resources than
we do.
o There has been no public market for our securities and there can be no
assurance that a public trading market for our securities will develop
or, if developed, will be sustained. Although we hope that our
securities will be quoted on the Over the Counter Bulletin Board,
there can be no assurance that a regular trading market will develop
for our securities, or, if developed, that it will be sustained.
o Future and existing government regulations may restrict our ability to
use certain forms of person-specific data, and any such restrictions
could limit the effectiveness and attractiveness of our products,
which could have a material adverse effect on our business and
operations.
3
RISK FACTORS
ANY INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ALL OF THE INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO PURCHASE ANY OF OUR
SECURITIES. YOU SHOULD ASSUME THAT, EVEN IF NOT SPECIFICALLY STATED WITHIN THIS
PROSPECTUS, IF ANY OF THE FOLLOWING RISKS ACTUALLY MATERIALIZE, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY AND
ADVERSELY AFFECTED. IN SUCH CASE, THE VALUE OF OUR SECURITIES COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. WE HAVE NOT ATTEMPTED TO RANK THE
FOLLOWING RISKS IN ORDER OF THEIR LIKELIHOOD.
RISKS RELATED TO OUR BUSINESS
-----------------------------
WE HAVE A LIMITED OPERATING HISTORY, AND WE ARE SUBJECT TO THE RISKS ENCOUNTERED
BY EARLY-STAGE COMPANIES.
We began producing our CD-ROM product, Worldwide Information(TM), in 1996.
Our Internet product, LocatePLUS(TM), was launched in March 2000. Accordingly,
we have a limited operating history, particularly with respect to our
LocatePLUS(TM) product, and our business prospects must be considered in light
of the risks and uncertainties to which companies in new and rapidly evolving
markets such as ours are exposed. These risks include, but are not limited to,
the following:
o Our products and services may fail to attract or retain customers.
o Intense competition and rapid technological change in our industry
could adversely affect the market's acceptance of our products.
o We may be unable to develop or maintain commercial relationships and
alliances necessary to commercialize our products.
o Our target market may demand technological and support resources that
may not be available to us.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND CANNOT ASSURE YOU THAT WE
WILL ACHIEVE PROFITABILITY.
We have incurred significant net losses since our inception. We incurred
net losses of approximately $5.8 million in 2000 and $4.3 million in 2001. Our
accumulated deficit as of December 31, 2001 was approximately $14.4 million. We
anticipate that we will increase our sales and marketing, product development
and general and administrative expenses during 2002 and for the foreseeable
future. To achieve profitability, we will need to generate substantially more
revenue than we have in prior years. Even if we ultimately achieve
profitability, we may not be able to sustain or increase our profitability. If
our revenue grows more slowly than we anticipate, or if our operating expenses
exceed our expectations, our operating results will be adversely affected.
OUR RIGHT TO USE CERTAIN OF THIRD PARTY DATA MAY BE SUBJECT TO TERMINATION BY
OUR DATA PROVIDERS.
We obtain our data from three major third-party data providers as well as
over 20 ancillary sources. We are currently in default with respect to
agreements that we have with two of our major providers. Under the terms of two
of these agreements, the data providers may terminate our right to use their
data in their sole discretion and without any recourse to us. If either of these
agreements is terminated, there can be no assurance that we would be able to
obtain and integrate replacement data on a timely basis. Although we believe
that we could obtain alternate data in the event that we are no longer permitted
to use these providers' data, we can give no assurance that any such termination
will not disrupt our business. Any such disruption could aversely effect our
financial condition and the price of our securities.
4
A SIGNIFICANT PORTION OF OUR ASSETS CONSIST OF AN AMOUNT DUE TO US FROM A THIRD
PARTY.
As of December 31, 2001, $1 million was due to us from an unaffiliated,
privately-held leasing company. Of the $1 million owed to us by that leasing
company, an aggregate of $750,000 was repaid in January and February 2002, and
we anticipate that the balance will be repaid in April 2002, although we cannot
guarantee the timing of this repayment or that this amount will be repaid at
all. In the event that this amount is not repaid, our business operations would
be materially harmed.
WE MAY HAVE INADEQUATE CASH RESOURCES AVAILABLE TO US TO FUND OUR OPERATIONS.
As of December 31, 2001, we had cash, cash equivalents and a note
receivable totaling approximately $1.9 million, of which approximately $900,000
consisted of bank deposits with three banks and $1 million was due to us from an
unaffiliated, privately-held leasing company (of which $750,000 was subsequently
repaid). From January 1, 2002 to February 13, 2002, we raised approximately $1.2
million through a private placement of our equity securities. We intend to use
those funds on an "as needed" basis to fund any shortfall in our operations. If
we do not raise any funds from this offering and if we do not reduce our planned
growth in expenditures, we anticipate that we would need to raise additional
capital by the end of 2002. There can be no guarantee that such capital would be
available to us, or, if it is available to us, that it would be on terms
favorable to us. Under such circumstances, and in the event that we are unable
to raise additional capital, we may be required to discontinue some or all of
our operations, to reduce the development of some or all of our products, or to
reduce our workforce, all of which could materially adversely effect us.
THE INITIAL PUBLIC OFFERING PRICE OF OUR UNITS MAY NOT ACCURATELY REFLECT THEIR
FUTURE MARKET PERFORMANCE.
We unilaterally determined the initial public offering price of the Units.
This offering price may not be indicative of future market performance and may
bear no relationship to the price at which our Units, or the underlying Class B
Non-voting Common Stock or public warrants, will trade (if our securities are
traded at all).
OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR SECURITIES.
We expect that our future quarterly operating results will fluctuate
significantly. Accordingly, you should not rely on quarter-to-quarter
comparisons of our historical results as an indication of our future
performance. If our quarterly operating results do not meet the expectations of
our investors, the market price of our securities will most likely decline. Our
future quarterly results may fluctuate as a result of many factors, some of
which are outside our control, including:
o the timing, introduction and commercialization of our new products and
services (including the integration of additional datasets into our
databases);
o increased unemployment in the United States, which may result in
reduced use of our products by human resources personnel;
o the potential costs of protecting our intellectual property rights;
o the operating costs and capital expenditures related to the expansion
of our business operations and infrastructure, including the retention
of key personnel, the addition of new employees and the acquisition
and integration of new datasets;
o the introduction of similar or substitute databases by our
competitors;
o legal and regulatory developments that may adversely affect our
ability to collect or disseminate data; and
o the timing and establishment of our marketing and channel partnership
arrangements.
WE HAVE LIMITED PRODUCT OFFERINGS, AND IF DEMAND FOR THESE PRODUCTS DECLINES OR
FAILS TO DEVELOP AS WE EXPECT, OUR NET REVENUE WILL DECLINE.
We derive the majority of our current consolidated net revenue from a
limited number of products. Specifically, in the year ended December 31, 2001,
we derived all of our recurring revenue from our CD-ROM-based Worldwide
Information(TM) and Internet-based LocatePLUS(TM) products. We have recently
developed a "wireless" version of our LocatePLUS(TM) product, but we have not
yet realized any revenue from that product. We expect that revenue from our
Internet-based and CD-ROM-based products will continue to account for most of
our total revenue for the foreseeable future. As a result, continued and
widespread market acceptance of our existing products is critical to our future
success. We cannot assure you that our current products will achieve market
acceptance at the rate at which we expect. If our products are not accepted by
the market, our business and financial condition would be adversely affected.
5
WE OBTAIN DATA FROM A VARIETY OF SOURCES. IF WE ARE UNABLE TO OBTAIN NECESSARY
DATA, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Our datasets consist of publicly available data, which we have organized
and integrated to allow our pre-screened users to rapidly search and evaluate.
We license or otherwise obtain our data from three primary sources as well as
over twenty ancillary sources. Our sources include both private and government
data providers, including federal, state and local government agencies. From
time to time, certain sources of publicly available data, such as state motor
vehicle registries, have refused to release data to us. As a result, we have, on
occasion, been forced to obtain such data through the exercise of our rights
under the Freedom of Information Act. Such efforts can be costly and time
consuming, and we cannot guarantee that we will be able to successfully acquire
such data on a consistent basis.
From time to time, we may also be required to license or purchase
additional data to expand our product offerings or maintain our databases. We
cannot assure you that such third-party licenses will be available to us on
commercially reasonable terms, or at all. Our inability to maintain or obtain
any third-party license required to sell or develop our products or product
enhancements could require us to obtain substitute, possibly less current data,
which could adversely affect our business, financial condition and results of
operations.
THE GROWTH OF DEMAND FOR OUR PRODUCTS MAY BE LIMITED.
We have not conducted any market study with respect to the demand for our
products. Thus, there can be no assurance that our past growth and product
acceptance will continue at levels sufficient to permit achievement of our long
term business objectives and projections.
IF WE CANNOT INTEGRATE, UPDATE AND IMPROVE OUR PRODUCTS, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
We must continuously update our databases so that we may provide datasets
to customers that are accurate and current. We must also integrate additional
datasets for our products to remain competitive. Integration and updates are
time consuming and often require extensive resources, as we often obtain public
documents in a form that is not suitable for use in any of our products. For
example, we often receive "raw data" on electronic tape media from state motor
vehicle licensing agencies that must be modified so that it can be searched
rapidly based upon partial information. We can give no assurance that we will
have adequate resources to update our datasets or to integrate new datasets. If
we are unable to update our datasets or integrate new datasets, our products are
likely to be less desirable to our target market than those of our competitors,
and our sales and financial condition would be adversely affected.
Our ability to remain competitive will depend in part on our ability to:
o obtain updated information;
o enhance and improve the functionality of the products and services we
offer; and
o develop and introduce new products to meet changing customer needs and
preferences and to integrate new technologies.
We cannot assure you that we will be successful in responding to these market
challenges in a timely and cost-effective manner. If we are unable to integrate
new technologies effectively or respond to these changing needs, our business
could be adversely affected.
6
THE MARKET FOR DATABASE PRODUCTS AND SERVICES IS HIGHLY COMPETITIVE.
Our industry is intensely competitive and we expect competition to continue
to increase from both existing competitors and new market entrants. Many of the
companies that currently compete with us, as well as other companies with whom
we may compete in the future, are national or international in scope and have
greater resources than we do. Those resources could enable those companies to
initiate price cuts or take other measures in an effort to gain market share in
our target markets. We may have inadequate resources to compete against such
businesses.
For example, our LocatePLUS(TM)product competes with products offered by:
o Accurinet;
o ChoicePoint;
o Confi-chek.com;
o FlatRateInfo.com; and
o Lexis-Nexis.
We cannot assure you that we will be able to compete successfully against
these or other current and future participants in our markets or against
alternative technologies, nor can we assure you that the competitive pressures
that we face will not adversely effect our business, operating results and
financial condition.
WE FACE RISKS ASSOCIATED WITH OUR STRATEGIC ALLIANCES.
To date, we have entered into one "channel partner" (distribution)
agreement. From time to time, we anticipate that we will enter into additional
"channel partner" arrangements and similar strategic alliances through which we
will license access to our databases to third parties in exchange for royalties.
We can give no assurance that we will be able to identify and secure appropriate
channel partners or that any channel partner arrangements will be profitable. If
we are unable to enter into appropriate channel partner arrangements, use of our
database may not grow sufficiently to meet our business objectives, and our
business, financial condition and operating results may be adversely affected.
TO INCREASE OUR REVENUE, WE MUST INCREASE OUR SALES FORCE, FOR WHICH WE CAN GIVE
NO ASSURANCE.
To date, we have sold our products primarily through our approximately
eleven person direct sales and tele-sales force. Our future revenue growth will
depend in large part on recruiting and training additional direct sales and
tele-sales personnel and expanding our distribution channels. We may experience
difficulty recruiting qualified sales and support personnel and establishing
third-party distribution relationships. We may not be able to successfully
expand our tele-sales force or other distribution channels, and any such
expansion, if achieved, may not result in increased revenue or profits.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY
BE SUBJECT TO INFRINGEMENT CLAIMS THAT MAY ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION.
Our success depends on our proprietary technologies. We rely on trade
secret rights, confidentiality agreements and procedures and licensing
arrangements to establish and protect our proprietary rights. We do not have
patents issued or pending on any of our technologies. As a result, we face risks
associated with our intellectual property positions, including:
o the potential need to engage in costly legal proceedings to enforce
our intellectual property rights;
7
o the possibility that third parties will be able to compete against us
without infringing our intellectual property rights; and
o the possibility that our products may infringe upon the intellectual
property rights of third parties.
Our business could be adversely affected if we fail to protect our intellectual
property rights adequately, if there are changes in applicable intellectual
property laws that are adverse to our interests or if we become involved in
litigation relating to our intellectual property rights.
OUR MARKET IS INCREASINGLY COMPETITIVE, AND, AS A RESULT, WE ANTICIPATE
CHALLENGES MAY ARISE TO OUR INTELLECTUAL PROPERTY POSITIONS.
As more companies enter our marketplace and develop competing intellectual
property rights, it is increasingly likely that claims will arise which assert
that some of our technologies infringe upon other parties' intellectual property
rights. These claims could subject us to costly litigation, divert management
resources and result in the loss of our intellectual property rights. These
claims may also require us to pay significant damages, cease development of
products or services, terminate our use of infringing products or technologies
or require us to develop non-infringing technologies. In these circumstances,
continued use of our intellectual property rights may require that we obtain
licenses to the intellectual property that is the subject of the alleged
infringement, and we might not be able to obtain these licenses on commercially
reasonable terms, if at all.
OUR EFFORTS TO RESTRICT ACCESS TO OUR INTELLECTUAL PROPERTY MAY BE INEFFECTIVE,
AND THE RESULTING LOSS OF OUR INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR
BUSINESS.
As part of our confidentiality procedures, we have entered into
non-disclosure agreements with certain of our customers, employees, consultants
and strategic partners. We generally attempt to control access to and
distribution of our technologies, datasets and other proprietary information.
Despite these procedures, third parties could attempt to copy or otherwise
obtain and make unauthorized use of our technologies or independently develop
similar technologies. If this were to occur, our business would be adversely
affected.
WE MAY BE UNABLE TO PREVENT THIRD PARTIES FROM DEVELOPING INTERNET SITES,
ACQUIRING DOMAIN NAMES OR USING TRADEMARKS SIMILAR TO OURS.
The data that we provide to users consists of publicly available
information. As a result, we are unable to preclude others from developing
equivalent databases.
We have registered several domain names, including LOCATEPLUS.COM and
WORLDWIDEINFORMATION.COM. As new domain name extensions (E.G., ".biz" and
".info") become available, we anticipate that we will not acquire all of the
other extensions for these addresses. We may be unable to prevent third parties
from acquiring domain names or other trademarks that are similar to, infringe
upon or otherwise decrease the value of our trademarks.
We know of at least one competitor that has a corporate and domain name
similar to ours. We believe that these similarities may cause confusion on the
part of potential customers, and this confusion may harm our business, financial
condition, and results of operations. We have sent a "cease and desist" letter
to this competitor, but have received no response to date. If our efforts do not
result in a favorable resolution, we may be required to file a lawsuit to
protect our interests. We can give no assurance that any such lawsuit, if
commenced, would result in a conclusion that is favorable to us.
WE FACE SIGNIFICANT SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF
CONFIDENTIAL INFORMATION.
We rely on encryption and other technologies to provide system security and
to effect secure
8
transmission of confidential information, such as credit card numbers. We
license these technologies from third parties. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the security measures used
by us to protect customer transaction data. If any compromise of our security
were to occur, it could have a material adverse effect on our reputation and
business. A party who is able to circumvent our security measures could
misappropriate our proprietary information or cause interruptions in our
operations and damage to our reputation and customers' willingness to use our
products. We may be required to expend significant capital and other resources
to protect against these security breaches or to alleviate problems caused by
these breaches.
WE FACE RISKS RELATED TO THE PROCESSING OF CREDIT CARDS.
Because we offer services over the Internet and accept credit card
information without a signature, our credit card charges may be subject to
dispute. If a customer disputes the validity of a credit card charge, that
transaction may be charged back to us. Substantial charge backs could disrupt
our business and result in a loss of credit card processing rights, which would
significantly harm our business, financial condition and results of operations.
OUR PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HAVE ADVERSE EFFECTS ON OUR
CUSTOMER RELATIONS AND FINANCIAL RESULTS.
Datasets as complex as those that we develop may contain undetected defects
or errors. For example, our products may contain unknown defects due to errors
in the data that we purchase from our data providers. Despite testing, defects
or errors may occur in our existing or new products, which could make them less
attractive to our target markets. As a result, defects and errors in our
datasets could result in loss of revenue or market share, failure to achieve
market acceptance, diversion of development resources, injury to our reputation
and an adverse effect on our business, financial condition and results of
operation.
DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS.
Our datasets may contain errors that may give rise to claims against us. We
disclaim all warranties on the data we include in our products. However, our
disclaimers may not be enforced. In such an event, or if liabilities arise that
are not contractually limited or adequately covered by our insurance, our
business could be adversely affected.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH.
As of December 31, 2001, we had 31 employees. We intend to expand our
customer base and develop new products. To manage our anticipated growth, we
must continue to improve our operational and financial systems and expand,
train, retain and manage our employee base. Because of the registration of our
securities, we will be subject to additional reporting and disclosure
obligations, and we anticipate that we will hire additional finance and
administrative personnel to address these obligations. In addition, the
anticipated growth of our business will place a significant strain on our
existing managerial and financial resources. If we cannot manage our growth
effectively, we may not be able to successfully coordinate the activities of our
technical, accounting and marketing staffs and our business could be adversely
affected.
9
IF WE ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, OUR FUTURE
FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
Our revenue for 2001 was approximately $1.4 million, an increase of
approximately $820,000 from the prior year. The recent growth in our business
has resulted in an increase in the responsibilities of our personnel. Several of
our personnel are presently serving in more than one capacity. In addition, we
expect that we will need to hire additional employees during 2002. Competition
for experienced and qualified personnel in our market is intense. We may not be
able to retain our current key employees, or attract, integrate or retain other
qualified personnel in the future. If we do not succeed in attracting new
personnel or in integrating, retaining and motivating our current personnel, our
business could be adversely affected.
CERTAIN OF OUR DIRECTORS AND OFFICERS WILL PERSONALLY BENEFIT FROM THE USE OF
THE PROCEEDS OF THIS OFFERING.
We may use a portion of the proceeds from this offering in conjunction with
a planned increase in the compensation that we will pay to our President and
Chief Executive Officer, Jon R. Latorella. We may also use certain of the
proceeds from this offering to pay bonuses to Mr. Latorella and Robert A.
Goddard, our Chief Financial Officer, to make tax payments in connection with
certain loan arrangements that we have with them. Those loan arrangements are
described in greater detail in the section of this prospectus titled "Certain
Transactions," beginning on page 40.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS.
Our success depends to a significant extent on the performance and
continued service of our senior management. We have no employment agreements
with any of our employees. The loss of the services of any of our senior
management or any of our other key employees could adversely affect our
business.
THERE IS NO ASSURANCE THAT WE WILL PAY DIVIDENDS IN THE FUTURE.
We have never declared or paid a cash dividend. At this time, we do not
anticipate paying any dividends in the future. We are under no legal or
contractual obligation to declare or to pay dividends, and the timing and amount
of any future dividends and distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business. You should not purchase our securities on the
expectation of future dividends.
RISKS RELATED TO OUR INDUSTRY
-----------------------------
EXISTING GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS MAY LIMIT OUR ABILITY TO
ACQUIRE OR DISSEMINATE DATA. ANY SUCH REGULATION COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
Much of the data we provide is subject to regulation by the Federal Trade
Commission under the Federal Fair Credit Reporting Act and Title V of the
Financial Services Modernization Act (which is also referred to as the
"Gramm-Leach-Bliley Act"), and to a lesser extent, by various other federal,
state and local regulatory authorities pursuant to a variety of laws. These laws
and regulations are designed to protect individuals from the misuse of their
personal information.
We have not engaged counsel to review our activity in light of these laws
and regulations, although
10
we believe that our activities do not violate any law specifically applicable to
the dissemination of data concerning individuals. Our belief is based upon our
compliance with the "best practices" of the Individual Reference Services Group
(which we refer to as the "IRSG"), a background information industry trade group
of which we are a member.
In the event that compliance with the IRSG's policies is inadequate to
comply with the requirements of applicable law, we may be in violation of laws
governing the dissemination of data. In such a case, we may be subject to
enforcement action by regulatory agencies and claims against us by individuals
(to the extent such laws permit private rights of action). Any such claims could
significantly disrupt our business and operations. We do not currently maintain
liability insurance to cover such claims.
FUTURE GOVERNMENT REGULATION MAY FURTHER LIMIT OUR ABILITY TO PROVIDE MEANINGFUL
DATA TO CUSTOMERS.
