As filed with the Securities and Exchange Commission on July 5, 2002
Registration No. _________
================================================================================
------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
LocatePLUS Holdings Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7379 04-3332304
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Identification Number)
Organization) Classification Code 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
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TITLE OF EACH CLASS OF SECURITIES REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- -------------------------------------------------- ----------------- ------------------ ---------------------- --------------
Class A Voting Common Stock, par value $0.01 per [1,655,395](2) $0.30 $ [496,619] $ 46
share
- -------------------------------------------------- ----------------- ------------------ ---------------------- --------------
Shares of Class A Voting Common Stock, par value 1,069,683(2)(3) $0.30 $ 320,905 $ 30
$0.01 per share, underlying issued convertible
securities
- -------------------------------------------------- ----------------- ------------------ ---------------------- --------------
Class B Non-voting Common Stock, par value $0.01 56,640,726(2) $0.25 $14,160,182 $1,303
per share
- -------------------------------------------------- ----------------- ------------------ ---------------------- --------------
Shares of Class B Non-voting Common Stock, par 3,772,455(2)(3) $0.25 $ 943,114 $ 87
value $0.01 per share, underlying issued
convertible securities
================================================== ================= ================== ====================== ==============
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Representing shares for resale by the Registrant's stockholders.
(3) Representing shares issuable upon exercise of warrants issued prior to the
date hereof, plus such indeterminate number of shares as may be issuable by
reason of anti-dilution provisions contained therein.
----------------------------------------
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.
----------------------------------------
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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 JULY 5, 2002
[LOGO]
LOCATEPLUS HOLDINGS CORPORATION
This prospectus relates to the resale of Class A Voting Common Stock and
Class B Non-Voting Common Stock of LocatePLUS Holdings Corporation by certain
owners of our securities. We will not receive any proceeds, commissions or other
remuneration with respect to sales by our selling security owners.
-----------------
Our security owners are offering for sale:
o [1,655,395] issued and outstanding shares of our Class A Voting Common
Stock;
o 56,640,726 issued and outstanding shares of our Class B Non-voting
Common Stock;
o [1,069,683] shares of Class A Voting Common Stock underlying certain
issued warrants, options and convertible debt; and
o 3,772,455 shares of Class B Non-voting Common Stock underlying certain
warrants.
-----------------
We have agreed to pay for all of the expenses of the registration of these
securities with the Securities and Exchange Commission. Selling stockholders
will pay any brokerage or similar commissions incurred in connection with the
sale of their shares.
There is no established public market for any of our securities. Our
selling security owners will sell shares in public or privately-negotiated
transactions.
INVESTING IN THESE SECURITIES 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.
-----------------
This prospectus is dated July 5, 2002.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...........................................................1
Risk Factors.................................................................4
Forward-Looking Statements...................................................12
Use of Proceeds..............................................................13
Determination of Offering Price..............................................13
Dividend Policy..............................................................13
Capitalization...............................................................14
Selected Consolidated Financial Data.........................................15
Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................17
Business.....................................................................25
Executive Officers and Directors.............................................31
Organization Within the Past Five Years......................................37
Certain Transactions.........................................................38
Principal Stockholders.......................................................42
Description of Capital Stock.................................................44
Plan of Distribution.........................................................47
Shares Eligible for Future Sale..............................................49
Transfer Agent and Registrar.................................................49
Legal Matters................................................................50
Experts......................................................................50
Additional Information.......................................................50
Index to Financial Statements................................................F-1
* * *
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.
- --------------------------------------------------------------------------------
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 SECURITIES).
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 InformationTM, that enables 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
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 (such as neighbors and other individuals sharing a residence) 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 using certain wireless devices manufactured by third parties, such
as personal digital assistants and e-mail capable pagers. We refer to this new
product as LocatePLUS Pocket(TM). We have not yet realized any revenue from
LocatePLUS PocketTM. 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 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., locating debtors and individuals in violation of
parole or bail restrictions); and
o background checks.