Future laws or regulations that further restrict the use of personal or
public record information could disrupt our business and could cause us to lose
revenue. For example, if laws were enacted that restricted our use of Social
Security numbers, our ability to conduct our business would be adversely
affected. If we are unable to respond to regulatory or industry standards
effectively, our business, financial condition and results of operation would be
adversely affected. Our future success will depend, in part, on our ability to
enhance and improve the responsiveness, functionality and features of our
products and services in accordance with newly-imposed regulatory or industry
standards, of which we can give no assurance.
WE COULD FACE LIABILITY BASED ON THE NATURE OF OUR SERVICES AND THE CONTENT OF
THE MATERIALS THAT WE PROVIDE.
We may face potential liability from individuals, government agencies or
businesses for defamation, invasion of privacy, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
data contained in our products. Although we carry a limited amount of general
liability insurance, our insurance may not cover claims of these types and may
not be adequate to indemnify us for liability that may be imposed. Any
imposition of liability, particularly liability that is not covered by insurance
or is in excess of our insurance coverage, could adversely affect our
reputation, business, financial condition or results of operations.
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES
-----------------------------------------------------
OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER CONTROLS A MAJORITY OF OUR VOTING
SECURITIES, AND THEREFORE CAN UNILATERALLY APPROVE CERTAIN TRANSACTIONS AND
MATTERS PRESENTED TO OUR STOCKHOLDERS.
Jon R. Latorella, our President and Chief Executive Officer, controls a
majority of our voting securities and will be able to elect the Board of
Directors and to individually control all matters requiring stockholder
approval.
In addition to electing the Board of Directors, stockholders must approve,
among other things:
o mergers or consolidations;
o sales of all or substantially all of our assets; and
o amendments to our Second Amended and Restated Certificate of
Incorporation.
This concentration of ownership may delay, deter or prevent transactions
that would result in a change of control, which in turn could reduce the value
of our securities.
11
WE HAVE A LARGE NUMBER OF SECURITIES THAT WILL BE AVAILABLE FOR RESALE
IMMEDIATELY AFTER OR SHORTLY FOLLOWING THIS OFFERING. SALES OF THESE SECURITIES
COULD CAUSE THE PRICE OF OUR SECURITIES, IF PUBLICLY TRADED, TO DECLINE.
Sales of a large number of shares of our securities in the public markets
after this offering, or the potential for such sales, could decrease the trading
price of our securities and could impair our ability to raise capital through
future sales of our securities. Immediately following the consummation of this
offering, and assuming no exercise of warrants, options or other convertible
securities, we will have 54,666,793 shares of Class A Voting Common Stock issued
and outstanding (including 1,558,213 shares which will be issued upon the
conversion of certain debt and accrued interest upon the consummation of this
offering) and 66,640,726 shares of Class B Non-voting Common Stock issued and
outstanding.
Except to the extent the shares of common stock are held by our
"affiliates," as defined under the Securities and Exchange Commission's Rule
144, we anticipate that all of those shares will be freely available for public
resale within 30 days after the consummation of this offering, either as a
result of the Securities and Exchange Commission's Rule 144(k) or as a result of
our planned registrations of those issued and outstanding securities through
separate resale registration statements. For more information on this matter,
you should review the section of this prospectus titled Shares Eligible for
Future Sale, beginning on page 47.
IN ADDITION TO THE PUBLIC WARRANTS, WE HAVE ISSUED A SUBSTANTIAL NUMBER OF
RESTRICTED WARRANTS AND OTHER CONVERTIBLE SECURITIES. OUR WARRANTS AND
CONVERTIBLE SECURITIES MAY CAUSE THE TRADING PRICE OF OUR SECURITIES TO DECLINE,
AND MAY DISRUPT OUR ABILITY TO RAISE CAPITAL FROM OTHER SOURCES.
After completion of this offering and assuming it is fully subscribed,
there will be 10,798,633 shares of Class A Voting Common Stock subject to
purchase pursuant to warrants (consisting of 10,000,000 public warrants and
798,633 restricted warrants). We will also have 44,444 shares of Class A Voting
Common Stock subject to purchase pursuant to a convertible promissory note. We
have reserved 14,995,000 shares of our Class A Voting Common Stock for issuance
pursuant to our equity compensation plan. After completion of this offering,
there will also be 3,658,477 shares of Class B Non-voting Common Stock subject
to purchase pursuant to restricted warrants. While these convertible securities
are outstanding, the holders will have the opportunity to profit from a rise in
the price of our securities with a resulting dilution in the interest of our
other security holders. Our ability to obtain additional financing during the
period these convertible securities are outstanding may be adversely affected
and their existence may have an effect on the price of our securities. The
holders of the convertible securities are likely to exercise them at a time when
we would, in all likelihood, be able to obtain any needed capital by a new
offering of securities on terms more favorable to us than those available under
convertible securities being exercised.
WE MAY SELL ADDITIONAL SHARES IN THE FUTURE, WHICH COULD CAUSE THE PRICE OF OUR
SECURITIES, IF PUBLICLY TRADED, TO DECLINE.
We currently have 150,000,000 shares of Class A Voting Common Stock and
250,000,000 shares of Class B Non-voting Common Stock authorized. As a result,
we have substantial amounts of authorized but unissued capital stock. Our Second
Amended and Restated Certificate of Incorporation and applicable provisions of
Delaware law provide that we may issue authorized capital at the approval of our
Board of Directors, and no stockholder vote or other form of stockholder
approval is required for us to issue such capital. Consequently, we could issue
shares of either class of our common stock after this offering in connection
with future financings or acquisitions or in conjunction with equity
compensation arrangements. The offering prices in connection with those future
issuances could be less than the offering price in this offering. Any future
issuances of any of our securities could cause the trading price of our
securities, if publicly traded, to decline.
12
YOU MAY NOT BE ABLE TO EXERCISE YOUR PUBLIC WARRANTS IF WE DO NOT MAINTAIN AN
EFFECTIVE REGISTRATION STATEMENT.
We are required to use commercially reasonable efforts to maintain a
registration statement relating to the offer and sale of the Class A Voting
Common Stock underlying the public warrants, and to qualify these public
warrants and the underlying Class A Voting Common Stock for sale in
jurisdictions in which their holders reside unless an exemption from such
registration or qualification is available. If such registration is not
maintained, the holders of the public warrants included in the Units may not be
able to exercise them.
THERE HAS NEVER BEEN A MARKET FOR OUR SECURITIES, AND WE CANNOT GUARANTEE THAT A
MARKET FOR OUR SECURITIES WILL DEVELOP.
There has been no public market for our securities and there can be no
assurance that a public trading market for our securities will develop or, if
developed, will be sustained. We have entered into preliminary discussions with
a prospective market maker for quotation of our securities on the Over the
Counter Bulletin Board (which we refer to as the "OTC Bulletin Board"), but we
can be no assurance that our securities will be so quoted, or that a regular
trading market will develop for our securities, or, if a market does develop,
that it will be sustained.
EVEN IF WE ARE QUOTED ON THE OTC BULLETIN BOARD, THE OTC BULLETIN BOARD MAY NOT
PROVIDE LIQUIDITY FOR OUR INVESTORS.
The OTC Bulletin Board is an inter-dealer, over-the-counter market that
provides significantly less liquidity than the NASDAQ Stock Market or national
or regional exchanges. Securities traded on the OTC Bulletin Board are usually
thinly traded, highly volatile, have fewer market makers and are not followed by
analysts. The Securities and Exchange Commission's order handling rules, which
apply to NASDAQ-listed securities, do not apply to securities quoted on the OTC
Bulletin Board. Quotes for stocks included on the OTC Bulletin Board are not
listed in newspapers. Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and holders of our securities may be
unable to resell their securities at or near their original acquisition price,
or at any price.
WE DO NOT HAVE SIGNIFICANT FINANCIAL REPORTING EXPERIENCE, WHICH MAY LEAD TO
DELAYS IN FILING REQUIRED REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION
AND SUSPENSION OF QUOTATION OF OUR SECURITIES, IF THEY BECOME QUALIFIED FOR
QUOTATION ON THE OTC BULLETIN BOARD, WHICH WILL MAKE IT MORE DIFFICULT FOR YOU
TO SELL YOUR SECURITIES.
The OTC Bulletin Board limits quotations to securities of issuers that are
current in their reports filed with the Securities and Exchange Commission.
These limitations may be impediments to our quotation on the OTC Bulletin Board.
Because we do not have significant financial reporting experience, we may
experience delays in filing required reports with the Securities and Exchange
Commission following the effectiveness of the registration statement to which
this prospectus is a part. Because issuers whose securities are qualified for
quotation on the OTC Bulletin Board are required to file these reports with the
Securities and Exchange Commission in a timely manner, the failure to do so may
result in a suspension of trading or delisting from the OTC Bulletin Board if
our stock does become qualified for quotation on the OTC Bulletin Board.
INVESTORS MUST CONTACT A BROKER-DEALER TO TRADE OTC BULLETIN BOARD SECURITIES.
INVESTORS DO NOT HAVE DIRECT ACCESS TO THE OTC BULLETIN BOARD SERVICE.
Because there are no automated systems for negotiating trades on the OTC
Bulletin Board, they are conducted via telephone. In times of heavy market
volume, the limitations of this process may result in a significant increase in
the time it takes to execute investor orders. Therefore, when investors place
market orders - an order to buy or sell a specific number of shares at the
current market price - it is possible for
13
the price of a stock to go up or down significantly during the lapse of time
between placing a market order and its execution.
WE ANTICIPATE THAT THERE WILL NOT BE MORE THAN ONE MARKET MAKER, IF ANY, FOR OUR
SECURITIES FOR THE FORESEEABLE FUTURE.
In the event that our securities are quoted on the OTC Bulletin Board, we
anticipate that we will not have more than one market maker for our securities.
As a result, in the event that this market maker ceases to make a market for our
securities for any reason, our investors may have no public market for their
securities.
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT.
Trading in our securities will be subject to the "penny stock" rules for
the foreseeable future. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
These rules require that any broker-dealer who recommends our securities to
persons other than prior customers and accredited investors must, prior to the
sale, make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to execute the transaction. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with trading in the penny stock
market. In addition, broker-dealers must disclose commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities they offer. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from recommending transactions
in our securities, which could severely limit the liquidity of our securities
and consequently adversely affect the market price for our securities.
* * *
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of these statements.
USE OF PROCEEDS
Assuming that we sell all of the Units that we are offering, we anticipate
that we will receive net cash proceeds of approximately $2,630,000 after
deduction of underwriting commissions, fees and offering expenses. In the event
that the minimum number of Units is sold under this offering, we will receive
net proceeds of approximately $305,000 after deduction of underwriting
commissions, fees and offering expenses.
14
We intend to use the proceeds of this offering to launch LocatePLUS
Pocket(TM), to acquire additional datasets for integration into our
LocatePLUS(TM) product and for working capital. We have not specifically
allocated the anticipated proceeds of this offering among these expected uses.
We will retain broad discretion in the allocation and use of the net proceeds of
this offering. Pending the uses described above, we intend to invest the net
proceeds from this offering in short-term, investment grade, interest-bearing
securities.
DETERMINATION OF OFFERING PRICE
Since none of our securities are listed or quoted on any exchange or
quotation system and since our underwriter is selling shares on a "best efforts"
basis, the offering price of our Units was unilaterally determined solely by our
Board of Directors. The facts we considered in determining that offering price
were:
o our financial condition and prospects;
o our limited operating history;
o the general condition of the securities market;
o our underwriter's informal prediction of demand for securities such as
the Units; and
o recent sales of our securities in private placements.
The offering price is not an indication of and is not based upon the actual
value of the Company. The offering price bears no relationship to our book
value, assets or earnings or any other recognized criteria of value. The
offering price should not be regarded as an indicator of the future market price
of our securities.
DIVIDEND POLICY
We have never declared or paid a cash dividend. At this time, we do not
anticipate paying dividends in the future. We are under no legal or contractual
obligation to declare or to pay dividends, and the timing and amount of any
future cash dividends and distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business and to fund future growth. You should not purchase our
Units on the expectation of future dividends.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2001,
on:
o an actual basis; and
o a PRO FORMA as adjusted basis to give effect to the conversion of our
outstanding mandatorily convertible debt and accrued interest into
1,511,825 shares of Class A Voting Common Stock, the issuance of
1,666,666 Units (the minimum that may be sold by us in this offering)
and the issuance of 10,000,000 Units (the maximum number that may be
sold by us in this offering) at an offering price of $0.30 per share
and after deducting underwriting commissions and estimated offering
expenses of approximately $160,000.
15
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
DECEMBER 31, 2001
(IN THOUSANDS)
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(ASSUMES MINIMUM) (ASSUMES MAXIMUM)
DEBT:
Current portion of convertible debt
and capital lease obligations ..................... $ 149 $ 149 $ 149
======== ======== ========
Capital lease obligations, net of
current portion ................................... $ 173 $ 173 $ 173
Mandatorily convertible debt ........................... 363 -- --
-------- -------- --------
Total long-term debt 536 173 173
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.01 per share:
Class A Voting Common Stock,
150,000,000 shares authorized;
53,108,580, 54,620,405, and
54,620,405 shares issued and
outstanding, respectively............................ 531 546 546
Class B Non-voting Common Stock,
250,000,000 shares authorized;
48,527,054, 50,193,720, 58,527,054
shares issued and outstanding,
respectively......................................... 485 502 585
Additional paid-in capital ............................. 14,214 14,829 16,511
Warrants ............................................... 548 660 1,220
Common stock subscriptions receivable
(4) (4) (4)
Accumulated deficit .................................... (14,286) (14,377) (14,377)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ............................. 1,488 2,156 4,481
-------- -------- --------
TOTAL CAPITALIZATION ................................... $ 2,173 $ 2,478 $ 4,803
======== ======== ========
16
DILUTION
ASSUMING MAXIMUM NUMBER OF UNITS SOLD
As of December 31, 2001, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
conversion of certain convertible debt and accrued interest into 1,511,825
shares of Class A Voting Common Stock and assuming the sale of 10,000,000 Units
in the offering (the maximum number of Units that we are offering for sale) at
the offering price of $0.30 per Unit, less the estimated offering expenses
including underwriting commissions, the PRO FORMA as adjusted net tangible book
value of each of the assumed outstanding shares of common stock would have been
$0.04. This would have resulted in dilution of $0.26 to new investors purchasing
Units in the offering. At the same time, our current stockholders would have
realized an increase in PRO FORMA net tangible book value of $0.02 after the
offering without further cost or risk to themselves.
The following table illustrates this per share dilution, assuming
10,000,000 Units are sold:
Initial public offering price, per Unit............................... $0.30
PRO FORMA net tangible book value per share
before the initial public offering.................................... $0.02
Increase in PRO FORMA as adjusted net tangible book value
per share attributable to investors in the offering................... $0.02
PRO FORMA as adjusted net tangible book value per share
after the offering.................................................... $0.04
Dilution per share to new investors................................... $0.26
ASSUMING MINIMUM NUMBER OF UNITS SOLD
As of December 31, 2001, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
conversion of certain convertible debt and accrued interest into 1,511,825
shares of Class A Voting Common Stock and assuming the sale of 1,666,667 Units
in the offering (the minimum number of Units that we may sell and receive any
proceeds from this offering) at the offering price of $0.30 per Unit, less the
estimated offering expenses including underwriting commissions, the PRO FORMA as
adjusted net tangible book value of each of the assumed outstanding shares of
common stock would have been $0.02. This would have resulted in dilution of
$0.28 to new investors purchasing Units in the offering. At the same time, our
current stockholders would have realized no change in the PRO FORMA net
tangible book value.
The following table illustrates this per share dilution, assuming 1,666,667
Units are sold:
Initial public offering price, per Unit............................... $0.30
PRO FORMA net tangible book value per share
before the initial public offering.................................... $0.02
Increase in PRO FORMA as adjusted net tangible book value
per share attributable to investors in the offering................... $0.00
PRO FORMA as adjusted net tangible book value per share
after the offering.................................................... $0.02
Dilution per share to new investors................................... $0.28
17
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected financial data set forth on the following page
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus.
The statement of operations data set forth below for the years ended
December 31, 2000 and 2001 and the balance sheet data as of December 31, 2000
and 2001 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The unaudited pro forma balance sheet
data has been prepared assuming the conversion of certain outstanding
mandatorily convertible debt into common stock as of December 31, 2000 pursuant
to this offering.
These historical results are not necessarily indicative of results to be
expected for any future period. See Note 14 in the Notes to the Consolidated
Financial Statements for a description of the computation of net loss per share
and the number of shares used in the per share calculation.
18
STATEMENTS OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
-----------------------------------
2000 2001
------------ ------------
REVENUES:
Licenses $ 490,480 $ 268,701
Services 98,632 752,109
Engineering services -- 388,187
------------ ------------
Total revenues 589,112 1,408,997
COSTS AND EXPENSES:
Costs of revenues:
Licenses 169,782 96,561
Services 1,293,297 986,240
Engineering services -- 49,347
Selling and marketing 1,010,621 799,486
General and administrative 3,439,251 3,317,128
------------ ------------
Total operating expenses 5,912,951 5,248,762
------------ ------------
OPERATING LOSS (5,323,839) (3,839,765)
OTHER INCOME (EXPENSE):
Interest income 19,605 67,768
Interest expense, (43,110) (590,970)
Loss on investment (500,000) --
Other income, net 13,902 6,712
------------ ------------
Net loss $ (5,833,442) $ (4,356,255)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.11) $ (0.04)
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE 51,916,934 99,613,673
PRO FORMA
AS ADJUSTED
BALANCE SHEET DATA: AS OF DECEMBER 31, DECEMBER 31,
2000 2001 2001
----------- ----------- -----------
(UNAUDITED)
Cash and equivalents $ -- $ 915,864 $ 915,864
Total current assets 174,082 2,264,301 2,264,301
Total assets 2,126,113 3,970,531 3,970,531
Total current liabilities 2,058,071 1,947,982 1,947,982
Mandatorily convertible debt 310,975 362,838 --
Total stockholders' equity (deficit) $ (425,870) $ 1,487,092 $ 1,849,930
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS TOGETHER WITH "SELECTED FINANCIAL
DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS BECAUSE OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE PRESENTED IN THE SECTION TITLED "RISK FACTORS" BEGINNING ON
PAGE 4 AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions.
Since 1996, we have sold a CD-ROM-based product, which we refer to as
Worldwide Information(TM), that enables users to search certain motor vehicle
records and driver's license information in multiple states through a dynamic
search engine, using complete or partial information.
Since March 1, 2000, we have maintained a database that is accessible
through the Internet, known as LocatePLUS(TM). Our LocatePLUS(TM) product
contains searchable and cross-referenced public information on individuals
throughout the United States, including individuals' names, addresses, dates of
birth, Social Security numbers, prior residences, and, in certain circumstances,
real estate holdings, recorded bankruptcies, liens, judgments, drivers' license
information and motor vehicle records. We anticipate that the majority of our
future revenues will be derived from our LocatePLUS(TM) product.
We distribute our content both directly (through the Internet in the case
of our LocatePLUS(TM) product and through the mail in the case of our Worldwide
Information(TM) CD-ROM) and through "channel partner" arrangements, by which
third party database providers obtain access to our databases in consideration
for a royalty. We have executed one channel partner agreement to date, which was
entered into in 2001. However, that channel partnership did not generate any
revenue until January 2002 and, as of this date, revenue generated from this
channel partnership has not been material. We anticipate that we will into
additional "channel partner" agreements in the future. We currently anticipate
that revenue from channel partner arrangements will constitute a material
portion of our revenue in 2002, and will continue to do so in the foreseeable
future.
In 2001, we entered into an arrangement with a third party database
provider, pursuant to which we provided certain engineering services relating to
the integration and assimilation of public data. We believe that revenue from
engineering services is not likely to constitute a material portion of our
future revenue.
Although our products consist primarily of publicly available - and
therefore non-proprietary - information, we integrate data in our products in a
proprietary manner that allows users to access data rapidly and efficiently. In
addition, our LocatePLUS(TM) product utilizes proprietary methodologies to "tie"
data associated with a given individual to a single background report, even
though the sources of data with respect to a given individual may be incomplete
or contain only partial information with respect to that individual.
Investors should not use our past results as a basis to predict our future
performance. We have incurred significant net losses since our inception. We
incurred net losses of approximately $5.8 million in 2000 and $4.4 million in
2001. Our accumulated deficit as of December 31, 2001 was approximately $14.4
million. We anticipate that we will increase our sales and marketing, product
development and general and administrative expenses during 2002 and for the
foreseeable future. To achieve profitability, we will need to generate
significantly more revenue than we have in prior years. Even if we ultimately do
achieve profitability, we may not be able to sustain or increase our
profitability. If our revenue increases more slowly than we anticipate, or if
our operating expenses exceed our expectations, our operating results will be
harmed.
20
Information in our Worldwide Information(TM) product is updated and
released either quarterly or twice a year. Revenue associated with our Worldwide
Information(TM) product is recognized upon delivery to the customer of a CD-ROM,
provided that no significant obligations remain, evidence of the arrangement
exists, the subscription fee is fixed or determinable and collectibility is
reasonably assured.