As of March 31, 2002, there were approximately 6,600 users of our
LocatePLUS(TM) database and approximately 2,700 purchasers of our Worldwide
InformationTM 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
------------
Our selling security owners are offering for sale an aggregate of
[1,655,395] shares of issued Class A Voting Common Stock and an aggregate of
56,640,726 shares of issued Class B Non-voting Common Stock. Our warrant
holders, option holders and convertible debt holders are offering for sale an
aggregate of 1,069,683 shares of Class A Voting Common Stock and an aggregate of
3,772,455 shares of Class B Non-voting Common Stock underlying those securities.
We will receive no proceeds from the sale of our issued securities. We will
receive proceeds from the exercise of warrants and options, unless such
securities are exercised pursuant to "net issuance" provisions included in such
securities. There is currently no public market for our securities. Although we
hope to 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.
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
---------------------------------------------------------
On August [__], 2002, we closed our initial public offering of securities,
pursuant to which we sold [12,000,000 Units]. Each Unit consisted of one share
of Class B Non-voting Common Stock and a redeemable three year warrant to
purchase one share of Class A Voting Common Stock for $0.50, which we refer to
as a "public warrant."
Investors should note that, with the exception of shares held by our
affiliates, all of our issued and outstanding shares of Class A Voting Common
Stock and Class B Non-voting Common Stock, as well as shares of Class A Voting
Common Stock and Class B Non-voting Common Stock underlying all of our issued
options, warrants and convertible debt, are anticipated to be available for
public resale, without restriction, either through our registration of those
securities or through the provisions of the Securities and Exchange Commission's
Rule 144(k). For more information on this matter, you should review the section
of this prospectus titled "Shares Eligible for Future Sale", beginning on page
49 of this prospectus. The following table outlines our capital stock as of the
date of this prospectus:
Class A Voting Common Stock outstanding.................[56,763,975](1)(2)
Class B Non-voting Common Stock outstanding.............[68,640,726](3)
- --------------
(1) Includes shares issued in connection with the mandatory conversion of
certain convertible promissory notes (and accrued interest) into
[1,655,395] shares of Class A Voting Common Stock on the consummation of
our initial public offering.
(2) Assuming no exercise or conversion of:
o warrants to purchase up to [13,025,239] shares of Class A Voting Common
Stock (including [12,000,000] public warrants);
o options to purchase up to 14,995,000 shares of Class A Voting Common
Stock; 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
3,772,455 shares of Class B Non-voting Common Stock.
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
IMPORTANT NOTE CONCERNING OUR FINANCIAL CONDITION
-------------------------------------------------
Our financial statements were prepared on the assumption that we will
continue as a going concern, and our independent accountants have expressed
doubt as to that assumption. In the event that we are unable to raise funds from
this offering, or 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. If
such additional capital was not available to us, we would likely be required to
reduce or discontinue our operations. Our management estimates that, if the
minimum number of Units is sold in our initial public offering, the proceeds
from that offering (together with anticipated cash from operations) will be
sufficient to permit us to continue our operations for at least twelve months
from the date of this prospectus. For more information on this matter, you
should review our financial statements, which begin on page F-1 of this
prospectus, as well as the section of this prospectus titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
beginning on page 17.
* * *
- --------------------------------------------------------------------------------
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. WE HAVE NOT ATTEMPTED TO RANK THE FOLLOWING RISKS IN ORDER OF THEIR
LIKELIHOOD.
RISKS RELATED TO OUR BUSINESS
-----------------------------
OUR FINANCIAL STATEMENTS WERE PREPARED ON THE ASSUMPTION THAT WE WILL CONTINUE
AS A GOING CONCERN, AND OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED DOUBT AS TO
THAT ASSUMPTION.
As a result of our losses from operations and our limited capital
resources, our independent accountants have expressed doubt as to our ability to
continue as a going concern. In the event that we are unable to raise funds from
this offering, or 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 would materially adversely effect our business.
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, $4.4 million in 2001 and $1.1
million for the three months ended March 31, 2002. Our accumulated deficit as of
March 31, 2002 was approximately $15.4 million. We anticipate that our expenses
relating to our sales and marketing and product development, as well as our
general and administrative expenses, will increase during 2002 and for the
foreseeable future. To achieve profitability, we must 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 and financial condition will be
adversely affected. For more information on this matter, you should review our
financial statements, which are included in this prospectus beginning on page
F-1.