In the case of our LocatePLUS(TM) product, we charge a "per click" fee to
customers, which varies based upon on the type and quantity of information
requested. Revenue from our LocatePLUS(TM) product is recognized when requested
information is downloaded, there is evidence of an arrangement, the fee is fixed
or determinable, and collectability is reasonably assured. We charge our fees to
customers' credit cards (in the case of approximately 75% of our current
customer base) or invoice customers for such fees on a monthly basis (in the
case of approximately 25% of our current customer base).
Our costs of revenue consist primarily of payments to obtain data and
software maintenance expenses, which consist primarily of payroll and related
expenses for information technology personnel, Internet access and hosting
charges, and expenses relating to Web content and design. We license or
otherwise obtain our data from three primary sources, as well as over twenty
other ancillary sources (including both private and government sources).
In March 1999, we entered into a data acquisition agreement to acquire
information related to real property. This agreement expires on June 30, 2002.
In July 1999, we entered into a three year data acquisition agreement to acquire
credit file header information. This agreement may be cancelled by the data
provider upon 90 days' notice, with or without cause. In August 1999, we entered
into a one year data acquisition agreement to acquire bankruptcy, liens, and
judgments information. This agreement was renewable for successive periods of
one year unless terminated upon 90 days' prior written notice. This agreement
was followed by a new agreement relating to bankruptcy, liens, and judgments
information, which we entered into on November 27, 2001. This new agreement has
a one year term with automatic one year successive renewal periods unless
terminated by either party prior to renewal. Payments under these agreements are
based on monthly minimum payments and monthly usage. For more information on
this, you should review the subsection of this section titled "Commitments and
Contingencies," beginning on page 24.
In 2000 and 2001, we recorded $640,000 and $648,500, respectively, in costs
related to these agreements, of which $337,000 was accrued but not paid, in
violation of the provisions of certain of these agreements. Our use of data
under one of these agreements may be subject to termination as a result of this
failure to pay. In the event that any of our primary sources of data were no
longer available to us, we believe that we would be able to integrate alternate
sources of data without significant disruption to our business or operations, as
we believe there are currently a number of equivalent providers of such data.
21
Our selling and marketing expenses consist of salaries and commissions paid
to sales representatives for the products that we offer, as well as direct mail
advertising campaigns and magazine and Internet banner advertisements.
General and administrative expenses consist of payroll and related expenses
for non-sales, non-research and development and executive and administrative
personnel, facilities expenses, insurance, professional services expenses,
travel and other miscellaneous expenses.
Interest income and expense primarily consists of earnings on our cash and
cash equivalents. Interest expense is attributable to convertible notes issued
in the year ended December 31, 2001. At December 31, 2001, we had notes payable
(current and long-term) totaling $372,838. Of this amount, $362,838 will
mandatorily convert into shares of our Class A Voting Common Stock upon the
consummation of this offering.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue from licenses of our Worldwide Information(TM) CD-ROM
product decreased to $268,701 for the year ended December 31, 2001 from $490,480
for the year ended December 31, 2000, a decrease of 45%. We believe this
decrease was the result of our re-direction of sales efforts toward our
Internet-based product, LocatePLUS(TM). We launched our LocatePLUS(TM) product
in March 2000. Service revenue from our Internet-based product, LocatePLUS(TM),
increased to $752,109 for the year ended December 31, 2001 as compared to
$98,632 for the year ended December 31, 2000, an increase of 662%. This increase
is attributable to an increase in customers and usage. We also realized $388,187
of revenue during the year ended December 31, 2001 from certain database
engineering services that we provided to a third party. We recognized no
engineering service revenue during fiscal year ended December 31, 2000, and we
do not anticipate that we will recognize material engineering service revenue in
the future.
COST OF LICENSE REVENUE. For the year ended December 31, 2001, our cost of
revenue for licenses of Worldwide Information(TM) was $96,561, as compared to
$169,782, for the year ended December 31, 2000, a decrease of 43%. This decrease
is primarily attributable to cost cutting measures initiated in early 2001,
including reducing our payroll costs. We anticipate that our cost of license
revenue will increase in 2002 because we plan to update our Worldwide
Information(TM) database to reflect changes in certain states' motor vehicle and
drivers license data and to develop a DVD-ROM version of our Worldwide
Information product.
COST OF SERVICE REVENUE. For the year ended December 31, 2001, our cost of
service revenue associated with LocatePLUS(TM) was $986,240, as compared to
$1,293,297 for the year ended December 31, 2000, a decrease of 24%. This
decrease is primarily attributable to cost-cutting measures, including payroll
cost reductions. We are currently negotiating with certain of these vendors to
re-establish modified versions of those data contracts. We anticipate that a
substantial portion of the proceeds of this offering will be used to acquire
additional data to enhance our LocatePLUS(TM) product, and we expect that we
will increase our cost of service revenue in the future.
22
COST OF ENGINEERING REVENUE. For the year ended December 31, 2001, our cost
of engineering revenue was $49,347. Cost of engineering revenue consisted of
salary and expenses allocated to an engineering project for a third party. We
had no engineering revenue, and no corresponding cost of engineering revenue, in
2000.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the year
ended December 31, 2001 were $799,486, as compared to $1,010,621 for the year
ended December 31, 2000, a decrease of approximately 20%. This reduction in
expenses is attributable primarily to reduced payroll costs. We plan to expand
our sales force and advertising efforts during 2002 as we attempt to increase
our customer base and sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $3,317,128 for the year ended December 31, 2001, from $3,439,251
for the year ended December 31, 2000, a decrease of 4%. We expect general and
administrative expenses to increase as we begin to hire additional personnel and
incur additional costs to manage the anticipated growth of our business and the
costs associated with being a publicly held company.
INTEREST INCOME (EXPENSE). Interest expense substantially increased to
$590,970 for the year ended December 31, 2001, from $43,110 for the year ended
December 31, 2000, an increase of 1,270%. This increase is attributable to
approximately $130,000 in increased interest on borrowings, an increase of
approximately $127,000 in interest expense relating to warrants issued with
certain convertible debt, and an increase of approximately $294,000 in interest
expense relating to the beneficial conversion features of this convertible debt.
LOSS ON INVESTMENT. During 2000, we entered into a series of agreements
with IntelliCorp, Ltd., an unaffiliated Ohio-based database provider. Under the
terms of those agreements, we loaned $500,000 in cash in exchange for certain
promissory notes convertible into ownership interests in IntelliCorp at
IntelliCorp's discretion. We recorded a bad debt reserve for the full amount of
that investment during 2000.
INCOME TAXES
As of December 31, 2001, we had net operating loss carryforwards for
federal and state income tax purposes of approximately $1.2 million, which
expire through 2021. We have provided a full valuation allowance on this
deferred tax asset because of the uncertainty relating to our ability to use
these losses. Changes in the ownership of our common stock also may limit our
use of these carryforwards.
23
LIQUIDITY AND CAPITAL RESOURCES
From our incorporation in 1996 through December 31, 2001, we raised
approximately $13.5 million through a series of private placements of equity and
convertible debt to fund marketing and sales efforts and develop our products
and services. During 2001, our financing activities provided approximately $5.3
million of cash, principally through the issuance of convertible debt and Class
B Non-voting Common Stock. As of December 31, 2001, our cash and investments
totaled $1,915,864. From January 1, 2002 through February 13, 2002, we raised
approximately $1.2 million through sales of our Class B Non-voting Common Stock.
During 2001, we used approximately $3.1 million in operating activities,
principally to fund our net losses. Also during 2001, we loaned $1.0 million to
an unaffiliated leasing company. As of the date of this prospectus, $750,000 of
this note has been repaid.
The financial statements included in this prospectus have been prepared
assuming that we will continue as a going concern, which contemplates continuity
of operations, realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. We have incurred an accumulated
deficit of approximately $14.3 million through December 31, 2001 and used
approximately $3.1 million of cash in operations during 2001. We believe that
additional financing will be required during 2002 to fund our planned
operations. As contemplated in this prospectus, our plans include raising
additional funds in 2002. There is no assurance that we will obtain the
financing to provide the resources necessary for us to continue our planned
operations through 2002.
There can be no assurance that such financing will be available to us, on
favorable terms, or at all. In the event that our operations are not profitable
or do not generate sufficient cash to fund our business, or if we fail to obtain
additional financing, we will have to substantially reduce our level of
operations. These circumstances raise substantial doubt about our ability to
continue as a going concern. The financial statements included in this
prospectus do not include any adjustments that might result from the outcome of
this uncertainty.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease office space and equipment under various operating lease
agreements that terminate on various dates through 2005. Future minimum
payments under our non-cancelable operating leases total $1,560,041.
CAPITAL LEASES
During the year ended 2000, we entered into certain long-term equipment
lease agreements. These agreements are classified as capital leases and expire
in 2005. Future minimum lease payments under our non-cancelable capital leases
total $413,302.
LICENSE AGREEMENTS
We have entered into various data acquisition agreements under which we are
required to make minimum payments totaling $785,000 through 2004.
24
LOAN DEFAULT
In consideration for a $10,000 loan made to us on March 9, 2001, we issued
a convertible promissory note. This convertible promissory note bears interest
at the rate of 12% per annum. The note matured on September 9, 2001. We have
continued to make interest payments under this note as they have come due. We
are currently in default with respect to the payment of the principal of this
loan. This note is currently convertible into 44,444 shares of our Class A
Voting Common Stock at the election of the holder.
LEGAL PROCEEDINGS
We are from time to time subject to legal proceedings and claims that arise
in the normal course of our business. There are currently no pending or known
actions for which the amount of ultimate liability could have a material adverse
effect on our financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations are
discussed throughout this section, where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 2 in the Notes to the Consolidated
Financial Statements included elsewhere in this prospectus. Note that our
preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
Our accounting policies that are the most important to the portrayal of our
financial condition and results, and which require the highest degree of
management judgment relate to revenue recognition and the provision for
uncollectible accounts receivable. We estimate the likelihood of customer
payment based principally on a customer's credit history and our general credit
experience. To the extent our estimates differ materially from actual results,
the timing and amount of revenues recognized or bad debt expense may be
materially misstated during a reporting period.
RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
Certain members of our Board of Directors have performed consulting
services for us. Expenses relating to these services amounted to $223,795 and
$303,892 in 2000 and 2001, respectively, and were recorded as part of general
and administrative expenses.
In 2001, we granted options to purchase 119,104 shares of Class A Voting
Common Stock for services rendered as a consultant to a former member of our
Board of Directors. We recorded an expense of $21,645 associated with these
options. In 2002, we issued a warrant to purchase 1,177,680 shares of Class B
Non-voting Common Stock for consulting services rendered by the former member of
our Board of Directors.
In 2001, we granted options to purchase 38,067 shares of Class A Voting
Common Stock and warrants to purchase 324,581 shares of Class B Non-voting
Common Stock in consideration for services rendered by a member of the Board of
Directors. We recorded expenses of $6,918 and $44,277, respectively, associated
with these options and warrants.
NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY
On February 1, 2002, and pursuant to our Non-employee Directors' Stock
Option Policy, we granted warrants to purchase a total of 70,000 shares of Class
B Non-voting Common Stock, with an exercise price of $0.15 per share, to two of
our Directors.
LOAN FROM DIRECTOR
During 2001, we issued convertible notes with detachable warrants to two
members of our Board of Directors in exchange for an aggregate of $215,000 in
cash. Consulting expenses in 2001 include $74,900 related to the exchange of
convertible debt into equity securities by a member of the Company's Board of
Directors.
USE OF OUR ASSETS
Certain of our executives are allowed use of company cars for both business
and personal purposes. These cars have been capitalized as assets of the
Company, totaling $115,278 as of December 31, 2001.
NOTES RECEIVABLE FROM RELATED PARTIES
During 2000, we loaned $400,000 in cash, and received, in exchange,
promissory notes from two officers. The notes bear interest at an annual rate
equal to the 90-day Treasury Bill Rate (1.7% at December 31, 2001). The
principal and accrued interest are due and payable in one lump sum on January 3,
2010, unless, prior to that date, we have inadequate funds to satisfy our
obligations as they generally become due, in which case the principal and
accrued interest would be immediately due and payable. We do not intend to make
a call on these notes in the foreseeable future and, therefore, the notes are
classified as long-term assets. In the event of a change of control, as defined
in these notes, or in the event that, as of January 3, 2003, the applicable
officer is (i) employed by us; (ii) an independent contractor for us; or (iii) a
member of our Board of Directors, then with respect to that officer's note, the
note shall be canceled without further action by any party. In the event that a
note is canceled pursuant to the conditions described above, we agreed to pay to
the applicable officer, no later than two months after the end of the officer's
applicable tax year in which such cancellation occurs, an amount in cash
sufficient to fulfill the officer's tax liability attributable to the
cancellation of the note. We are amortizing the principal balance of these notes
on a monthly basis through January 3, 2003. Through December 31, 2001, we
recorded $256,944 of compensation expense. Additionally, we have accrued
approximately $138,000 through December 31, 2001 relating to an estimate of the
officers' tax liability expected to be reimbursed by us.
25
INTELLICORP
In 2001, we entered into a Channel Partnership (license and distribution)
Agreement with IntelliCorp, that provided for IntelliCorp to license certain
data from us in consideration for a royalty equal to 50% of the revenue that
IntelliCorp realizes from the sale of our data. No royalties were recognized
under this agreement in 2001. In January 2002, we amended the Channel
Partnership Agreement to increase the royalty rate to 75% of the revenue
realized by IntelliCorp on sales of our data, to terminate IntelliCorp's
conversion right with respect to our loan to IntelliCorp, and to cease interest
accrual on our loan to IntelliCorp as of February 1, 2002. As of that date,
interest receivable of $76,280 was due but not recorded as income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, "Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method.
In July 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets," which became effective for us on January 1, 2002. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization and includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, and reclassification of certain intangibles out of previously
reported goodwill.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses significant issues
relating to the implementation of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and develops a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, its provisions are to be
applied prospectively.
Had we implemented the above accounting pronouncements in the current
period, our financial position and results of operations would not have been
effected.
* * *
26
BUSINESS
OVERVIEW
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions.
Since 1996, we have sold a CD-ROM-based product, which we refer to as
Worldwide Information(TM), that enables users to search certain motor vehicle
records and drivers' license information in multiple states.
Since March 1, 2000, we have maintained a database that is accessible
through the Internet, known as LocatePLUS(TM). Our LocatePLUS(TM) product
contains searchable and cross-referenced public information on individuals
throughout the United States, including individuals' names, addresses, dates of
birth, Social Security numbers, prior residences, and, in certain circumstances,
real estate holdings, recorded bankruptcies, liens, judgments, drivers' license
information and motor vehicle records.
INDUSTRY BACKGROUND
We are a background information provider. Users of background information
have historically included law enforcement, other government agencies, law
firms, investigation companies, private investigators and insurance companies.
Information is used by those entities for various activities ranging from legal
discovery to employment screening to the detection of fraud and the prevention
of crime and terrorism. Additional users, such as large businesses, have
increasingly availed themselves of background information services in connection
with their hiring practices and other business decisions. The business market
for online public information was $1.5 billion to $2.0 billion in 1998 and is
expected to reach $4.0 billion by 2003, according to Argus Research.
A considerable amount of background information about individuals in the
United States is publicly available. Examples of such public data include:
o names and addresses o property ownership
o aliases o bankruptcies
o nationwide court records o certain criminal records
The sources of these types of public data, however, are often fragmented
and geographically dispersed. In addition, the reliability of this information
and the data provided by various sources may not be consistent. In this
environment, businesses and government agencies that wish to use public
information are faced with the time-consuming, costly and difficult task of
gathering data from numerous locations and sources, verifying the information
acquired and organizing it into a useful format. While services and technologies
have developed to enable remote access to information sources, there has
historically been few comprehensive access points for information available
about individuals. Traditional sources of information, including credit
reporting services and other database services, make available only limited
types of information for specific purposes, such as verifying credit worthiness.
Such services may also be limited by applicable law to specified uses and users.
Almost none of those sources are integrated in a manner that allows easy and
rapid access to data.
BUSINESS STRATEGY
Our business plan is to provide an entire suite of information products and
services for professionals in law enforcement agencies, human resources, law
firms, insurance underwriting, fraud investigation, private equity funds,
corporate securities, private investigation and financial institutions. We
27
believe that we will be able to compete with comparable services based upon the
pricing of our services and based upon certain technical advantages incorporated
in our systems (such as our data integration methodologies and our hyper-linked
and wireless LocatePLUS(TM) reports).
OUR TARGET MARKET AND SCREENING OF USERS
Our products are marketed and sold to federal, state and local government
agencies (including law enforcement agencies), private investigators, human
resource professionals and the legal profession. Our products are used in:
o crime and terrorism investigation (such as in conjunction with federal
and state investigations in the aftermath of the September 11th
terrorist attacks and recent bio-terror incidents);
o detection of fraud;
o "skip tracking" (i.e., the location of debtors and individuals in
violation of parole or bail restrictions);
o background checks;
o legal due diligence; and
o risk management.
Our products are generally marketed and sold only to pre-screened business
and government end users. We do not sell products or services to the general
public due to the liability that may arise from the release of personal
information to the public. Before obtaining access to our LocatePLUS(TM)
database or our Worldwide Information(TM) product, we generally require
commercial customers to provide background information about their business need
for data and about themselves, such as business licenses, bar cards or private
investigator licenses. Individuals involved in law enforcement must provide
evidence of their authority.
In an attempt to prevent the misuse of our date, we have adopted a three
tier security schema.
======= ============================= ==========================================
LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS
======= ============================= ==========================================
Names, Addresses and Phone Numbers
I General Business Past Residences, Neighbors and Affiliates
Real Property
======= ============================= ==========================================
Private Investigators Level I Data, plus:
II Insurance Liens and Judgments
Attorneys/Law Firms Drivers' Records
Government Certain Motor Vehicle Records
Corporate Security
======= ============================= ==========================================
Level I and II Data, plus:
Comprehensive Criminal Records
III Law Enforcement Restricted Motor Vehicle Records
Certain Credit Reporting Data
======= ============================= ==========================================
28
We are a member of the Individual Reference Services Group (which we refer
to as the "IRSG"), a background information industry trade group. The IRSG has
adopted a series of principles, which it has deemed industry "best practices"
designed to ensure individual privacy while allowing access to needed data by
authorized users. We believe that we currently comply with the IRSG's
principles, based on a 2001 audit conducted by the IRSG.
LOCATEPLUS(TM)
We launched our LocatePLUS(TM) Internet site in March 2000. Our
LocatePLUS(TM) database contains searchable and cross-referenced public
information on individuals throughout the United States. Information is
presented in a dynamic, hyper-linked fashion, permitting users to rapidly
identify and obtain personal information relating to individuals and their
associated residences, possible acquaintances, and a variety of other types of
data. Our LocatePLUS(TM) database consists of approximately 5 billion individual
data entries. According to our estimates, we have data entries relating to
approximately 205 million adult individuals in the United States (or
approximately 98% of the adult population of the United States based on the 2000
United States Census).
As of December 31, 2001, there were 4,185 pre-screened users of our
LocatePLUS(TM) database.
Datasets currently integrated in our LocatePLUS(TM) product include
nationwide records relating to:
o names and addresses o real estate records
o aliases o prior residences
o dates of birth o recorded bankruptcies
o Social Security numbers o liens
o driver's license information o motor vehicle records
o residential address information o certain death records
(including dates of residence)
o phone numbers
o vessel registrations
We intend to continue integration of datasets into our LocatePLUS(TM)
product, including:
o certain criminal arrest, conviction o certain professional
and incarceration records licenses
o certain hunting and fishing licenses o certain fingerprint files
o certain facial image files o Federal Aviation
Administration records
o certain gun licenses
We can currently give no assurance as to the timing of integration of such
datasets, however, or whether these new datasets will be integrated with our
LocatePLUS(TM) product at all.
We believe that one of the significant advantages of our LocatePLUS(TM)
product, in comparison with many products with which we compete, is the ability
of LocatePLUS(TM) to "tie" data associated with a given individual to produce a
single report. Our LocatePLUS(TM) system uses a proprietary methodology to
associate data in a manner that generally results in a matching of data entries
across diverse data sources, allowing users to obtain a single, comprehensive
data report about an individual, even when there is no single element that ties
data entries together (such as a Social Security number). This comprehensive
data report is itself linked to other data potentially relevant to a business or
government agency researching an individual, such as names and addresses of
possible acquaintances, relatives and neighbors of that individual.
29
LOCATEPLUS POCKET(TM)
We recently developed a version of our LocatePLUS(TM) product that is
accessible through wireless personal digital assistants and devices such as the
RIM Blackberry(R), which we refer to as LocatePLUS Pocket(TM). We expect to
market this wireless LocatePLUS(TM) product primarily to law enforcement
agencies. We cannot currently estimate revenues from this wireless product, as
market acceptance of our product will depend on a variety of factors outside our
control, including the availability of competing products and the resources
available to law enforcement agencies. We expect that these devices will be
marketed and sold on a subscription fee basis, permitting unlimited access to
our LocatePLUS(TM) database for a flat monthly fee provided that that the user
agrees to a fixed term commitment.
WORLDWIDE INFORMATION(TM)
Since 1996, we have produced CD-ROM products that enable users to quickly
search motor vehicle records in multiple states through a dynamic search engine,
known as Worldwide Information(TM). Our Worldwide Information(TM) product
enables users to search certain motor vehicle records and drivers' license
information in multiple states through a dynamic search engine. Unlike many
competing products, our Worldwide Information(TM) product enables users to
rapidly identify vehicles or drivers using complete or partial search criteria.
We believe that this ability to search partial data is a valuable tool in
circumstances in which incomplete information is available, as is often the case
in criminal investigations. Unlike data provided by Internet-based services,
searches on our CD-ROM product are confidential and unavailable to any person
other than the user of our CD-ROM product. We believe that the confidential
nature of this CD-ROM product makes it particularly attractive to law
enforcement agencies, which must often conduct criminal investigations in strict
secrecy.
As of December 31, 2001, there were approximately 2,700 pre-screened
purchasers of our Worldwide Information(TM) CD-ROM product.
We currently expect to expand our Worldwide Information(TM) product to
include data from additional states, and to develop a DVD-ROM-based version of
this product, although we can give no assurance as to the timing of such product
launches or whether such products will be developed at all. We expect that a
DVD-ROM-based version of this product, if developed, would permit multi-state
Worldwide Information(TM) databases to reside on a single medium.
SOURCES OF OUR DATA
Our operations depend upon information derived from a wide variety of
automated and manual sources. External sources of data include public records
information companies, governmental authorities and on-line search systems. We
license or otherwise obtain our data from three primary sources, as well as over
twenty other ancillary sources (including both private and government sources).
In March 1999, we entered into a data acquisition agreement to acquire
information related to real property. This agreement expires on June 30, 2002.
In July 1999, we entered into a three year data acquisition agreement to
acquire credit file header information. This agreement is terminable by the data
provider at the data provider's discretion, with or without cause.
30
In August 1999, we entered into a one year data acquisition agreement to
acquire bankruptcy, liens and judgments information. That agreement included a
provision that caused it to be automatically renewable unless 90 days' prior
notice was given. We entered into a new agreement with this data provider on
November 27, 2001. That agreement has a one year term with automatic one year
renewal periods unless terminated by either party prior to renewal.
Payments under these agreements are based on monthly minimum payments and
monthly usage. In 2000 and 2001, we recorded $640,000 and $648,500,
respectively, in costs related to these agreements, including an aggregate of
approximately $337,000 that we have accrued but not paid in violation of certain
of these agreements. Our use of data under one of these agreements may be
subject to termination as a result of this failure to pay.
In the event that any of our primary sources of data were to cease to be
available to us, we believe that we would be able to integrate alternate sources
of data without significant disruption to our business or operations, as our
management has identified a number of alternate sources for our data. We may be
subject to business disruptions, however, as a result of any such termination.
Any such disruption could have a material adverse effect on our business and
financial condition.
REGULATORY RESTRICTIONS ON OUR BUSINESS
Both federal and state law regulates the sale of data. Recently, consumer
advocates and federal regulators have voiced concerns regarding public access
to, or commercial use of, personal information. As a result, increased pressure
has been placed upon federal and state legislators to regulate the dissemination
or commercial use of personal information.
One recent legislative enactment that has had an effect on our business was
the Financial Services Modernization Act of 2000, also known as the
"Gramm-Leach-Bliley Act". Among other things, this law restricts the collection,
use, and transfer of certain data that includes "credit header" information,
which had historically functioned as the backbone of our data resources.
Implementation of this law's restrictions by the Federal Trade Commission
significantly effected the availability of certain data for our database, but we
have subsequently developed datasets that function independently of "credit
header" information. Although we have not engaged counsel to review this matter
or the conduct of our operations generally, we believe that our operations are
currently unaffected by the Gramm-Leach-Bliley Act or any law specifically
applicable to the dissemination of data concerning individuals. Our belief is
based upon our compliance with the "best practices" of the IRSG. Any further
restriction on our use of personal information, however, could limit the
usefulness and have a material adverse affect on our operations, our products,
including our LocatePLUS(TM) product.
Federal and state law prohibits us from selling data relating to minors.
Our products have been designed to prevent the dissemination of such data.
DISTRIBUTION OF OUR PRODUCTS
We distribute our content both directly (though the Internet in the case of
our LocatePLUS(TM) product and through the mail in the case of our Worldwide
Information(TM) CD-ROM) and through "channel partner" arrangements, by which
third parties access our databases in consideration for a royalty. We also, from
time to time, provide certain consulting services to third party database
providers on the integration and assimilation of public data.
To date, our efforts to license data have resulted in a single Channel
Partnership Agreement that we have with IntelliCorp, Ltd., an Ohio-based
database company. Under the terms of our Channel Partnership Agreement with
IntelliCorp, we will share certain data with IntelliCorp and receive a royalty
with respect to that data. We have not yet realized any material revenue from
this relationship. This agreement is expected to terminate in August 2003, but
may be extended or canceled prior to that date under certain limited conditions.
COMPETITION
Current competitors for our LocatePLUS(TM) product include Accurinet,
ChoicePoint, Confi-chek.com, FlatRateInfo.com, and Lexis-Nexis. Many of the
companies that currently compete with this product, as well as other companies
with whom we may compete in the future, are national or international in scope
and have greater resources than we do. Those resources could enable those
companies to initiate price cuts or take other measures in an effort to gain
market share in our target markets.
Our Worldwide Information(TM) product primarily competes with the
registries of motor vehicles of various states that sell their data to screened
users. These state agencies generally provide data in "raw form" without the
search capabilities that we provide in our Worldwide Information(TM) product.
FACILITIES
LocatePLUS Holdings Corporation and our wholly owned subsidiary, LocatePLUS
Corporation, are presently headquartered in Beverly, Massachusetts, where we
lease approximately 32,000 square feet.
31
The lease on that facility expires on February 28, 2005, and our annual lease
obligation is approximately $480,000.
Our wholly owned subsidiary, Worldwide Information, Inc., is presently
located in Byfield, Massachusetts where it leases approximately 2,700 square
feet. The lease on the Byfield facility expires on March 1, 2003 and the current
annual rent is approximately $25,000.
We also lease a storage facility in Georgetown, Massachusetts pursuant to a
month-to-month lease, with current monthly rent of $500. We believe that our
facilities are sufficient for our projected needs.
INTELLECTUAL PROPERTY
Publicly available data concerning individuals is generally
non-proprietary. As a result, our intellectual property consists largely of
certain trade secrets and know-how associated with the integration of databases
and our ability to link diverse datasets. We rely on a combination of
confidentiality agreements, restrictions on access to our proprietary systems,
and contractual provisions (such as in our user agreements) to protect our
intellectual property.
We have registered LOCATEPLUS.COM(R) as a trademark with the United States
Patent and Trademark Office for our Internet site. We maintain LOCATEPLUS(TM)
and WORLDWIDE INFORMATION(TM) as unregistered trademarks relating to our
products. We may, from time to time, claim certain other rights under trademark
law, however, we currently have no other marks registered or pending with the
United States Patent and Trademark Office or the equivalent agency of any other
country.
Patent protection is generally not available for compilations of data (such
as our products), and therefore we have no patents on any of our products, and
we currently do not anticipate any patents issuing with respect to any of our
products. Similarly, rights under United States copyright law do not extend to
mere compilations of data, although we may have certain rights under United
States copyright law with respect to the organization, integration and
presentation of our data.
EMPLOYEES
As of December 31, 2001, we had approximately 30 employees. We believe
that our relations with our employees are good.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings, although
claims may arise from time to time in the conduct of our operations. There can
be no assurance at this time that any claims that may arise in connection with
the conduct of our business will not materially adversely effect our business or
operations, or divert our critical resources.
32
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS
- -------------------------------- --- ---------
Jon R. Latorella 38 Chairman of the Board, President and
Chief Executive Officer
Robert A. Goddard 50 Chief Financial Officer, Treasurer and
Secretary
Sonia P. Bejjani 32 Director, President-Worldwide
Information, Inc.
John P. Houlihan 56 Director
Thomas Garlock 45 Director
Steven W. Silva 39 Vice President of Business Development
JON R. LATORELLA co-founded our business in 1991 and has been our Chief
Executive Officer since we commenced our activities. Mr. Latorella is also the
Chairman of our Board of Directors. Before founding our business, Mr. Latorella
served as a consultant to various local and state law enforcement agencies. Mr.
Latorella holds a Bachelor of Science/Bachelor of Arts from the University of
Massachusetts, which he received in 1994.
ROBERT A. GODDARD has been our Chief Financial Officer since October 1999.
Before joining us, Mr. Goddard was employed with ChannelHealth.com as Vice
President-Finance and Administration. From 1997 to 1999, Mr. Goddard was
employed by Wang Healthcare Information Systems. In 1997, Mr. Goddard filed for
bankruptcy protection in connection with the termination of his marriage. Mr.
Goddard received a Bachelor of Science in Business Administration/Finance from
Northeastern University in 1974 and graduated from the Corporate Financial
Management Program at the Harvard University Graduate School of Business in
1988.
SONIA P. BEJJANI co-founded our business in 1991 and has been a member of
our Board of Directors and employed by us in various capacities since we
commenced our activities. For the five years ending August 1, 2001, Ms. Bejjani
was our Vice President - Sales and Customer Service. Since August 1, 2001, Ms.
Bejjani has been the President of Worldwide Information, Inc., our wholly-owned
subsidiary.
JOHN P. HOULIHAN has been President and owner of Zalkin, Inc., a worldwide
exporter of used clothing with offices in Council Bluffs, Iowa and Brownsville,
Texas, since 1979. Before that, Mr. Houlihan owned Goodrich Dairy, a chain of 47
retail stores, and Riekes Equipment, a material handling and forklift company.
Mr. Houlihan holds a Bachelor of Arts from Creighton University, which he
received in 1968, and a Juris Doctorate from Creighton University, which he
received in 1971. Mr. Houlihan joined our Board of Directors in January 2001.
THOMAS GARLOCK has provided organizational and merger and acquisition
consulting services to technology companies in the computer hardware/software
and wireless telecommunications industry since 1980. Mr. Garlock has been the
principal in a variety of communications license-based ventures that have
developed cellular telephone systems in 55 "metropolitan statistical areas" in
the United States. He is the co-founder and Chairman of In Sync Interactive
Corporation, the nation's largest owner of interactive video data service
licenses issued by the Federal Communications Commission. In October 2001, In
Sync filed for bankruptcy protection with respect to 29 of its 42 subsidiaries.
Mr. Garlock attended Kent State University, the University of California at Los
Angeles, and the Otis Parsons School of Design. Mr. Garlock joined our Board of
Directors in October 1996.
STEVEN W. SILVA has been our Vice President of Business Development since
January 2002. Mr. Silva was employed with SuperWings Inc., a developer of mobile
field service management applications, as its Vice President of Business
Development and Marketing from 2000 to 2002 . During 2000, Mr. Silva was
33
the Vice President of Strategic Marketing at ZipLink Inc., a provider of
wholesale Internet connectivity solutions, where he was responsible for
marketing, product management, business development and strategic alliances.
From 1997 to 2000, Mr. Silva worked for eZenia! Inc., a provider of real time
collaboration solutions, where he held worked as its Director of Technical
Business Development. From 1990 to 1997, Mr. Silva also held channel sales and
marketing positions with PictureTel Corporation, a provider of visual
collaboration systems. Mr. Silva holds a Bachelor of Science in Business
Administration/Economics from Salem State College, which he received in 1985.
We do not have any employment agreements with any of our employees.
BOARD OF DIRECTORS
We currently have four members of our Board of Directors, who are elected
to annual terms and until their successors are elected and qualified. Executive
officers are appointed by the Board of Directors on an annual basis and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of our directors, officers or key employees.
Our Board of Directors currently has two committees, the Compensation
Committee and the Audit Committee.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors approves the selection of our
independent auditors and interacts with our independent accountants to discuss
questions about our financial reporting. In addition, the Audit Committee
reviews the independence of our auditors, the scope and results of our audit and
our annual operating results. The Audit Committee also considers the adequacy of
our internal accounting procedures and reports to the Board of Directors with
respect to our other auditing and accounting matters. The Audit Committee also
reviews the fees to be paid to and the performance of our independent
accountants. Currently, the members of the Audit Committee are Messrs. Garlock
and Houlihan.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews and recommends
to the Board of Directors the salaries, benefits and stock option grants of all
employees, consultants, directors and other individuals compensated by us. The
Compensation Committee also administers our equity compensation plan and other
employee benefits plans that we may adopt from time to time. Currently, the
members of the Compensation Committee are Messrs. Garlock and Houlihan.
DIRECTORS' COMPENSATION
On February 1, 2002, we adopted a Non-employee Director Stock Option Policy
under the terms of our equity compensation plan. Under the Non-employee Director
Stock Option Policy, we will make annual grants (beginning on the date of
adoption of the policy) to our non-employee directors of warrants to purchase
35,000 shares of our Class B Non-voting Common Stock as compensation for service
on our Board of Directors (and any committees). Each of these warrants will have
an exercise price that is equal to the fair market value of our Class B
Non-voting Common Stock as of the date of grant. No separate compensation is
provided to directors for service on either of our two committees. We will also
reimburse our directors for out-of-pocket costs associated with their activities
on the Board of Directors. Pursuant to this policy, on February 1, 2002, we
granted warrants to purchase 35,000 shares of Class B Non-voting Common Stock
with an exercise price of $0.15 per share to each of Messrs. Garlock and
Houlihan.
34
Directors who are also employees of LocatePLUS Holdings Corporation or any
of its subsidiaries (currently, Mr. Latorella and Ms. Bejjani) are not paid any
compensation for their service as directors.
BENEFIT PLANS
EQUITY COMPENSATION PLAN
On November 16, 1999, our Board of Directors ratified and adopted an
Incentive and Non-Qualified Stock Option Plan, which we refer to as our "equity
compensation plan". The equity compensation plan set aside 15,000,000 shares of
our Class A Voting Common Stock (then referred to as our "Common Stock") for
issuance pursuant to the exercise of incentive and non-qualified stock options
to be awarded to our employees, officers and directors at the recommendation of
the equity compensation plan's administrator and subject to the approval of our
Board of Directors. We strongly believe in the concept of each employee having
some form of equity participation as an incentive toward excellence in
individual performance and our furthered success.
In June 2000, our equity compensation plan was amended and restated to
provide greater flexibility to the equity compensation plan's administrator in
the granting of various forms of equity compensation. As of December 31, 2001,
7,950,000 incentive stock options and 2,652,716 non-qualified stock options were
outstanding under the equity compensation plan. The weighted average exercise
price of all options granted under the equity compensation plan was $0.20 per
share as of December 31, 2001. As of December 31, 2001, one option to purchase
5,000 shares of Class A Voting Common Stock had been exercised. In March 2002,
Messrs. Garlock and Houlihan, the members of our Compensation Committee, were
appointed co-administrators of the equity compensation plan.
EQUITY COMPENSATION PLAN INFORMATION
The following table reflects equity compensation granted or issued by us as
of December 31, 2001, to employees and non-employees (such as directors,
consultants, advisors, vendors, customers, suppliers and lenders) in exchange
for consideration in the form of goods or services.
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS RIGHTS EQUITY COMPENSATION PLANS(1)
------------------- --------------------- ----------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS:
Class A Voting
Common Stock 10,602,716 $0.20 4,392,284
- ------------------------------- ---------------------------- --------------------------- -----------------------------
Class B Non-voting
Common Stock 0 - -
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS:
Class A Voting
Common Stock 763,500 $0.20 N/A
- ------------------------------- ---------------------------- --------------------------- -----------------------------
Class B Non-voting
Common Stock 2,550,797 $0.14 N/A
TOTAL:
Class A Voting
Common Stock 11,366,216 $0.20 N/A
- ------------------------------- ---------------------------- --------------------------- -----------------------------
Class B Non-voting
Common Stock 2,480,797 $0.15 N/A
(1) Excludes securities reflected in column titled "Number of securities to be
issued upon exercise of outstanding options, warrants and rights".
35
401(K)
We sponsor a defined contribution plan under the provisions of Section
401(k) of the Internal Revenue Code, which covers substantially all of our
employees. We may make discretionary matching contributions up to 1% of annual
employee contributions. Our contributions vest ratably over a six-year period.
We pay the administrative expenses of this plan.
* * *
36
SUMMARY COMPENSATION TABLE
The following table sets forth, for 2001, 2000 and 1999 certain
compensation paid by us, including salary, bonuses and certain other
compensation, to our Chief Executive Officer and all other executive officers
whose annual compensation for the years ended December 31, 2001, 2000 and 1999
exceeded $100,000.
SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- -------------------------------- ---------- ---------------- ------------------ ------------------- ------------------
JON R. LATORELLA 2001 48,850(1) - - 13,200(3)
President and 2000 127,462 275,000(2) - 13,200(3)
Chief Executive Officer 1999 156,000 - 190,000(4) -
ROBERT A. GODDARD 2001 123,802 - - 8,079(5)
Chief Financial Officer, 2000 125,000 125,000(2) - 6,384(5)
Treasurer and Secretary 1999(6) 31,635 - 1,000,000(7) 11,064(8)
(1) Mr. Latorella elected to reduce his annual salary to $50,000 in January
2001. On February 1, 2002, the Compensation Committee of the Board of
Directors voted to increase Mr. Latorella's salary to $250,000 per annum
upon the commencement of trading of our securities on the OTC Bulletin
Board.
(2) On January 3, 2000 the Board of Directors approved, and we made, a term
loan to Mr. Latorella in the amount of $275,000, and a loan to Mr. Goddard
in the amount of $125,000. These loans were intended to provide a bonus to
Mr. Latorella and Mr. Goddard for services rendered in conjunction with the
development and launch of our LocatePLUS(TM) product. These loans were
evidenced by promissory notes, pursuant to which interest on each loan is
computed at an annual rate equal to the 90-day Treasury Bill Rate. The
principal and accrued interest on these notes are due and payable in one
lump sum on January 3, 2010, unless we have inadequate funds to satisfy our
obligations as they generally become due, in which case the principal and
accrued interest will be immediately due and payable. We do not intend to
make a call on these notes in the foreseeable future. In the event of a
change of control of LocatePLUS Holdings Corporation (E.G., a sale of all
or substantially all of our assets or a transaction or series of
transactions in which more than 50% of our voting equity is sold or
otherwise transferred) or in the event that, as of January 3, 2003, Mr.
Latorella or Mr. Goddard, as applicable, is (i) still employed by us; (ii)
an independent contractor for us; or (iii) a member of our Board of
Directors, then the obligations and debt evidenced by the notes shall be
immediately and without further action by any party be canceled. In the
event that either or both notes are canceled pursuant to the above clauses,
we will make a tax equalization payment to Mr. Latorella and/or Mr.
Goddard, as applicable. Because Mr. Latorella currently controls a majority
of our voting stock, we currently anticipate that his loan will be
canceled in 2003.
(3) Mr. Latorella and his family are allowed use of two company cars, the value
of which is approximately $1,100 per month to Mr. Latorella.
(4) Mr. Latorella was granted a fully vested incentive stock option to purchase
190,000 shares of Class A Voting Common Stock on November 16, 1999, with an
exercise price of $0.22 per share. This option expires on November 16,
2004.
(5) Mr. Goddard receives a monthly automobile allowance of $523 and a fuel
allowance as part of his compensation.
(6) Mr. Goddard began employment with us on October 25, 1999.
(7) Mr. Goddard was issued an option to purchase 1,000,000 shares of Class A
Voting Common Stock on November 16, 1999, with an exercise price of $0.20
per share. This option is fully vested, and it expires on November 16,
2009.
(8) Mr. Goddard received a $10,000 signing bonus, and an aggregate of $1,064 in
automobile allowances for November and December 1999.
37
ADVISORY BOARD
On December 2, 1999, our Board of Directors authorized the formation of an
Advisory Board that will provide ongoing advice and consultation to the Board of
Directors to enhance the development and operation of our LocatePLUS(TM)
product. The Advisory Board will consist of up to eight members (none of which
will be employees or directors) selected by the Board of Directors based on each
candidate's experience, accomplishments and national recognition in the fields
encompassed by our target markets. Compensation for members of our advisory
board consists of expense reimbursement and a grant of a fully vested
non-qualified stock option or immediately exercisable warrant as set forth
below. The Advisory Board meets informally from time to time with management.
DALE C. JENKINS, JR.