OUR RIGHT TO USE CERTAIN THIRD PARTY DATA MAY BE SUBJECT TO TERMINATION BY OUR
DATA PROVIDERS. ANY SUCH TERMINATION COULD DISRUPT OUR BUSINESS.
We obtain our data from three major third-party data providers as well as
over 20 ancillary sources. Under the terms of agreements that we have with two
of our major data providers, the data providers may terminate our right to use
their data in their sole discretion and without any recourse to us. If any of
our major data provider agreements is terminated, there can be no assurance that
we would be able to obtain and integrate replacement data on a timely basis. In
such an event, our products would likely be less attractive to current and
potential customers and our revenue would likely decrease.
A SIGNIFICANT PORTION OF OUR ASSETS CONSISTS OF AN AMOUNT DUE TO US FROM A THIRD
PARTY. IF THIS AMOUNT IS NOT REPAID, OUR FINANCIAL CONDITION COULD BE HARMED.
As of March 31, 2002, $250,000 was owed to us by an unaffiliated,
privately-held leasing company. Since March 31, 2002, $100,000 has been repaid,
and we anticipate that the balance (plus accrued interest) will be repaid by
July 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 financial condition would be materially harmed.
4
OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR SECURITIES.
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 likely decline. Our future quarterly results may fluctuate as a
result of many factors, some of which are outside our control, including:
o legal and regulatory developments that may adversely affect our ability
to collect or disseminate data;
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;
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 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 as
well as the three months ended March 31, 2002, 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 do not achieve increasing market acceptance, our revenue
would most likely decline our financial condition will be adversely affected.
WE OBTAIN DATA FROM A VARIETY OF SOURCES. IF WE ARE UNABLE TO OBTAIN NECESSARY
DATA, OUR PRODUCTS MAY NOT BE ATTRACTIVE TO OUR TARGET CUSTOMERS.
Sources of our data 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 would likely be less attractive to our current and
prospective customers.
5
IF WE CANNOT INTEGRATE, UPDATE AND IMPROVE OUR PRODUCTS, OUR PRODUCT MAY BE LESS
ATTRACTIVE TO OUR TARGET MARKET, WHICH WOULD ADVERSELY AFFECT OUR REVENUES AND
FINANCIAL CONDITION.
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.
THE MARKET FOR DATABASE PRODUCTS AND SERVICES IS HIGHLY COMPETITIVE, AND WE MAY
NOT BE ABLE TO EFFECTIVELY COMPETE IN THIS MARKET.
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 affect our business.
WE FACE RISKS ASSOCIATED WITH OUR STRATEGIC ALLIANCES, WHICH COULD LIMIT OUR
ABILITY TO INCREASE OUR MARKET SHARE.
To date, we have entered into one "channel partner" (distribution)
agreement and we are currently in negotiations with respect to a second channel
partner 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.
TO INCREASE OUR REVENUE, WE MUST INCREASE OUR SALES FORCE, AND EXPAND OUR
DISTRIBUTION CHANNELS. WE CAN NOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN THESE
EFFORTS.
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
6
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 products consist of publicly available data that we organize to permit
rapid and effective computerized searches. Because our datasets consist of
publicly available data, we cannot prevent competitors from developing
equivalent databases. We anticipate that our success will depend, in part, on
our proprietary data integration and linking methodologies. We have not
obtained, and do not anticipate that we will obtain, patent protection for these
methodologies. We rely on trade secret rights, confidentiality agreements and
procedures and licensing arrangements to establish and protect our proprietary
rights with respect to our data integration methodologies. Despite our efforts,
third parties could attempt to copy or otherwise obtain and make unauthorized
use of our products or independently develop similar products.
WE FACE SIGNIFICANT SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF
CONFIDENTIAL INFORMATION. IF WE ARE UNABLE TO ADEQUATELY PROTECT CERTAIN
CONFIDENTIAL INFORMATION, OUR REPUTATION AND BUSINESS WOULD BE ADVERSELY
AFFECTED.
We rely on encryption and other technologies to provide system security and
to effect secure 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 POSSIBLE "CHARGEBACKS" IN CONNECTION WITH THE PROCESSING OF CREDIT
CARDS. IF WE INCUR SUBSTANTIAL CHARGEBACKS, OUR CREDIT CARD PROCESSING RIGHTS
COULD BE TERMINATED, WHICH WOULD SIGNIFICANTLY IMPAIR OUR OPERATIONS.
Because we offer services over the Internet and process credit card charges
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 result in a loss of credit
card processing rights with a corresponding decrease in revenue, which would
significantly harm our business, financial condition and results of operations.
For more information on our reliance on credit card processing, you should
review the section of this prospectus titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations", beginning on page
17.
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.
7
DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT MAY NOT BE
COVERED BY OUR INSURANCE.
Our datasets may contain errors that may give rise to claims against us. We
generally 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, our business could be
adversely affected. We currently do not maintain professional liability
insurance, and our general liability insurance may not cover claims of this
nature.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH.
As of March 31, 2002, we had 35 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 ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, WE MAY NOT
BE ABLE TO CONTINUE OUR BUSINESS AS PRESENTLY CONDUCTED.
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 harmed.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS; THE LOSS OF ANY OF OUR
KEY EMPLOYEES COULD DELAY OUR PLANS FOR GROWTH.
Our success depends to a significant extent on the performance and
continued service of our senior management and other key employees, and
particularly those of our President and Chief Executive Officer, Mr. Jon R.
Latorella. 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 would disrupt our operations and would delay our plans for growth
while we work to replace those employees. We do not maintain "key man" life
insurance on any of our employees. As a result, if any of our key employees were
to die or become unable to provide services for us, our operations would be
disrupted and we would have no means of recovering any resulting losses.
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.
8
RISKS RELATED TO OUR INDUSTRY
-----------------------------
EXISTING GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS MAY LIMIT OUR ABILITY TO
ACQUIRE OR DISSEMINATE DATA. IF OUR ABILITY TO ACQUIRE OR DISSEMINATE DATA IS
LIMITED, OUR REVENUES WILL DECREASE AND OUR FINANCIAL CONDITION WILL BE
ADVERSELY AFFECTED. WE MAY ALSO BE SUBJECT TO LIABILITY ARISING FROM SUCH
REGULATIONS.
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 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 OUR
PRODUCTS TO CUSTOMERS AND CAUSE US TO LOSE REVENUE.
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 provide meaningful data to our customers 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, would negatively affect our
reputation, business, financial condition and results of operations.
9
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES
-----------------------------------------------------
OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER CONTROLS A MAJORITY OF OUR VOTING
SECURITIES AND WILL CONTINUE TO HOLD A SIGNIFICANT PORTION OF OUR VOTING
SECURITIES, EVEN IF ALL OF THE PUBLIC WARRANTS ARE EXERCISED. THEREFORE, HE CAN
UNILATERALLY APPROVE CERTAIN TRANSACTIONS AND MATTERS PRESENTED TO OUR
STOCKHOLDERS. 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.
Jon R. Latorella, our President and Chief Executive Officer, controls a
majority of our voting securities and can elect the Board of Directors and
individually control all matters requiring stockholder approval. Mr. Latorella
will continue to hold a significant portion (approximately [41.4]%) of our
voting securities, even if all of the public warrants are exercised. Mr.
Latorella received his holdings upon the incorporation of our predecessor,
Worldwide Information, Inc., in 1996 in consideration for his contribution of
the then ongoing business of Worldwide Information plus an amount of cash equal
to less than $0.01 per share.
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.
"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.
WE HAVE A LARGE NUMBER OF SECURITIES THAT WILL BE AVAILABLE FOR RESALE. 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,
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. Assuming no exercise of warrants, options or other convertible
securities, we will have [56,763,975] shares of Class A Voting Common Stock
issued and outstanding (including [1,655,395] shares which were issued upon the
conversion of certain debt and accrued interest upon the consummation of our
initial public offering) and [68,640,726] 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, either as a result of the Securities and Exchange Commission's Rule
144(k) or as a result of our registration of those securities. For more
information on this matter, you should review the section of this prospectus
titled "Shares Eligible for Future Sale", beginning on page 49.