On December 2, 1999, we appointed Dale C. Jenkins, Jr., as the first member
of our Advisory Board. In 1999, Mr. Jenkins was appointed to the position of
Special Assistant for Law Enforcement and Public Safety to the Chancellor of
Higher Education of the Commonwealth of Massachusetts. Mr. Jenkins was also
appointed to the Advisory Board of the U.S. Commission on Civil Rights and the
Massachusetts Governor's Crime Watch Committee and was a consultant to the U.S.
Department of Justice. In addition, Mr. Jenkins directed the Lead Advanced
Security Team for Presidents Ronald Reagan and George H. W. Bush and acted as
Deputy Director of Inaugural Security for then President-Elect George H. W.
Bush. On November 17, 1999, our Board of Directors granted a ten-year option to
Mr. Jenkins to purchase 25,000 shares of our Class A Voting Common Stock with an
exercise price of $0.20 per share as compensation for his services on the
Advisory Board.
JAMES A. CORRY
On July 20, 2000, our Board of Directors appointed James A. Corry as the
second member of our Advisory Board. Since July 2001, Mr. Corry has been the
Chief Operating Officer of Abel Telecom, Inc., based in Scottsdale, Arizona.
Prior to that, Mr. Corry was a criminal investigation and security expert for
the United States Secret Service. During his more than twenty years with that
agency, Mr. Corry worked on security issues globally, conducting criminal and
fraud investigations and managing the security of political personnel, including
President George H. W. Bush. On June 1, 2001, the Board of Directors issued to
Mr. Corry a ten-year option to purchase 25,000 shares of our Class A Voting
Common Stock with an exercise price of $0.20 per share as compensation for his
services on the Advisory Board.
WILLIAM H. SHAHEEN
On October 1, 2001, our Board of Directors appointed William H. Shaheen to
our Advisory Board. Mr. Shaheen is currently the Managing Partner of the law
firm of Shaheen and Cohen, with offices in Concord and Dover, New Hampshire. Mr.
Shaheen served as U.S. Attorney for the District of New Hampshire from 1976 to
1981. In 1981, he was appointed a New Hampshire District Court Judge in Durham,
New Hampshire. Mr. Shaheen resigned his judgeship in 1997 upon the election of
his wife as Governor of the State of New Hampshire. On October 12, 2001, Mr.
Shaheen received a ten-year warrant to purchase 25,000 shares of our Class B
Non-voting Common Stock, with an exercise price of $0.20 for his services on the
Advisory Board.
DAVID G. DUCHESNEAU
On October 1, 2001, our Board of Directors also appointed David G.
Duchesneau to our Advisory Board. From 1991 to the present, Mr. Duchesneau has
been General Manager of Standa, Inc., a full service private investigative
agency and consulting firm. From 1971 to 1991, Mr. Duchesneau was the Commander
and Senior Officer of the Organized Crime Unit and Fugitive Apprehensive Unit of
the New Hampshire State Police. On October 12, 2001, Mr. Duchesneau was issued a
ten-year warrant to purchase 25,000 shares of our Class B Non-voting Common
Stock, with an exercise price of $0.20 per share in consideration for his
services on the Advisory Board.
38
CHARLES LYONS
On November 20, 2001, our Board of Director appointed Charles Lyons to the
Board of Directors. Mr. Lyons is the Superintendent Director of the Shawsheen
Valley Technical School District located in Billerica, Massachusetts. He is also
the Chairman of the Arlington, Massachusetts Board of Selectmen. On that date,
our Board of Directors granted a ten-year warrant to Mr. Lyons to purchase
12,500 shares of our Class B Non-voting Common Stock with an exercise price of
$0.20 per share as compensation for his services on the Advisory Board.
ORGANIZATION WITHIN THE PAST FIVE YEARS
We were incorporated in Massachusetts in 1996 as Worldwide Information,
Inc. In July 1999, we reincorporated in Delaware to take advantage of certain
favorable corporate excise tax rates relative to Massachusetts and Delaware's
well-established corporate law. As part of that re-incorporation, we changed our
name to LocatePLUS.com, Inc.
On August 1, 2001, we changed our name from LocatePLUS.com, Inc. to
LocatePLUS Holdings Corporation as part of a corporate restructuring. In
conjunction with that corporate restructuring, we created two wholly-owned
subsidiaries, LocatePLUS Corporation, a Delaware corporation, and Worldwide
Information, Inc., a Delaware corporation. We capitalized LocatePLUS Corporation
with all of our Internet-based LocatePLUS(TM) business, in consideration for all
of its equity, 100 shares of common stock, par value $0.01. We capitalized
Worldwide Information, Inc. with all of our CD-ROM-based Worldwide
Information(TM) business, in consideration for all of its equity, 100 shares of
common stock, par value $0.01. We created these subsidiaries for two primary
reasons:
o We wished to isolate any potential liabilities in one of our products
(such as claims associated with errors or omissions in our databases,
as described in the section above titled "Risk Factors" beginning on
page 4) in a manner that would reduce the impact of any such
liabilities on our other product line. There are no claims pending
relating to errors or omissions in either of our two product lines,
nor does management currently anticipate any such claims. However, as
disclosed above, claims associated with defects in our databases may
arise from time to time.
o We wished to administratively separate the operations associated with
our LocatePLUS(TM) product from our Worldwide Information(TM) product.
Operations associated with our Worldwide Information(TM) product have
historically been conducted through our Byfield, Massachusetts office.
Operations associated with our LocatePLUS(TM) product have been
conducted through our Beverly, Massachusetts office. Although each of
these products is marketed to similar users, the acquisition and
integration of data for and the operation of these two products
differs significantly.
LocatePLUS Holdings Corporation provides certain administrative and
executive functions on behalf of each of the two subsidiaries, such as
management of payroll and other accounts payable.
We presently hold all of the equity of each subsidiary, and we account for
each subsidiary on a consolidated basis.
No options, warrants or similar rights to acquire equity in either
subsidiary currently exists, nor do we anticipate any such rights being created
in the future. We have no present intention of selling or otherwise disposing of
either subsidiary.
39
CERTAIN TRANSACTIONS
JON R. LATORELLA
On January 3, 2000, the Board of Directors approved, and we made, a term
loan to Mr. Latorella for $275,000. This loan was intended to provide a bonus to
Mr. Latorella for services rendered in conjunction with the development and
launch of our LocatePLUS(TM) product. The loan was evidenced by a promissory
note, pursuant to which interest on the loan is computed at an annual rate equal
to the 90-day Treasury Bill Rate. The principal and accrued interest on this
note are due and payable in one lump sum on January 3, 2010, unless we have
inadequate funds to satisfy our obligations as they generally become due, in
which case the principal and accrued interest will be immediately due and
payable. We do not intend to make a call on these notes in the foreseeable
future. In the event of a change of control of LocatePLUS Holdings Corporation
(E.G., a sale of all or substantially all of our assets or a transaction or
series of transactions in which more than 50% of our voting equity is sold or
otherwise transferred) or in the event that, as of January 3, 2003, Mr.
Latorella is:
o still employed by us; or
o an independent contractor for us; or
o a member of our Board of Directors,
then the obligations and debt evidenced by the notes shall be immediately and
without further action by either party canceled. In the event that the note is
canceled pursuant to the above clauses, we will make a tax equalization payment
to Mr. Latorella. This loan is being accounted for by us as compensation expense
over its term. Because Mr. Latorella currently controls a majority of our voting
stock, we currently anticipate that this loan will be cancelled in 2003.
Mr. Latorella elected to reduce his annual salary to $50,000 in January
2001. On February 1, 2002, the Compensation Committee of the Board of Directors
voted to increase Mr. Latorella's salary to $250,000 per annum upon the
commencement of trading of our securities on the OTC Bulletin Board.
Mr. Latorella was granted a fully vested incentive stock option to purchase
190,000 shares of Class A Voting Common Stock on November 16, 1999, with an
exercise price of $0.22 per share in consideration for his services rendered.
This option expires on November 16, 2004.
ROBERT A. GODDARD
On January 3, 2000, the Board of Directors approved, and we made, a term
loan to Mr. Goddard for $125,000. This loan was intended to provide a bonus to
Mr. Goddard for services rendered in conjunction with the development and launch
of the LocatePLUS(TM) product. The loan was evidenced by a promissory note,
pursuant to which interest on the loan is computed at an annual rate equal to
the 90-day Treasury Bill Rate. The principal and accrued interest on this note
are due and payable in one lump sum on January 3, 2010, unless we have
inadequate funds to satisfy our obligations as they generally become due, in
which case the principal and accrued interest will be immediately due and
payable. We do not intend to make a call on these notes in the foreseeable
future. In the event of a change of control of LocatePLUS Holdings Corporation
(E.G., a sale of all or substantially all of our assets or a transaction or
series of transactions in which more than 50% of our voting equity is sold or
otherwise transferred) or in the event that, as of January 3, 2003, Mr. Goddard
is:
o still employed by us; or
o an independent contractor for us; or
o a member of our Board of Directors,
40
then the obligations and debt evidenced by the notes shall be immediately and
without further action by either party be canceled. In the event that the note
is canceled pursuant to the above clauses, we will make a tax equalization
payment to Mr. Goddard.
Mr. Goddard was issued an option to purchase 1,000,000 shares of Class A
Voting Common Stock on November 16, 1999, with an exercise price of $0.20 per
share in conjunction with our retention of him. This option is fully vested, and
it expires on November 16, 2009.
THOMAS GARLOCK
We paid Mr. Garlock $228,992 in 2001, $223,795 in 2000 and $178,395 in 1999
for services rendered as a consultant. We have no formal agreement with Mr.
Garlock with respect to Mr. Garlock's consulting services.
Mr. Garlock was also issued options under our equity compensation plan to
purchase an aggregate of 874,179 shares of Class A Voting Stock (with an
exercise price of $0.20), of which options to purchase 836,112 were granted in
November 1999, and options to purchase 38,067 were granted in June 2001, in
consideration for his services on our Board of Directors.
In consideration for consulting services rendered for us, we also issued
warrants to purchase 324,581 shares of our Class B Non-voting Common Stock to
Mr. Garlock on December 31, 2001. These ten-year warrants have an exercise price
of $0.15 per share.
On February 1, 2002, Mr. Garlock was issued an option to purchase 35,000
shares of our Class B Non-voting Common Stock for $0.15 per share pursuant to
our Non-employee Directors Stock Option Policy.
JOHN HOULIHAN
On March 7, 2001, we borrowed $15,000 from Mr. Houlihan pursuant to a
promissory note providing for an interest rate of 12% per annum. The interest on
this loan was repaid on April 26, 2001. On that date, the principal on this loan
was exchanged for 150,000 shares of Class B Non-voting Common Stock.
In conjunction with this note, we also issued to Mr. Houlihan a warrant to
purchase shares of our capital stock. This warrant currently permits Mr.
Houlihan to purchase 75,000 shares of our Class A Voting Common Stock for $0.20
per share.
On February 1, 2002, Mr. Houlihan was issued an option to purchase 35,000
shares of our Class B Non-voting Common Stock for $0.15 per share pursuant to
our Non-employee Directors Stock Option Policy.
GREGORY LINDAE
Mr. Gregory Lindae, a former member of our Board of Directors who resigned
on April 12, 2001, and his wholly-owned corporation, Castlerock Ventures, has
provided certain consulting services for us from time to time. We had no formal
agreement with respect to the payment of these amounts. In 1999, Mr. Lindae was
paid $4,310 and Castlerock Ventures was paid $39,300. In 2000, we employed Mr.
Lindae, and he was paid $85,000 for his services. Mr. Lindae ceased his services
as an employee in December 2000.
On November 11, 1999, we issued a non-qualified stock option to purchase
445,736 shares of our Class A Voting Common Stock under our equity compensation
plan to Mr. Lindae for services as a member of our Board of Directors. This
option had an exercise price of $0.20 per share.
In January 2001, in exchange for a loan from Mr. Lindae in the amount of
$200,000, we issued a convertible secured promissory note to him. The interest
rate on this note was 18% per annum for the first thirty days, and changed to
25% per annum, compounded quarterly. On September 10, 2001, this note and its
associated accrued interest was exchanged for 2,999,600 shares of Class B
Non-voting Common Stock. In connection with this loan, we also issued to Mr.
Lindae a ten year warrant, which as modified by our agreement with Mr. Lindae,
allows him to purchase 500,000 shares of our Class B Non-voting Common Stock for
$0.10 per share.
In June 2001, we granted options to Mr. Lindae to purchase 119,104 shares
of our Class A Voting Common Stock for $0.20 per share for services rendered as
a consultant.
On January 31, 2002, we issued a ten-year warrant to Mr. Lindae to purchase
1,177,680 shares of our Class B Non-voting Common Stock for $0.15 per share for
consulting services rendered by him.
41
PRINCIPAL STOCKHOLDERS
As of December 31, 2001, we had 53,108,580 shares of Class A Voting Common
Stock and 48,527,054 shares of Class B Non-voting Common Stock issued and
outstanding.
The table on the following page sets forth certain information known to us
with respect to the beneficial ownership of our Class A Voting Common Stock and
Class B Non-voting Common Stock on December 31, 2001, and on a PRO FORMA basis,
by:
o each of our directors;
o each of our executive officers;
o each person known to us to beneficially own more than 5% of either
class of our common stock; and
o all of our directors and executive officers as a group.
The PRO FORMA post-offering presentation assumes that:
o the maximum number of Units are sold in this offering;
o all public warrants issued as part of the Units are exercised
(resulting in the issuance of 10,000,000 shares of our Class A Voting
Common Stock); and
o the conversion of certain mandatorily convertible debt upon the
consummation of this offering into shares of Class A Voting Common
Stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock underlying options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after the
effective date of the offering are deemed outstanding, while such shares are not
deemed outstanding for computing percentage ownership of any other person.
For the purpose of this table, "Class A Stock" refers to our Class A Voting
Common Stock and "Class B Stock" refers to our Class B Non-voting Common Stock.
To our knowledge, except as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by such
stockholder. In the table, all options are fully vested, and all warrants are
immediately exercisable, unless otherwise noted.
Each of our directors and executive officers can be contacted at 100
Cummings Center, Suite 235M, Beverly, Massachusetts 01915.
42
CLASS A VOTING COMMON STOCK CLASS B NON-VOTING COMMON STOCK
--------------------------------------------- -----------------------------------------------
PERCENTAGE OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------ ------------------
NUMBER OF SHARES PRO FORMA NUMBER OF SHARES PRO FORMA
BENEFICIALLY BEFORE POST BENEFICIALLY BEFORE POST
BENEFICIAL OWNER OWNED OFFERING OFFERING OWNED OFFERING OFFERING
- ---------------- ----- -------- -------- ----- -------- --------
DIRECTORS
JON R. LATORELLA 27,690,500(1) 52.0% 42.7% - * *
SONIA P. BEJJANI 2,000,000(2) 3.6% 3.0% - * *
THOMAS GARLOCK 1,417,024(3) 2.6% 2.2% 324,581(4) * *
JOHN P. HOULIHAN 550,000(5) 1.0% * 1,625,000(6) 3.4% 2.8%
OFFICERS
ROBERT A. GODDARD 1,000,000(7) 1.9% 1.5% - * *
5% STOCKHOLDERS
GREGORY LINDAE 700,000(8) 1.3% 1.0% 5,122,320(9) 10.5% 8.7%
P.O. Box 9062
Truckee, CA 96162
All directors and 32,657,524(10) 58.0% 49.2% 1,949,581(11) 4.0% 3.3%
executive officers
as a group (5 persons)
- ---------------------------
* Less than one percent of outstanding shares.
Less than one percent of outstanding shares.
(1) Includes 190,000 shares issuable upon exercise of a fully vested stock
option, with an exercise price of $0.22 per share.
(2) Consists of the vested portion (2,000,000 shares) of an option to purchase
2,500,000 shares with an exercise price of $0.20 per share. The balance of
that option will vest on January 3, 2003, assuming Ms. Bejjani is still
employed by us on that date.
(3) Includes 433,476 shares held by the Kenai River Trust, over which Mr.
Garlock has voting and dispositional authority. Includes 874,179 shares
issuable upon exercise of fully vested stock options, with a weighted
average exercise price of $0.20 per share.
(4) Consists of 324,581 shares issuable upon exercise of immediately
exercisable warrants with an exercise price of $0.15 per share. Does not
include options to purchase 35,000 shares with an exercise price of $0.15
per share pursuant to an option granted on under our Non-employee Directors
Stock Option Policy on February 1, 2002.
(5) Includes 75,000 shares held by the Houlihan Trust, over which Mr. Houlihan
has voting and dispositional authority. Also includes 75,000 shares of
issuable upon exercise of certain currently exercisable warrants with an
exercise price of $0.20 per share.
(6) Does not include options to purchase 35,000 shares with an exercise price
of $0.15 per share granted under our Non-employee Directors Stock Option
Policy on February 1, 2002.
(7) Includes 1,000,000 shares issuable upon exercise of a fully vested stock
option with an exercise price of $0.20 per share.
(8) Includes shares issuable upon the exercise of fully vested options to
purchase 564,840 shares with an exercise price of $0.20 per share. Does not
include 531,511 shares pledged to Mr. Lindae by a stockholder of the
Company in connection with a loan by Mr. Lindae to that stockholder.
(9) Includes shares issuable upon the exercise of immediately exercisable
warrants to purchase 500,000 shares with an exercise price of $0.10 per
share. Does not include options to purchase 35,000 shares with an exercise
price of $0.15 per share granted under our Non-employee Directors Stock
Option Policy on February 1, 2002.
(10) Includes 4,139,179 shares issuable upon the exercise of convertible
securities.
(11) Includes 324,581 shares issuable upon the exercise of warrants.
43
DESCRIPTION OF CAPITAL STOCK
The authorized capital of LocatePLUS Holdings Corporation consists of:
o 150,000,000 shares of Class A Voting Common Stock; and
o 250,000,000 shares of Class B Non-voting Common Stock.
The following description of our capital stock does not purport to be complete
and is governed by and qualified by our Second Amended and Restated Certificate
of Incorporation (which we refer to as our "Charter") and By-laws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
UNITS
Each Unit consists of one share of Class B Non-voting Common Stock
(described below) and one public warrant to purchase a share of our Class A
Voting Common Stock (also described below). The Class B Non-voting Common Stock
and public warrants will trade only as a Unit for 185 days following this
offering (unless the public warrant is exercised, in which case the underlying
Class B Non-voting Common Stock and Class A Voting Common Stock so purchased
will trade separately upon exercise).
COMMON STOCK
As of December 31, 2001, there were 53,108,580 shares of Class A Voting
Common Stock and 48,527,054 shares of Class B Non-Voting Common Stock, issued
and outstanding.
The holders of both classes of our common stock are entitled to receive
ratably dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, the holders of both classes of our
common stock are entitled to share ratably in all assets remaining after payment
of liabilities. Neither class of our common stock has any preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to either class of our common stock.
CLASS A VOTING COMMON STOCK
Shares of Class A Voting Common Stock are entitled to one vote per share
held of record on all matters submitted to a vote of stockholders. Holders of
Class A Voting Common Stock do not have cumulative voting rights, and,
therefore, the holder of a majority of the shares of Class A Voting Common Stock
(currently, Mr. Latorella) may elect all of our directors standing for election.
CLASS B NON-VOTING COMMON STOCK
Shares of Class B Non-voting Common Stock have no voting rights, but are
otherwise identical to the shares of Class A Voting Common Stock.
PUBLIC WARRANTS
GENERAL
Each public warrant entitles the holder to purchase one share of our Class
A Voting Common Stock for $0.50 per share. The exercise price is subject to
adjustment upon the occurrence of certain events as provided in the public
warrant certificate and as summarized below. Our public warrants may be
exercised at any time after the consummation of this offering and ending on the
44
one year anniversary date of the closing of this offering, which is its
expiration date. Those of our public warrants which have not previously been
exercised will expire on the expiration date. A public warrant holder will not
be deemed to be a holder of the underlying shares of our Class A Voting Common
Stock for any purpose until the public warrant has been properly exercised.
EXERCISE
A public warrant holder may exercise our public warrants only if an
appropriate registration statement is then in effect with the Securities and
Exchange Commission and if the shares of Class A Voting Common Stock underlying
our public warrants are qualified for sale under the securities laws of the
state in which the holder resides. We will use commercially reasonable efforts
to maintain the registration of the Class A Voting Common Stock underlying the
warrants until the expiration date of the public warrants and to qualify for
sale the shares of Class A Voting Common Stock in each U.S. jurisdiction in
which our public warrant holders reside.
Our public warrants may be exercised by delivering to our Transfer Agent
the applicable public warrant certificate on or prior to the expiration date,
with the form on the reverse side of the certificate executed as indicated,
accompanied by payment of the full exercise price for the number of public
warrants being exercised plus payment of any taxes required by the holder's
jurisdiction. Fractional shares of Class A Voting Common Stock will not be
issued upon exercise of our public warrants.
ADJUSTMENTS OF EXERCISE PRICE
If we effect any stock split or stock combination with respect to our Class
A Voting Common Stock, the exercise price in effect immediately prior to such
stock split or combination will be proportionately reduced or increased, as the
case may be. Any adjustment of the exercise price will also result in an
adjustment of the number of shares purchasable upon exercise of a public
warrant.
CONVERTIBLE NOTES WITH DETACHABLE RESTRICTED WARRANTS
From September 2000 to January 2001, we sold $312,000 in convertible notes
and restricted warrants in a private placement. We refer to these securities as
our "Bridge Notes and Warrants". These convertible notes Bridge Notes bear
interest at 14% per annum and will be due and payable on September 25, 2005,
unless converted into shares of our Class A Voting Common Stock prior to that
date (as described below). The Bridge Warrants are detachable from the Bridge
Notes, and permit the holders to purchase an aggregate of 156,000 shares of our
Class A Voting Common Stock under limited conditions (described below).
Under the terms of these Bridge Notes, the principal and interest of each
promissory note will automatically convert into shares of our Class A Voting
Common Stock at the rate of $0.24 per share upon the consummation of this
offering (which is 80% of the fair market value of our Class A Voting Common
Stock as of the date of conversion of the Bridge Notes, as determined by our
Board of Directors with reference to this offering). Each Bridge Warrant will
become exercisable for a 20-day period beginning on the effective date of
conversion of the Bridge Notes (i.e., the consummation of this offering);
thereafter, the Bridge Warrants will expire by their terms. The exercise price
of the Bridge Warrants will be $0.24 per share, although the Bridge Warrants
include "net issuance" provisions permitting a holder to exchange a portion of
the warrant for shares of Class A Voting Common Stock in lieu of payment of the
warrant's cash exercise price.
RESTRICTED WARRANTS
We have issued restricted warrants to purchase an aggregate of 642,633
shares of our Class A Voting Common Stock, for which the weighted average
exercise price of these warrants is $0.20 per share. We have also issued
restricted warrants to purchase an aggregate of 3,728,477 shares of our Class B
Non-voting Common Stock, for which the weighted average exercise price of these
warrants is $0.14 per share. These restricted warrants include "net issuance"
provisions, permitting a holder to exchange a portion of the warrants for shares
of the underlying security in lieu of payment of a cash exercise price.
CONVERTIBLE NOTE
In consideration for a $10,000 loan made to us on March 9, 2001, we issued
a convertible promissory note. This convertible promissory note bears interest
at the rate of 12% per annum. This note matured on September 9, 2001. We have
continued to make interest payments under this note. We are currently in default
with respect to the payment of this loan. This note is convertible into 44,444
shares of our Class A Voting Common Stock at the election of the holder.
45
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Our Charter provides that members of our Board of Directors shall not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director except for liability:
o for any breach of the director's duty of loyalty to the corporation or
its stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the General Corporation Law of the State of
Delaware (relating to distributions by insolvent corporations); or
o for any transaction from which the director derived an improper
personal benefit.
Our Charter also provides that if the General Corporation Law of the State
of Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of members of
our Board of Directors will be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Our Charter and By-laws also provide that we may indemnify our directors
and officers to the fullest extent permitted by Delaware law. A right of
indemnification shall continue as to a person who has ceased to be a director or
officer and will inure to the benefit of the heirs and personal representatives
of such a person. The indemnification provided by our Charter and By-laws will
not be deemed exclusive of any other rights that may be provided now or in the
future under any provision currently in effect or hereafter adopted by our
Charter, By-laws, by any agreement, by vote of our stockholders, by resolution
of our directors, by provision of law or otherwise.
We have also secured directors' and officers' liability insurance on behalf
of our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons in
accordance with the provisions contained in our Charter and By-laws, Delaware
law or otherwise, we have been advised that, in the opinion of the Securities
and Exchange Commission, this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and we will follow the
court's determination.
PLAN OF DISTRIBUTION
We are registering 10,000,000 Units for sale through our underwriter on a
minimum/maximum "best efforts" basis at an offering price of $0.30 per Unit.
Subscriptions for our Class A Voting Common Stock will be deposited into
escrow with our transfer agent, Transfer Online, Inc., until a minimum of
$500,000 (1,666,667 Units) of subscriptions have been
46
received. In the event that we do not receive a minimum of $500,000 in
subscriptions by [ten days after the effective date of this registration
statement], subscribed funds will be released to subscribers without interest or
deduction.
In the event that a minimum of $500,000 in acceptable subscriptions is
received by Transfer Online by [ten days after the effective date of this
registration statement], then, no later than [thirteen days after the effective
date of this registration statement], we will close on those funds in a single
closing, and issue the Units purchased.
Our underwriter reserves the right to reject any subscription, in whole or
in part. In the event that our offering is oversubscribed, we anticipate that
our underwriter will accept subscriptions based upon the date in which funds are
received by our transfer agent.
In consideration for our underwriters' services, our underwriter will
receive an underwriting commission of 7%, or $0.021 per share of Class A Voting
Common Stock sold by them. In the event that our underwriter does not sell the
minimum number of Units required by this offering, our underwriter will receive
no commission or remuneration from us, other than certain allocated expenses,
totaling less than $3,000 which we have advanced to them. Our underwriter will
receive no commission for purchases by any of our employees.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering and assuming the full subscription of
this offering, we will have Units consisting of 10,000,000 shares of Class B
Non-voting Common Stock and warrants to purchase 10,000,000 shares of our Class
A Voting Common Stock registered under the Securities Act of 1933. Promptly
after the completion of this offering, we intend to register 56,640,726 shares
of Class B Non-voting Common Stock and up to 28,218,130 shares of Class A Voting
Common Stock, all of which are currently issued and outstanding shares owned by
our stockholders.
We also anticipate that we will file a registration statement with respect
to 2,410,290 shares of Class A Voting Common Stock underlying issued convertible
securities (including shares issuable upon the conversion of certain mandatorily
convertible debt and accrued interest which will convert into shares of Class A
Voting Common Stock upon the consummation of this offering, shares underlying a
certain convertible promissory note and shares underlying certain issued
warrants) and 3,728,477 shares of Class B Non-voting Common Stock underlying
certain issued warrants. We also anticipate that we will register 15,000,000
shares of Class A Voting Common Stock issued or issuable under our equity
compensation plan through a registration on Form S-8.
Upon the conclusion of the public offering and assuming that the maximum
number of Units are sold in the offering, we will have 54,666,793 shares of
Class A Voting Common Stock issued and outstanding (including shares issued in
connection with the mandatory conversion of certain convertible promissory notes
(and accrued interest) into 1,558,213 shares of Class A Voting Common Stock
upon the consummation of this offering, but assuming no exercise or conversion
of warrants to purchase up to 10,798,633 shares, up to 14,995,000 shares subject
to purchase pursuant our equity compensation plan or a convertible promissory
note to purchase 44,444 shares) and 66,640,726 shares of Class B Non-voting
Common Stock (assuming no exercise or conversion of warrants and options to
purchase 3,728,477 shares of Class B Non-voting Common Stock).
Of the Class A Voting Common Stock and Class B Non-voting Common Stock, all
of the issued and outstanding shares will be freely tradable (either as a result
of the Securities Exchange Commission's Rule 144(k) or due to our registration
of such securities), except to the extent that such securities are held by
"affiliates," as defined by the SEC. As of the date of this prospectus, our
affiliates hold 28,518,618
47
shares of Class A Voting Common Stock and 2,325,000 shares of our Class B
Non-voting Common Stock.
In general, under Rule 144, as currently in effect, after the date of this
prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned shares of our common stock for at least one year, including
any person who is deemed to be our affiliate, will be entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of:
o 1% of the number of shares of such class of common stock then
outstanding, which will equal approximately 546,668 shares (in the
case of Class A Voting Common Stock) and 583,073 shares (in the case
of Class B Non-voting Common Stock, assuming the minimum number of
Units are sold in this offering) immediately after the offering; or
o the average weekly trading volume of our Common Stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale.
Sales under Rule 144 are also governed by other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us. Under Rule 144(k), however, a person who is not, and for the three
months prior to the sale of such shares has not been, an affiliate of the
company will be free to sell "restricted securities" (E.G., shares issued in a
private placement) which have been held for at least two years without regard to
the limitations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our securities is Transfer Online,
Inc. Transfer Online's address is 227 SW Pine Street, Suite 300, Portland,
Oregon 97204.
LEGAL MATTERS
The validity of the Units offered by this prospectus will be passed upon
for us by Kirkpatrick & Lockhart LLP.
EXPERTS
The financial statements as of December 31, 2000 and 2001 and for each of
the years in the period ended December 31, 2001 included in this Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Note 1 to the financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act of 1933 for the shares of Common
Stock in the offering, of which this prospectus is a part. This prospectus does
not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and the Units, we refer you to the
registration statement and the exhibits and schedule that were filed with the
registration statement.
Statements contained in this prospectus about the contents of any contract
or any other document that is filed as an exhibit to the registration statement
are not necessarily complete, and we refer you to the full
48
text of the contract or other document filed as an exhibit to the registration
statement. A copy of the registration statement and the exhibits and schedules
that were filed with the registration statement may be inspected without charge
at the Public Reference Room maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part of the registration statement may be obtained from the Securities
and Exchange Commission upon payment of the prescribed fee. Information
regarding the operation of the Public Reference Room may be obtained by calling
the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC. The address of the site is
WWW.SEC.GOV.
49
LOCATEPLUS HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 F-3
Consolidated Statements of Operations for the years ended F-4
December 31, 2000 and 2001
Consolidated Statements of Stockholders' Equity (Deficit) for the F-5
years ended December 31, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended F-6
December 31, 2000 and 2001
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
LocatePLUS Holdings Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
LocatePLUS Holdings Corporation and its subsidiaries at December 31, 2000 and
2001 and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
as to whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, the Company's losses
from operations and limited capital resources raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 13, 2002
F-2
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
PRO FORMA
DECEMBER 31,
2001
DECEMBER 31, (UNAUDITED)
2000 2001 (NOTE 2)
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 915,864 $ 915,864
Accounts receivable, less allowance for doubtful accounts of
$34,740 and $8,900 in 2000 and 2001, respectively 91,159 153,590 153,590
Prepaid expenses and other current assets 82,923 194,847 194,847
Note receivable -- 1,000,000 1,000,000
------------ ------------ ------------
Total current assets 174,082 2,264,301 2,264,301
Property and equipment, net 1,543,253 1,414,938 1,414,938
Security deposits 132,389 148,236 148,236
Notes receivable - related parties, net 276,389 143,056 143,056
------------ ------------ ------------
Total assets $ 2,126,113 $ 3,970,531 $ 3,970,531
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Cash overdraft $ 16,395 $ -- $ --
Accounts payable 1,226,582 1,061,336 1,061,336
Accrued expenses 326,075 467,392 467,392
Deferred revenue 319,193 270,004 270,004
Current portion of capital lease obligation 169,826 139,250 139,250
Convertible debt -- 10,000 10,000
------------ ------------ ------------
Total current liabilities 2,058,071 1,947,982 1,947,982
Capital lease obligations, net of current portion 182,937 172,619 172,619
Mandatorily convertible debt 310,975 362,838 --
------------ ------------ ------------
Total liabilities 2,551,983 2,483,434 2,120,601
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock, $0.01 par value; 150,000,000 shares
authorized; 53,108,580 shares issued and outstanding at
December 31, 2000 and 2001, and 54,620,405 issued and
outstanding pro forma 531,086 531,086 546,204
Class B common stock, $0.01 par value, 250,000,000 shares
authorized; 48,527,054 shares issued and outstanding at
December 31, 2001 -- 485,270 485,270
Additional paid-in capital 8,846,452 14,213,637 14,652,066
Warrants 126,732 547,994 547,994
Common stock subscriptions receivable -- (4,500) (4,500)
Accumulated deficit (9,930,140) (14,286,395) (14,377,105)
------------ ------------ ------------
Total stockholders' equity (deficit) (425,870) 1,487,092 1,849,930
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,126,113 $ 3,970,531 $ 3,970,531
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements
F-3
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31,
2000 2001
------------ ------------
Revenues:
Licenses $ 490,480 $ 268,701
Services 98,632 752,109
Engineering services -- 388,187
------------ ------------
Total revenues 589,112 1,408,997
Costs and expenses:
Costs of revenues:
Licenses 169,782 96,561
Services 1,293,297 986,240
Engineering services -- 49,347
Selling and marketing 1,010,621 799,486
General and administrative 3,439,251 3,317,128
------------ ------------
Total operating expenses 5,912,951 5,248,762
------------ ------------
Operating loss (5,323,839) (3,839,765)
Other income (expense):
Interest income 19,605 67,768
Interest expense (43,110) (590,970)
Loss on investment (500,000) --
Other income, net 13,902 6,712
------------ ------------
Net loss $ (5,833,442) $ (4,356,255)
============ ============
Basic and diluted net loss per share $ (0.11) $ (0.04)
Shares used in computing basic and diluted net loss per share 51,916,934 99,613,673
The accompanying notes are an integral part of these consolidated financial statements.
F-4
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS
------ ------ ------ ------ ------- --------
Balance at December 31, 1999 49,681,080 $496,811 $5,669,855
Payment of stock subscription receivable
Issuance of common stock at $1.00 per share,
net of issuance costs of $212,628 3,422,500 34,225 3,175,647
Issuance of common stock upon exercise of
stock options at $0.20 per share 5,000 50 950
Issuance of warrants to purchase common
stock in exchange for services $126,732
Net loss
---------- -------- ---------- -------- ----------- -------
Balance at December 31, 2000 53,108,580 531,086 8,846,452 126,732
Issuance of common stock at $0.10 per 30,209,121 $302,091 2,717,071
share, net of issuance costs of $1,750
Issuance of common stock in exchange for
services 75,000 750 6,750
Issuance of common stock at $0.15 per 12,307,836 123,078 1,700,472
share, net of issuance costs of $22,558
Issuance of detachable warrants to
purchase common stock in conjunction
with convertible debt 126,541
Beneficial conversion feature on
convertible debt 293,912
Issuance of options to purchase common
stock in exchange for services 101,488
Issuance of warrants to purchase common
stock in exchange for services 294,721
Exchange of convertible notes payable to related 2,996,000 29,960 269,640
party plus accrued interest at $0.075 per share
Exchange of convertible notes payable plus accrued
interest at $0.10 per share 2,672,430 26,724 240,519
Exchange of convertible notes payable at
$0.15 per share 266,667 2,667 37,333
Net loss
---------- -------- ---------- -------- ----------- --------
Balance at December 31, 2001 53,108,580 $531,086 48,527,054 $485,270 $14,213,637 $547,994
========== ======== ========== ======== =========== ========
COMMON STOCK TOTAL
SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY (DEFICIT)
---------- ------- ----------------
Balance at December 31, 1999 $(679,001) $(4,096,698) $1,390,967
Payment of stock subscription receivable 679,001 679,001
Issuance of common stock at $1.00 per share,
net of issuance costs of $212,628 3,209,872
Issuance of common stock upon exercise of
stock options at $0.20 per share 1,000
Issuance of warrants to purchase common
stock in exchange for services 126,732
Net loss (5,833,442) (5,833,442)
------ ------------ ----------
Balance at December 31, 2000 -- (9,930,140) (425,870)
Issuance of common stock at $0.10 per
share, net of issuance costs of $1,750 (4,500) 3,014,662
Issuance of common stock in exchange for
services 7,500
Issuance of common stock at $0.15 per 1,823,550
share, net of issuance costs of $22,558
Issuance of detachable warrants to
purchase common stock in conjunction
with convertible debt 126,541
Beneficial conversion feature on
convertible debt 293,912
Issuance of options to purchase common
stock in exchange for services 101,488
Issuance of warrants to purchase common
stock in exchange for services 294,721
Exchange of convertible notes payable
plus accrued interest to related party
at $0.075 per share 299,600
Exchange of convertible notes payable
plus accrued interst at $0.10 per share 267,243
Exchange of convertible notes payable
at $0.15 per share 40,000
Net loss (4,356,255) (4,356,255)
------- ------------ ----------
Balance at December 31, 2001 $(4,500) $(14,286,395) $1,487,092
======= ============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,833,442) $(4,356,255)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 318,797 421,542
Provision for doubtful accounts 41,587 --
Interest on convertible debt converted into common stock -- 26,943
Interest expense related to warrants issued with convertible debt -- 126,541
Interest expense related to beneficial conversion features -- 293,912
Interest expense recorded on mandatorily convertible debt 4,975 45,863
Loss on disposal of property and equipment 6,610 4,940
Amortization of notes receivable from related parties 123,611 133,333
Expense recorded upon exchange of convertible notes payable to a related party -- 74,900
Expense recorded for fair value of common stock issued for services -- 7,500
Expense recorded for fair value of options and warrants issued for
services 126,732 396,209
Loss on investment 500,000 --
Changes in assets and liabilities:
Accounts receivable (34,052) (62,431)
Prepaid expenses and other assets (82,923) (111,924)
Accounts payable 633,148 (165,246)
Accrued expenses 256,236 141,317
Notes receivable - related parties (400,000) --
Deferred revenue 46,396 (49,189)
Security deposits (57,887) (15,847)
----------- -----------
Net cash used in operating activities (4,350,212) (3,087,892)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of note receivable -- (1,000,000)
Purchases of property and equipment (986,987) (310,167)
Proceeds from sale of property and equipment 3,900 12,000
Investment in notes receivable (500,000) --
----------- -----------
Net cash used in investing activities (1,483,087) (1,298,167)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash overdraft -- (16,395)
Cash overdraft 16,395 --
Repayment of convertible debt -- (30,000)
Proceeds from issuance of convertible debt 306,000 551,000
Payments of obligations under capital lease (170,547) (40,894)
Proceeds from issuance of common stock and collection of stock
subscriptions receivable, net of issuance costs 3,889,873 4,838,212
----------- -----------
Net cash provided by financing activities 4,041,721 5,301,923
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,791,578) 915,864
Cash and cash equivalents, beginning of year 1,791,578 --
----------- -----------
Cash and cash equivalents, end of year $ -- $ 915,864
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 38,135 $ 97,711
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of property and equipment under capital leases $ 496,249
Exchange of convertible debt into common stock $ 505,000
Relative fair value of detachable warrants issued in conjunction with
convertible debt 126,541
Value ascribed to beneficial conversion features on convertible debt 293,912
Issuance of common stock for subscription receiveable 4,500
The accompanying notes are an integral part of these consolidated financial statements.
F-6
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
LocatePLUS Holdings Corporation (the "Company") was initially
incorporated in Massachusetts in 1996 as Worldwide Information, Inc. In
July 1999, the Company reincorporated in Delaware and changed its name
to LocatePLUS.com, Inc. On August 1, 2001, the Company changed its name
from LocatePLUS.com, Inc. to LocatePLUS Holdings Corporation as part of
a corporate restructuring. As part of the restructuring, the Company
created two wholly-owned subsidiaries, LocatePLUS Corporation and
Worldwide Information, Inc. The restructuring was completed by
commonly-controlled entities and, accordingly, was accounted for based
on historical cost. All intercompany accounts are eliminated in
consolidation.
The Company provides access to public information such as bankruptcies,
real estate transactions and motor vehicles and drivers' licenses to
commercial, private sector and law enforcement entities in the United
States. In 1999 and prior periods, this information was delivered to
customers on compact disks. In March 2000, the Company began providing
information through the Internet.
LIQUIDITY AND OPERATIONS
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates continuity
of operations, realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The
Company has incurred an accumulated deficit of approximately $14.3
million through December 31, 2001 and used approximately $3.1 million
of cash in operations during fiscal 2001. The Company raised
approximately $1,200,000 of equity (see Note 17) from January 1, 2002
through February 13, 2002; however, management believes that additional
financing will be required during 2002 to fund the Company's planned
operations. Management's plans include raising additional funds in
2002. There is no assurance that the Company will obtain the financing
to provide the resources necessary for the Company to continue its
planned operations through fiscal 2002. In the event the Company's
operations are not profitable or do not generate sufficient cash to
fund the business, or if the Company fails to obtain additional
financing, management will have to substantially reduce its level of
operations. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at date of purchase to be cash equivalents. At
December 31, 2001, total cash equivalents consisting of money market
funds at a major financial institution, were approximately $890,000.
NOTE RECEIVABLE
At December 31, 2001, note receivable consisted solely of a promissory
note due on May 31, 2002 (see Note 17).
CONCENTRATION OF RISK
Financial instruments that subject the Company to credit risk consist
of cash equivalents, accounts receivable, note receivable, and the note
receivable-related parties. The risk with respect to cash equivalents
is minimized by the Company's policies in which such investments are
only placed with highly rated counterparties with relatively short
maturities. The note receivable is placed with an unrated counterparty
with a twelve-month maturity (see Note 17). Consequently, the carrying
F-7
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
value of cash equivalents and note receivable approximates their fair
value based on the short-term maturities of these instruments. The risk
with respect to accounts receivable is minimized by the large number of
customers comprising the Company's customer base, none of which are
individually significant, and by their dispersion across many
geographical regions. The Company generally does not require
collateral, but evaluations of customers' credit and financial
condition are performed periodically. The notes receivable-related
parties are being amortized to expense assuming they will be forgiven
in 2003 (see Note 3).