10
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 LIMIT OUR ABILITY TO RAISE CAPITAL FROM
OTHER SOURCES.
As of the date of this prospectus, there are [13,025,239] shares of Class A
Voting Common Stock issuable upon the exercise of warrants (consisting of
[12,000,000] public warrants and 1,025,239 restricted warrants). We also have
44,444 shares of Class A Voting Common Stock issuable upon conversion of a
certain $10,000 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. As of the date of this prospectus, there also are 3,772,455
shares of Class B Non-voting Common Stock issuable upon the exercise of certain
restricted warrants. While these securities are outstanding, the holders will
have the opportunity to profit from a rise in the price of our securities with a
resulting dilution (upon exercise or conversion) 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 a negative effect on the price of our securities. The holders
of these 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 provided under the warrants and
convertible promissory notes.
WE MAY SELL ADDITIONAL SHARES IN THE FUTURE, WHICH COULD CAUSE THE PRICE OF OUR
SECURITIES 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 to decline.
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 give 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. If our securities are not quoted on the OTC Bulletin
Board, we anticipate that there would be no public market for our securities for
the foreseeable future.
EVEN IF OUR SECURITIES ARE QUOTED ON THE OTC BULLETIN BOARD (OF WHICH WE CAN
GIVE NO ASSURANCE), THE OTC BULLETIN BOARD MAY NOT PROVIDE LIQUIDITY FOR OUR
INVESTORS.
Even if our securities are quoted on the OTC Bulletin Board (of which we
can give no assurance) 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.
11
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. IF OUR SECURITIES ARE NOT QUOTED ON THE OTC
BULLETIN BOARD, THE HOLDERS OF OUR SECURITIES MAY BE UNABLE TO SELL THEIR
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.
INVESTORS MUST CONTACT A BROKER-DEALER TO TRADE OTC BULLETIN BOARD SECURITIES.
INVESTORS DO NOT HAVE DIRECT ACCESS TO THE OTC BULLETIN BOARD SERVICE. AS A
RESULT, YOU MAY NOT BE ABLE TO BUY OR SELL OUR SECURITIES AT THE TIMES THAT YOU
MAY WISH.
Even if our securities are quoted on the OTC Bulletin Board, the OTC
Bulletin Board may not permit our investors to sell securities when and in the
manner that they wish. 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 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 THIS MARKET MAKER
CEASES TO MAKE A MARKET FOR OUR SECURITIES, THERE WOULD BE NO MARKET FOR OUR
SECURITIES.
In the event that our securities are quoted on the OTC Bulletin Board (of
which we can give no assurance), 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
will have no public market for their 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 assumptions
underlying our forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
12
USE OF PROCEEDS
We will not receive any proceeds or other remuneration from the sale of our
securities by our selling security owners.
DETERMINATION OF OFFERING PRICE
Our selling security owners will act independently of us in making
decisions with respect to the timing, manner and size of each sale. In the event
that our securities are quoted on the OTC Bulletin Board, the selling
stockholders may sell the shares from time to time
o at market prices prevailing on the OTC Bulletin Board at the time of
offer and sale, or
o at prices related to such prevailing market prices, or
o in negotiated transactions, or
o in a combination of such methods of sale.
Our selling security owners may effect such transactions by offering and
selling the shares directly to or through securities broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of the shares
for whom such broker-dealers may act as agent or to whom the selling
stockholders may sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
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 any
of our securities on the expectation of future dividends.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
13
CAPITALIZATION
The table below sets forth our capitalization as of March 31, 2002, 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
[1,564,736] shares of Class A Voting Common Stock, and the issuance of
[12,000,000] Units at an offering price of $0.30 per Unit and after
deducting underwriting commissions of $0.021 per Unit and deducting
estimated offering expenses of approximately $160,000.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", beginning on page 17
of this prospectus and our consolidated financial statements and the related
notes beginning on page F-1 of this prospectus.