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets. When assets are retired
or disposed, the assets and related accumulated depreciation are
eliminated from the accounts and any resulting gain or loss is
reflected in income. Repairs and maintenance are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method under
which deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. A
deferred tax asset is established for the expected future benefit of
net operating loss and credit carryforwards. A valuation reserve
against net deferred tax assets is required if, based upon available
evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
REVENUE RECOGNITION
The Company currently licenses information contained on compact disks
or provides information online through its website. The information
contained on compact disks is updated and released either quarterly or
biannually. Revenue is recognized upon delivery to the customer of a
compact disk, provided that no significant obligations remain, evidence
of the arrangement exists, the fees are fixed or determinable, and
collectability is reasonably assured. Upon purchase of multiple compact
disks, revenue is deferred until shipment of the compact disks. The
revenue related to these multiple disks is recognized upon shipment of
a disk and is allocated based on the number of compact disks to which
the customer is entitled.
Online subscription enables customers to obtain information through
Internet access. The fee charged to customers varies based on the type
of information requested. Revenue is recognized when the information
requested is downloaded, there is evidence of an arrangement, the fee
is fixed or determinable, and collectibility is reasonably assured.
Engineering services relates to software development and integration
services provided to a third party database provider with whom the
Company was to have an arrangement whereby the Company provided to the
third party access to the Company's database. This arrangement was not
consummated and the third party paid the Company for software
development services through the date of termination.
COSTS OF REVENUES AND SOFTWARE DEVELOPMENT COSTS
Costs of license revenues consist primarily of payments relating to
data acquisition, materials and costs associated with compilation of
compact disks, such as labor. Costs of services revenues consist
primarily of payments under license agreements related to data
acquisition, software development and maintenance costs and costs
associated with delivery of such service that include labor and
depreciation.
F-8
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
Software development costs are generally charged to operations as
incurred, as they relate to ongoing maintenance of data and the
Company's website. The Company evaluates for capitalization certain
software development costs in accordance with the American Institute of
Certified Public Accountants Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Costs incurred for the Company's own personnel and
outside consultants who are directly associated with software developed
for internal use may be capitalized. Costs eligible for capitalization
under SOP 98-1 have been immaterial to date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation to employees and
directors under the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations. Accordingly, compensation expense is recorded
for stock-based compensation issued to employees and directors in fixed
amounts, to the extent the fixed exercise prices are less than the fair
market value of the Company's common stock at the date of grant. The
Company provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Stock-based compensation to non-employees is accounted
for under the provisions of SFAS 123.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during each period (see Note 14). Diluted
earnings per share gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted earnings per
share does not assume the issuance of potential common shares that have
an anti-dilutive effect.
PRO FORMA NET LOSS PER COMMON SHARE (UNAUDITED)
The pro forma net loss per share gives effect to the mandatory
conversion of all outstanding mandatorily convertible debt into shares
of Class A Voting Common Stock as if the conversion had occurred upon
issuance of the debt. Pro forma net loss per common share is computed
based upon the weighted average number of common shares and common
equivalent shares (using the treasury stock method) outstanding (see
Note 14). Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be
anti-dilutive. In the computation of pro forma net loss per share,
interest related to the mandatorily convertible debt is not included
in determining net loss.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of the Company's initial public offering and pursuant
to the contractual agreements with the mandatorily convertible debt
holders, all the outstanding mandatorily convertible debt plus accrued
interest will be converted into Class A Voting Common Stock. The
unaudited pro forma presentation of the balance sheet has been prepared
assuming the conversion of the outstanding mandatorily convertible
debt into common stock as of December 31, 2001 pursuant to the initial
public offering of the Company's common stock contemplated in this
prospectus.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and contingent liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant
estimates relate to amounts and timing of revenue recognition and
provisions for doubtful accounts. Actual results could differ from
those estimates.
F-9
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
COMPREHENSIVE LOSS
Comprehensive loss is the change in equity of a company during a period
from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distribution to
owners. Comprehensive loss does not differ from net loss for the years
ended December 31, 2000 and 2001.
RECENT PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 141, "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interest method.
In July 2001, the FASB also issued SFAS 142, "Goodwill and Other
Intangible Assets," which is effective for the Company on January 1,
2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization and includes provisions for the reclassification
of certain existing recognized intangibles as goodwill, reassessment of
the useful lives of existing recognized intangibles, and
reclassification of certain intangibles out of previously reported
goodwill. SFAS 142 also requires a company to complete a transitional
goodwill impairment test within six months from the date of adoption.
In October 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses
significant issues relating to the implementation of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and develops a single accounting model,
based on the framework established in SFAS 121, for long-lived assets
to be disposed of by sale, whether previously held and used or newly
acquired. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively.
Had the Company implemented the above accounting pronouncements in the
current period, the financial position and results of operations would
not have been affected.
3. NOTES RECEIVABLE - RELATED PARTIES
During 2000, the Company issued cash loans of $400,000 and received in
exchange, promissory notes from certain officers. The notes bear
interest at an annual rate equal to the 90-day Treasury Bill Rate (1.7%
at December 31, 2001). The principal and accrued interest are due and
payable in one lump sum on January 3, 2010, unless the Company has
inadequate funds to satisfy its obligations as they generally become
due, in which case the principal and accrued interest would be
immediately due and payable. The Company, however, does not intend to
make a call on these notes in the foreseeable future and, therefore,
the notes are classified as long-term assets. In the event of a change
of control, as defined in the agreements to the notes, or in the event
that, as of January 3, 2003, the officers are (i) still employed by the
Company; (ii) an independent contractor of the Company; or (iii) a
member of the Company's Board of Directors, then the obligations and
debt evidenced by the notes shall be canceled without further action by
any party. In the event that the note is canceled pursuant to the
conditions noted above, the Company agrees to pay to the officers, no
later than two months after the end of the officer's applicable tax
year in which such cancellation occurs, an amount in cash, sufficient
to fulfill the officer's tax liability attributable to the cancellation
of the notes. The principal is being expensed by the Company on a
monthly basis through January 3, 2003. Through December 31, 2001, the
Company recorded $256,944 of such compensation expense; the Company has
not recorded any interest income relating to these notes. Additionally,
the Company has accrued approximately $138,000 through
F-10
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
December 31, 2001 relating to an estimate of the officers' tax
liability expected to be reimbursed by the Company.
4. INVESTMENT
During 2000, the Company entered into certain agreements, as amended,
with a third party ("IntelliCorp") under which the Company invested a
total of $500,000 in cash in exchange for contingently convertible
promissory notes. As of December 31, 2000, the Company reserved all
amounts owed to it by IntelliCorp.
On January 22, 2002 both parties agreed to the repayment of the
$500,000 through an addendum to the Channel Partner Agreement signed in
August 2001 between the parties. The addendum provides for a 75:25
sharing of revenues received by the third party resulting from this
Channel Partner Agreement in favor of the Company. One third of
proceeds remitted to the Company under this arrangement will be treated
as repayment of the $500,000 plus accrued interest and the balance will
be recorded as revenue. On full repayment of the $500,000 plus accrued
interest, the revenue sharing arrangement will change to a 50:50 basis.
Interest on the note ceased to accrue on January 21, 2002 in accordance
with the arrangement. As of that date, interest receivable of $76,280
was due but not recorded as income.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
ESTIMATED
USEFUL LIFE
(IN YEARS) 2000 2001
---------- ----------- -----------
Equipment 3-5 $ 868,238 $ 1,091,353
Vehicles 5 82,526 115,278
Software 3 127,990 152,990
Furniture and fixtures 7 382,978 388,493
Leasehold improvements 5 516,207 516,892
----------- -----------
1,977,939 2,265,006
Less accumulated depreciation and
amortization (434,686) (850,068)
----------- -----------
Property and equipment, net $ 1,543,253 $ 1,414,938
=========== ===========
The carrying value of assets under capital leases was $479,145, net of
amortization of $72,745 and $482,173, net of amortization of $203,953
as of December 31, 2000 and 2001, respectively.
Depreciation and amortization expense was $318,797 and $421,542 for the
years ended December 31, 2000 and 2001, respectively. Amortization
expense on the equipment under capital lease was $72,745 and $131,208
for the years ended December 31, 2000 and 2001, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
F-11
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
2000 2001
----------- -----------
Payroll and related taxes $ 154,418 216,454
Sales tax 40,893 44,974
Accounting, legal and professional fees 35,000 117,625
Other 95,764 88,339
----------- -----------
Total $ 326,075 467,392
=========== ===========
7. LICENSE AGREEMENTS
The Company sources its data from three primary sources and has entered
into various license agreements with the related data providers. In
March 1999 the Company entered into a data acquisition agreement to
acquire information related to real property. The agreement is for
three years. In July 1999, the Company entered into a data acquisition
agreement to acquire credit file header information. The term of the
agreement is five years, after which time either party may terminate
the agreement upon 90 days' prior written notice. During the initial
five-year term the data provider may terminate the agreement for any
reason. In August 1999 the Company entered into a data acquisition
agreement to acquire bankruptcy liens and judgments information. The
initial term of the agreement was for one year and was automatically
renewable for subsequent periods of one year thereafter unless
terminated upon 90 days' prior written notice. This agreement was
amended on November 27, 2001, resulting in a one year term with
automatic one year renewals unless terminated by either party prior to
renewal. Payments under these agreements are based on minimum monthly
payments and monthly usage (see Note 10).
In 2000 and 2001 the Company recorded $640,000 and $648,500,
respectively, in costs related to these agreements.
8. CONVERTIBLE DEBT AND NOTE PAYABLE
MANDATORILY CONVERTIBLE DEBT
During October, November and December 2000 and January 2001, the
Company issued convertible subordinated notes with detachable warrants
to purchase 156,000 shares of the Company's Class A Voting Common Stock
for proceeds of $312,000 in cash. The notes pay interest at a rate of
14% per year, compounded semiannually on the unpaid balance of the
principal amount until paid in full or converted. All outstanding
principal and accrued unpaid interest shall be due and payable on the
first to occur of: the fifth-year anniversary on various dates during
2005 and 2006, or the occurrence of an event of default as defined in
the agreements to the notes.
F-12
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
The notes are not convertible at the discretion of the holder. The
entire outstanding principal amount of the notes and any accrued unpaid
interest shall automatically convert into shares of the Class A Voting
Common Stock of the Company, upon the first to occur of: (i) the
Company's initial public offering; (ii) the closing of at least a $5
million equity investment in the Company in an offering subsequent to
the issuance of the convertible debt; or (iii) a transaction involving
a change of control of the Company. The conversion price shall be equal
to: (i) 80% of the per share value of the common stock as determined by
the Board of Directors of the Company, in good faith; or (ii) 80% of
the value of the consideration offered to each shareholder for each
share of the Company's common stock in the event of a change of control
transaction, in which all or substantially all of the common stock of
the Company is acquired or transferred.
The warrants will remain outstanding indefinitely until 20 days after
the occurrence of any of the above conversion events which triggers
exercisability; the warrants are then exercisable for a period of 20
days after the occurrence of one of the events that cause the
conversion of the notes. The exercise price of the warrant will equal
the conversion price described above.
The Company allocated the investment proceeds among the note and
warrants based on their relative fair values. The relative fair value
of the warrants was deemed to be immaterial at the date of issuance
based on the contingent right to exercise the warrants and the low
probability of exercise, and the pricing of the subordinated notes
relative to a stand-alone debt instrument.
Additionally, should the debt be settled in stock as a result of the
occurrence of one of the specified events, the value of the common
shares issued at the settlement date in excess of the carrying value of
the debt will be recorded as interest expense upon settlement.
CONVERTIBLE NOTE PAYABLE TO RELATED PARTIES
In January 2001, the Company issued a convertible note with a
detachable warrant to a member of the Company's Board of Directors in
exchange for $200,000 in cash. The interest rate was 18% per annum for
the first thirty days, and increased thereafter to 25% per annum
compounded quarterly. The Company was obligated to pay the balance in
full a maximum of six months from the January 2001 execution date or,
earlier, in the event of a $1 million private placement, sale or change
in control . The principal and interest were convertible at the option
of the holder into shares of Class A Voting Common Stock at the lower
of 75% of the per share value as determined in the above-mentioned
private placement, sale of substantially all of the assets of the
Company, or change in control of the Company, or $0.15 per share.
The detachable warrant was for the purchase of 500,000 shares of Class
A Voting Common Stock at a price per share to be determined upon the
above-mentioned private placement. The warrant had a term of ten years
and became exercisable upon the above-mentioned private placement.
The Company allocated the investment proceeds to the debt and warrant
based on their relative fair values. The relative fair value of the
warrant was determined to be $62,608 which was recorded as debt
discount, a reduction of the carrying amount of the debt. This amount
was amortized to interest expense over the term of the debt. The fair
value of the warrant was based on the Black-Scholes model. The
Black-Scholes calculation incorporated the following assumptions: 0%
dividend yield, 100% volatility, 5.0% average risk-free interest rate,
a ten-year life and an underlying Class A Voting Common Stock value of
$0.20 per share.
Additionally, based upon the accounting conversion price, the notes
contained an embedded beneficial conversion feature to which the
Company ascribed a value of $129,274 and recorded the amount as a
reduction of the carrying amount of the debt and a corresponding
increase to additional paid-in capital. This amount was amortized to
interest expense over the term of the debt.
F-13
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
On August 1, 2001, the note, having a carrying value of $200,000, plus
accrued interest of $24,700 was exchanged for 2,996,000 shares of Class
B Non-voting Common Stock. Upon exchange, the difference between the
fair value of the Class B Non-voting Common Stock issued and the
carrying value of the debt including accrued interest was $74,900 which
has been recorded as general and administrative expense (see Note 9).
Additionally, on August 1, 2001, the detachable warrant was modified to
allow the holder to purchase 500,000 shares of Class B Non-voting
Common Stock at $0.10 per share.
In March 2001, the Company issued a convertible note with a detachable
warrant to a member of the Company's Board of Directors in exchange for
$15,000 in cash. The interest rate was 12% per annum with interest
payments due and payable on March 31, June 30 and September 30. The
Company was obligated to pay the balance in full a maximum of six
months from the March 2001 execution date or, earlier, in the event of
a $1 million private placement, sale or change in control . The
principal and interest were convertible at the option of the holder
into shares of Class A Voting Common Stock at the lower of 75% of the
per share value as determined in the above-mentioned private placement,
sale or change in control, or $0.20 per share.
The detachable warrant was for the purchase of 75,000 shares of Class A
Voting Common Stock at $0.20 per share. The warrant has a term of ten
years and became exercisable upon the above-mentioned private
placement, sale, or change in control.
The Company allocated the investment proceeds to the debt and warrant
based on their relative fair values. The relative fair value of the
warrant was determined to be $7,148 which was recorded as debt
discount, a reduction of the carrying amount of the debt. This amount
was amortized to interest expense over the term of the debt. The fair
value of the warrant was based on the Black-Scholes model. The
Black-Scholes calculation incorporated the following assumptions: 0%
dividend yield, 100% volatility, 5.0% average risk-free interest rate,
a ten-year life and an underlying Class A Voting Common Stock value of
$0.20 per share.
Additionally, based upon the accounting conversion price, the notes
contained an embedded beneficial conversion feature to which the
Company ascribed a value of $7,852 and recorded the amount as a
reduction of the carrying amount of the debt and a corresponding
increase to additional paid-in capital. This amount was amortized to
interest expense over the term of the debt.
In April 2001, the note, having a carrying value of $15,000, was
exchanged for 150,000 shares of Class B Non-voting Common Stock.
CONVERTIBLE NOTES PAYABLE
In February 2001, the Company issued convertible notes with detachable
warrants in exchange for $100,000 in cash. The notes had six-month
terms and bore interest at a rate of 18% per year with interest
payments due and payable on March 31, June 30 and September 30. The
notes were convertible at the option of the holder into shares of Class
A Voting Common Stock of the Company. The principal and interest were
convertible at the lower of 75% of the per share value based on
financing of at least $1 million, a sale of substantially all of the
assets of the Company, or a change in control of the Company, or $0.15
per share. The detachable warrants were for the purchase of 200,000
shares of the Company's Class A Voting Common Stock at $0.20 per share.
The warrants had a term of ten years and became exercisable upon the
above- mentioned private placement.
F-14
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
In March and April 2001, the Company issued convertible notes with
detachable warrants in exchange for $200,000 in cash. The notes had
six-month terms and bore interest at rates ranging from 12% to 18% per
year with interest payments due and payable on March 31, June 30 and
September 30. The notes were convertible at the option of the holder
into shares of Class A Voting Common Stock of the Company. The
principal and interest were convertible at the lower of 75% of the per
share value based on financing of at least $1 million, a sale of
substantially all of the assets of the Company, or a change in control
of the Company, or $0.20 per share. The detachable warrants were for
the purchase of 195,000 shares of the Company's Class A Voting Common
Stock at $0.20 per share. The warrants had a term of ten years and
became exercisable upon the above- mentioned private placement, or
sale.
The Company allocated the investment proceeds to the debt and warrants
based on their relative fair values. The relative fair value of the
warrants was determined to be $56,786 which was recorded as debt
discount, a reduction of the carrying amount of the debt. This amount
was to be amortized to interest expense over the term of the debt;
however, upon settlement the remaining balance was immediately
amortized. The fair value of the warrants was based on the
Black-Scholes model. The Black-Scholes calculation incorporated the
following assumptions: 0% dividend yield, 100% volatility, 5.0% average
risk-free interest rate, a ten-year life and an underlying Class A
Voting Common Stock value of $0.20 per share.
Additionally, based upon the accounting conversion price, the notes
contained an embedded beneficial conversion feature to which the
Company ascribed a value of $156,786 on the issue date, which was
recorded as a reduction of the carrying amount of the debt and a
corresponding increase to additional paid-in capital. This amount was
to be amortized to interest expense over the term of the debt remaining
on the recording date; however, upon settlement the remaining balance
would be immediately amortized.
In April 2001, $10,000 of these notes were repaid and $240,000 of the
notes plus accrued interest of $2,243 were exchanged for 2,422,430
shares of Class B Non-voting Common Stock. In September and December
2001, $40,000 of the notes were exchanged for 266,667 shares of Class B
Non-voting Common Stock. At December 31, 2001, $10,000 of these notes
remain outstanding.
NOTE PAYABLE
In March 31, 2001 the Company issued a note in exchange for $30,000 in
cash. The note plus accrued interest was payable on April 30, 2001. On
April 27, 2001, the Company repaid $20,000 of the principal plus
accrued interest of $6,000, and the remaining unpaid principal of
$10,000 was settled by the issuance by the Company of 100,000 shares of
Class B Non-voting Common Stock.
9. RELATED PARTY TRANSACTIONS
Certain members of the Company's Board of Directors have performed
consulting services for the Company. Expenses relating to these
services amounted to $223,795 and $303,892 in 2000 and 2001,
respectively, and were recorded as part of general and administrative
expenses. The 2001 amount includes expenses of $74,900 related to the
exchange of debt issued to a member of the Company's Board of Directors
(see Note 8).
In 2001, the Company granted options to purchase 119,104 shares of
Class A Voting Common Stock at $0.20 per share for services rendered as
a consultant to a former Board member. The Company recorded an expense
of $21,645 associated with the options. In 2002, the Company granted a
warrant to purchase 1,177,680 shares of Class B Non-voting Common Stock
at $0.15 per share for consulting services rendered by the former Board
member (see Note 17).
In 2001, the Company granted options to purchase 38,067 shares of Class
A Voting Common Stock at $0.20 per share and warrants to purchase 324,
581 shares of Class B Non-voting Common Stock at $0.15 per share in
consideration for services rendered by a member of the Company's Board
of Directors. The Company recorded expenses of $6,918 and $44,277,
respectively, associated with these options and warrants.
F-15
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
During 2001, the Company issued convertible notes with detachable
warrants to two members of the Company's Board of Directors in exchange
for $215,000 (see Note 8).
Certain executives of the Company are allowed use of company cars for
both business and personal purposes. These cars have been capitalized
as assets of the Company totaling $115,278 as of December 31, 2001.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under various operating
lease agreements which terminate on various dates through 2005. Rent
expense amounted to $392,167 and $493,701 for 2000 and 2001,
respectively.
Future minimum payments under noncancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31,
2002 $ 507,220
2003 490,436
2004 482,044
2005 80,341
-----------
Total $1,560,041
==========
CAPITAL LEASES
During 2000, the Company entered into certain long-term equipment lease
agreements, which included three leaseback transactions. These
agreements are classified as capital leases and expire in 2005.
Future minimum lease payments under noncancelable capital leases are as
follows:
YEAR ENDING DECEMBER 31,
2002 $ 193,200
2003 112,385
2004 60,724
2005 46,993
---------
413,302
Less: amounts representing interest (101,433)
---------
Present value of future minimum lease payments 311,869
Less: amounts due within one year (139,250)
---------
Long-term portion $ 172,619
=========
LICENSE AGREEMENTS
The Company entered into data acquisition agreements under which the
Company is required to make minimum payments as follows:
F-16
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
YEAR ENDING DECEMBER 31,
2002 $ 410,000
2003 250,000
2004 125,000
---------
$ 785,000
=========
The Company's operations depend upon information that includes public
records. If material changes were to occur in federal or state laws
regulating or prohibiting the distribution of public records,
particularly credit header records, the Company's financial condition
and results of operations could be materially affected. In the event
that such a termination occurred, management believes it can acquire
replacement data from other sources; however, such termination may have
an adverse effect on the Company's results.
LEGAL PROCEEDINGS
The Company is from time to time subject to legal proceedings and
claims which arise in the normal course of its business. There are no
pending or known actions for which the amount of ultimate liability
could have a material adverse effect on the Company's financial
position or results of operations.
11. INCOME TAXES
Deferred tax assets consist of the following at December 31:
2000 2001
----------- -----------
Net operating loss carryforwards $ 3,072,000 $ 4,524,000
Depreciation and amortization 59,000 229,000
Bad debt reserve 30,000 14,000
Investment loss 201,000 201,000
Capitalized research and development 402,000 359,000
Other 25,000 16,000
----------- -----------
Gross deferred tax assets 3,789,000 5,343,000
Valuation allowance (3,789,000) (5,343,000)
----------- -----------
$ -- $ --
=========== ===========
The Company has provided a valuation allowance for the full amount of
the deferred tax assets since realization of these future benefits is
not sufficiently assured. As the Company achieves profitability, these
deferred tax assets may be available to offset future income tax
liabilities and expenses.
At December 31, 2001, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately
$1,235,000. The federal and state net operating loss carryforwards
expire through 2021.
Certain substantial changes in the Company's ownership may occur. As a
result, under the provisions of the Internal Revenue Code, the amount
of net operating loss carryforwards available annually to offset future
taxable income may be limited. The amount of this annual limitation is
F-17
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
determined based upon the Company's value prior to the ownership
changes taking place. Subsequent ownership changes could further affect
the limitation in future years.
A reconciliation between the amount of reported tax expense and the
amount computed using the U.S. federal statutory rate of 34% is as
follows:
2000 2001
----------- -----------
Income tax benefit at statutory rate $(1,983,000) $(1,481,000)
State tax benefit, net (364,000) (242,000)
Interest and other 8,000 169,000
----------- -----------
(2,339,000) (1,554,000)
Increase in valuation allowance 2,339,000 1,554,000
----------- -----------
$ -- $ --
=========== ===========
12. COMMON STOCK
DESCRIPTION OF COMMON STOCK
On March 23, 2001, the Company amended its articles of incorporation
wherein it renamed all the authorized 150,000,000 shares of common
stock, par value $0.01 per share, Class A Voting Common Stock and
authorized the issuance of 250,000,000 shares of Class B Non-voting
Common Stock.
Each Class A Voting Common stockholder is entitled to one vote for each
share held on all matters submitted to a vote of stockholders. The
holders of both classes of common stock are entitled to dividends on a
pro rata basis, when-and-if declared by the Company's Board of
Directors. Through December 31, 2001, no dividends have been declared
or paid.
As of December 31, 2001, a total of 15,758,500 shares of Class A Voting
Common Stock have been reserved for issuance upon exercise of
outstanding stock option and warrant agreements. As of December 31,
2001, 2,480,797 shares of Class B Non-voting Common Stock were reserved
for issuance upon exercise of outstanding warrant agreements.
STOCK OPTIONS AND WARRANTS
In November 2000 and April 2001, the Company issued warrants to
purchase 138,663 and 137,500 shares of its Class A Voting Common Stock
at a price of $1.00 and $0.20 per share, respectively, in consideration
for services rendered by third parties. The warrants fully vested on
the date of grant and will expire on various dates through April 2011.
The Company recorded general and administrative expense of $126,732 and
$25,057, respectively, associated with these warrants. In October 2001,
the Company canceled the warrants issued in November 2000 and issued
warrants to purchase 138,663 shares of Class B Non-voting Common Stock,
for an exercise price of $0.15 per share. The Company recorded expense
of $18,851 related to these warrants.
Also during 2001, the Company issued options to purchase 460,171 shares
of Class A Voting Common Stock at $0.20 per share and warrants to
purchase 1,779,634 shares of Class B Non-Voting Common Stock at $0.15
and $0.20 per share to third parties in exchange for services. The
Company recorded expense of $90,945 and $242,450, respectively,
associated with these options and warrants.
F-18
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
In 2000 and 2001, the Company also issued warrants to purchase 156,000
shares of its Class A Voting Common Stock in conjunction with the
issuance of $312,000 of convertible debt (see Note 8).
During 2001, the Company issued warrants to purchase 970,000 shares of
the Company's Class A Voting Common Stock in conjunction with the
issuance of $545,000 of convertible debt (see Note 8).
During 2001, the Company issued options to purchase 57,922 shares of
Class A Voting Common Stock and warrants to purchase 62,500 shares of
Class B Non-voting Common Stock to members of the Company's advisory
board. The exercise price was $0.20 per share, the term was ten years,
and these options and warrants were exercisable immediately upon
issuance. The Company determined the fair value of the options and
warrants to be $10,543 and $8,363, respectively, and recorded the
amounts as compensation expense on the date of issuance.
As of December 31, 2001, each of these options and warrants was
outstanding.
During 2000 and 2001, the Company has issued a total of 291,633 and
5,191,297 options and warrants outside the stock option plan (see Note
13).
13. STOCK OPTION PLAN
On November 16, 1999, the Board of Directors approved the Incentive and
Non-Qualified Stock Option Plan (the "Plan") as amended. Under the
terms of the Plan, the Company is authorized to grant incentive and
nonqualified stock options to purchase shares of common stock to its
employees, officers and directors, and consultants or advisors. The
Board of Directors administers the Plan. A maximum of 15,000,000 shares
of Class A Voting Common Stock has been approved for issuance under the
Plan of which 4,392,284 are available for grant at December 31, 2001.
The Board of Directors determines the exercise price and vesting period
of the options at the date of grant. The exercise price for incentive
stock options shall not be less than 100% of the fair market value of
the Company's stock on the date of grant. The option exercise period
will not exceed ten years from the date of grant. If a grantee owns
stock representing more than 10% of the outstanding shares on the date
such an incentive option is granted, the price shall be at least 110%
of fair market value and the maximum term of the options will be five
years.
F-19
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
The following table presents activity under the Plan for the years
ended December 31, 2000 and 2001:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at December 31, 1999 6,694,623 $ 0.20
Exercised (5,000) 0.20
Canceled (110,000) 0.20
----------
Outstanding at December 31, 2000 6,579,623 0.20
Issued 4,148,093 0.20
Canceled (125,000) 0.20
----------
Outstanding at December 31, 2001 10,602,716 0.20
==========
The estimated weighted average fair value at the date of grant for
stock options issued to employees during 2001 was $0.06. No options
were granted during 2000.
The following table summarizes information relating to options
outstanding at December 31, 2001:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
$0.20 - $0.22 10,522,716 8.49 $ 0.20 6,857,473 $ 0.20
$0.30 80,000 9.01 $ 0.30 80,000 $ 0.30
---------- ---------
10,602,716 8.49 $ 0.20 6,937,473 $ 0.20
========== =========
For purposes of providing pro forma disclosures, the fair value for
options was estimated at the date of grant using the minimum value
option pricing method with the following weighted average assumptions:
2001
Expected life (years) 5
Average risk-free interest rate 5.5%
Volatility 0.00%
Dividend yield 0.00%
F-20
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
Had the Company determined compensation expense for the Plan in
accordance with the fair value methodology prescribed by SFAS 123, the
Company's pro forma net loss and loss per share would have been:
YEAR ENDED DECEMBER 31
----------------------------
2000 2001
----------- -----------
Net loss - reported $(5,833,442) $(4,356,255)
Amortization of stock compensation expense (8,697) (77,785)
----------- -----------
Pro forma net loss $(5,842,139) $(4,434,040)
=========== ===========
Pro forma net loss per share - basic and diluted $ (0.11) $ (0.04)
For purposes of this disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future
years since the pro forma expense includes only one year of option
grants.
F-21
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
14. HISTORICAL AND PRO FORMA NET LOSS PER SHARE
The computations of basic and diluted loss per common share are based
upon the weighted average number of common shares outstanding.
Potential common shares from the exercise of stock options and warrants
are antidilutive for all periods presented and were not included in the
computations of diluted net loss per share.
YEAR ENDED DECEMBER 31,
---------------------------------------
Historical: 2000 2001
------------ ------------
Net loss $ (5,833,442) $ (4,356,255)
Weighted average of common shares used in net loss per
share - basic and diluted 51,916,934 99,613,673
Net loss per share -
basic and diluted $ (0.11) $ (0.04)
Pro forma (unaudited)
Historical net loss $ (4,356,255)
Interest on mandatorily convertible debt 45,863
------------
Pro forma net loss $ (4,310,392)
============
Weighted average number of common shares 99,613,673
Weighted average number of common shares
upon conversion of mandatorily convertible debt 1,300,000
------------
Total weighted average number of common shares used in
computing pro forma net loss per share 100,913,673
============
Pro forma net loss per share - basic and diluted $ (0.04)
15. DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan under the provisions
of Section 401(k) of the Internal Revenue Code, which covers
substantially all employees. The Company may make discretionary
matching contributions up to 1% of employee contributions. Company
contributions vest ratably over a six-year period. The Company pays
administrative expenses to the plan, which approximate $1,000 each
year.
Company matching contributions amounted to $2,329 and $4,469 in 2000
and 2001, respectively.
16. SEGMENT INFORMATION
The Company has two reportable segments which management operates as
distinct sales
F-22
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
organizations; these two segments are segregated by the nature of
products and services provided. The Company measures and evaluates its
two reportable segments based on revenues and costs of revenues. The
licenses segment provides information on motor vehicles and drivers'
licenses, contained on compact disks. The services segment provides
information on individuals throughout the United States of America
through the Company's website. No material operating costs, other than
costs of revenues, and assets and liabilities relate to the product
segment.
2000 2001
---------- ----------
Revenues:
Licenses $ 490,480 $ 268,701
Services 98,632 752,109
---------- ----------
Total revenues 589,112 1,020,810
---------- ----------
Costs of revenues:
Licenses 169,782 96,561
Services 1,293,297 986,240
---------- ----------
Total costs of revenues $1,463,079 $1,082,801
========== ==========
17. SUBSEQUENT EVENTS
On January 22, 2002, the Company amended its Channel Partner Agreement
with Intellicorp to provide for the future repayment of the fiscal 2000
investment in Intellicorp (see Note 4).
On January 31, 2002, the Company granted options to purchase 1,777,680
shares of Class B Non-voting Common Stock to a former board member (see
Note 9).
On January 4, 2002 and February 1 and 5, 2002, the Company sold
portions of the note receivable back to the issuer resulting in total
proceeds of $750,000. Those proceeds were subsequently deposited in the
Company's primary operating cash account. The remaining note receivable
approximates $250,000.
From January 1, 2002 through February 13, 2002, the Company issued
8,113,672 shares of Class B Non-voting Common Stock resulting in net
proceeds of $1,198,576, net of issuance costs of $18,475.
On February 1, 2002, the Company issued warrants to purchase a total of
70,000 shares of Class B Non-voting Common Stock to two directors of
the Company pursuant to the non-employee director stock option policy.
F-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We estimate that the approximate expenses in connection with this
Registration Statement will be as follows:
SEC registration fee.................... $ 736
Legal fees and expenses................. 80,000
Accounting fees and expenses............ 55,000
Miscellaneous........................... 24,000
--------
Total................................... $159,736
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
From March 1999 to December 1999, the Registrant sold 7,447,752 shares of
Common Stock (now referred to as Class A Voting Common Stock) to 178 accredited
investors for $0.20 per share. The Registrant undertook no general solicitation
with respect to those offers and sales. The Registrant also inadvertently sold
shares in this offering to four sophisticated non-accredited investors. Of the
four, one received financial information with respect to the Company in
compliance with Rule 502(b) at the time of sale. The remaining three were
offered, and rejected, rescission of their investment after the presentation of
financial information meeting the requirements of Rule 502(b). The offer and
sale of these securities were exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act and Rules 506 and 508 promulgated
thereunder.
From November 1999 to June 2001, the Registrant granted options to purchase
11,142,716 shares its Common Stock (now referred to as Class A Voting Common
Stock) to 43 employees and consultants to the Registrant under the terms of the
Registrant's Incentive and Non-qualified Stock Option Plan. These options have
varying exercise prices. Of these options to purchase 11,142,716 shares, an
option to purchase 5,000 shares of Common Stock was exercised by one employee.
The offer and sale of these securities exempt from registration under the
Securities Act under the provisions of Section 4(2) of the Securities Act and
Rule 701 promulgated under the Securities Act.
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From December 1999 to February 2000, the Registrant sold 3,000,000 shares
of Common Stock (now referred to as Class A Voting Common Stock) to 120
accredited investors for $1.00 per share. The offer and sale of these securities
were exempt from registration under the Securities Act under the provisions of
Section 4(2) of the Securities Act and Rules 506 promulgated under the
Securities Act, as the Registrant has received representations from all offerees
that they were accredited investors at the time of the offer and sale and no
general solicitation was undertaken.
From March 2000 to September 2000, the Registrant sold 3,000,000 shares of
Common Stock for $1.00 per share (now known as Class A Voting Common Stock) to
96 accredited investors. The offer and sale of these securities were exempt from
registration under the Securities Act under the provisions of Section 4(2) of
the Securities Act and Rule 506 promulgated under the Securities Act, as the
Registrant received representations from all offerees that they were accredited
investors at the time of the offer and sale and no general solicitation was
undertaken.
From October 2000 through January 2001, the Registrant issued a total of
$312,000 in convertible promissory notes with detachable restricted warrants to
9 accredited investors. The offer and sale of these securities were exempt from
registration under the Securities Act under the provisions of Section 4(2) of
the Securities Act and Rule 506 promulgated under the Securities Act, as the
Registrant has received representations from all offerees that they were
accredited investors at the time of the offer and sale and no general
solicitation was undertaken.
In January 2001, the Registrant issued $200,000 in the form of a
convertible promissory note with a detachable warrant to one investor, then a
member of the Registrant's Board of Directors. The offer and sale of that
security was exempt from registration under the Securities Act under the
provisions of Section 4(2) of the Securities Act and Rules 506 promulgated under
the Securities Act.
In February and March 2001, the Registrant issued $345,000 in six-month
convertible term promissory notes to 11 accredited investors. The offer and sale
of these securities were exempt from registration under the Securities Act under
the provisions of Section 4(2) of the Securities Act. The offer and sale of that
security was exempt from registration under the Securities Act under the
provisions of Section 4(2) of the Securities Act and Rules 506 promulgated under
the Securities Act, as the Registrant has received representations from all
offerees that they were accredited investors at the time of the offer and sale
and no general solicitation was undertaken.
In April 2001, the Registrant made a non-transferable rights offering to
its accredited stockholders to sell three shares of the Registrant's Class B
Non-voting Common Stock for $0.10 per share for each share of Class A Voting
Common Stock held by each stockholder. Pursuant to that offer, the Registrant
sold approximately 31.6 million shares of Class B Non-voting Common Stock to 270
of its stockholders. The offer and sale of that security was exempt from
registration under the Securities Act under the provisions of Section 4(2) of
the Securities Act and Rules 506 promulgated under the Securities Act, as the
Registrant received representations from all offerees that they were accredited
investors at the time of the offer and sale and no general solicitation was
undertaken.
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At various times from November 17, 2000 to March 12, 2002, the Registrant
issued warrants to purchase an aggregate of 311,296 shares of Class A Voting
Common Stock to 9 consultants and members of the Registrant's Board of Advisors
in consideration for services rendered. The Registrant believes these issuances
were exempt from registration under the Securities Act under Section 4(2) of the
Securities Act.
From August 2001 to January 2002, the Registrant issued warrants to
purchase an aggregate of 311,296 shares of Class A Voting Common Stock to 16
consultants and members of the Registrant's Board of Advisors in consideration
for services rendered. The Registrant believes these issuances were exempt from
registration under the Securities Act under Section 4(2) of the Securities Act.
From September 2001 through February 13, 2002, the Registrant sold
20,421,510 shares of Class B Non-voting Common Stock to 175 accredited investors
(of which 82 were existing stockholders) for $0.15 per share. The offer and sale
of these securities were exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act and Rules 506 promulgated under
the Securities Act, as the Registrant received representations from all offerees
that they were accredited investors at the time of the offer and sale and no
general solicitation was undertaken.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.1 Underwriting Agreement between LocatePLUS Holdings Corporation and
Oftring & Company, Inc., dated March 15, 2002.
3.1 Second Amended and Restated Certificate of Incorporation of
LocatePLUS Holdings Corporation, as filed with the Secretary of State
of the State of Delaware on March 19, 2002.
3.2 By-Laws of LocatePLUS Holdings Corporation.
4.1 Warrant and Unit Agreement by and between LocatePLUS Holdings
Corporation and Transfer Online, Inc., dated March 22, 2002.
4.2 Form of Warrant Certificate.
4.3 Form of Unit Certificate.*
4.4 Form of Class A Voting Common Stock Certificate.*
4.5 Form of Class B Non-voting Common Stock Certificate.*
4.6 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of
Class A Voting Common Stock).
4.7 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of
Class B Non-voting Common Stock).*
4.8 Form of Convertible Subordinated Promissory Note ("Bridge Note").
4.9 Form of Detachable Warrant Agreement ("Bridge Warrant").
4.10 $10,000 Convertible Promissory Note, dated March 9, 2001.
5.1 Opinion of Kirkpatrick & Lockhart LLP.*
10.1 Master Lease Agreement between Cummings Properties, Inc. and
Worldwide Information, Inc., dated November 20, 1999.
10.2 Database License Agreement between Worldwide Information, Inc. and
TransUnion Corporation, undated.*
10.3 Database License Agreement between LocatePLUS.com, Inc. and Hogan
Information Services Co., dated November 27, 2001.*
10.4 License Agreement between Worldwide Information, Inc. and First
American Real Estate Solutions, LLC, dated March 31, 1999.*
10.5 Channel Partner Agreement between LocatePLUS Holdings Corporation and
Intellicorp LTD, dated September 1, 2001.
10.6 Letter Agreement between LocatePLUS Holdings Corporation and
Intellicorp LTD, dated December 19, 2001.
10.7 Secured Note, dated June 1, 2001.
21.1 Subsidiaries of LocatePLUS Holdings Corporation.
23.1 Consent of Kirkpatrick & Lockhart LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Escrow Agreement by and between Transfer Online, Inc. and LocatePLUS
Holdings Corporation dated March 18, 2002.*
-----------------------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to:
(1) For determining any liability under the Securities Act, treat the
information omitted from this form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or
497(h) under
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the Securities Act of 1933 as part of this registration statement as of the
time the Securities and Exchange Commission declared it effective.
(2) For determining any liability under the Securities Act of 1933,
treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in this registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
The undersigned Registrant hereby undertakes with respect to the securities
being offered and sold in the offering:
(1) To file, during any period in which it offers or sells securities,
a post- effective amendment to this Registration Statement to:
(A) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(B) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in this registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(C) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post- effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by director, officer or controlling
person relating to the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the Commonwealth of
Massachusetts, on March 28, 2002.
LOCATEPLUS HOLDINGS CORPORATION
(REGISTRANT)
By: /s/ Jon R. Latorella
------------------------------------
Chairman, President and Chief
Executive Officer
Each person whose signature appears below appoints Jon R. Latorella as his
or her attorney-in-fact, with full power of substitution and re-substitution, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement on Form SB-2 of LocatePlus.com Holdings Corporation Inc.,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all the said attorney-in-fact and agent or his or her
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jon R. Latorella Chairman of the Board, President March 28, 2002
- --------------------------------- and Chief Executive Officer
Jon R. Latorella
/s/ Robert A. Goddard Chief Financial Officer, March 28, 2002
- --------------------------------- Treasurer and Secretary
Robert A. Goddard (Chief Accounting Officer)
/s/ Sonia P. Bejjani Director, March 28, 2002
- --------------------------------- President, Worldwide Information, Inc.
Sonia P. Bejjani
/s/ John P. Houlihan Director March 28, 2002
- ---------------------------------
John P. Houlihan
/s/ Thomas W. Garlock Director March 28, 2002
- ---------------------------------
Thomas W. Garlock
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