MARCH 31, 2002
(IN THOUSANDS)
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
DEBT:
Current portion of convertible debt and
capital lease obligations ............. $ 167 $ 167
========== ==========
Capital lease obligations, net of current
portion ............................... 167 167
Mandatorily convertible debt ............... 376
---------- ----------
Total long-term debt .................. 543 167
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.01 per share:
Class A Voting Common Stock,
150,000,000 shares authorized; 53,108,580
and 54,673,318 shares issued and
outstanding, respectively ............... 531 531
Class B Non-voting Common Stock,
250,000,000 shares authorized; 56,640,726
and 68,640,726 shares issued and ........ 566 547
outstanding, respectively
Additional paid-in capital ................. 15,321 18,037
Warrants ................................... 733 1,539
Accumulated deficit ........................ (15,348) (15,442)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ................. 1,803 5,367
---------- ----------
TOTAL CAPITALIZATION ....................... $ 2,513 $ 5,701
========== ==========
14
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 on the following page 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 statement of operations
data set forth below for the quarters ended March 31, 2001 and 2002 and the
balance sheet data as of March 31, 2002 have been derived from unaudited
financial statements included elsewhere in this prospectus and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of our financial
position and results of operations for such periods.
The unaudited PRO FORMA balance sheet data has been prepared reflecting the
conversion of certain outstanding mandatorily convertible debt into common stock
as of March 31, 2002 pursuant to our initial public 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.
15
STATEMENTS OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
2000 2001 2001 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
REVENUES:
Information Sales - CD Rom $ 490,480 $ 268,701 $ 90,556 $ 66,494
Information Sales - Online 98,632 752,109 129,009 281,661
Engineering services -- 388,187 -- --
------------- ------------- ------------- -------------
Total revenues 589,112 1,408,997 219,565 348,155
COSTS AND EXPENSES:
Costs of revenues:
CD Rom 169,782 96,561 22,871 26,173
Online 1,293,297 986,240 236,277 190,983
Engineering services -- 49,347 -- --
Selling and marketing 1,010,621 799,486 188,280 274,980
General and administrative 3,439,251 3,317,128 535,167 903,581
------------- ------------- ------------- -------------
Total operating expenses 5,912,951 5,248,762 982,595 1,395,717
------------- ------------- ------------- -------------
OPERATING LOSS (5,323,839) (3,836,765) (763,030) (1,047,562)
OTHER INCOME (EXPENSE):
Interest income 19,605 67,768 6 16,426
Interest expense (43,110) (590,970) (321,390) (34,744)
Loss on investment (500,000) -- -- --
Other income, net 13,902 6,712 1,878 4,548
------------- ------------- ------------- -------------
Net loss $ (5,833,442) $ (4,356,255) $ (1,082,536) $ (1,061,332)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.11) $ (0.04) $ (0.02) $ (0.01)
SHARES USED IN COMPUTING BASIC AND DILUTED 51,916,934 99,613,673 53,108,580 108,397,027
NET LOSS PER SHARE
PRO FORMA
AS ADJUSTED
BALANCE SHEET DATA: AS OF DECEMBER 31, MARCH 31, MARCH 31,
2000 2001 2002 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Cash and equivalents $ -- $ 915,864 $ 757,859 $ 757,859
Total current assets 174,082 2,264,301 2,647,910 2,647,910
Total assets 2,126,113 3,970,531 4,317,443 4,317,443
Total current liabilities 2,058,071 1,947,982 1,971,327 1,971,327
Mandatorily convertible debt 310,975 362,838 375,537 --
Total stockholders' equity (deficit) $ (425,870) $ 1,487,092 $ 1,803,346 $ 2,178,883
16
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 InformationTM, 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 are currently negotiating with a
third-party to establish a second channel partner agreement for the distribution
of certain of our data, although we can give no assurance as to the timing of
that agreement or if that agreement will be executed at all.
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. This agreement was terminated
in 2001. 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 link
data from different sources 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.
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 fee is fixed or
determinable and collectibility is reasonably assured. Information in our
Worldwide Information(TM) product is updated and released either quarterly or
twice a year. In the case of our LocatePLUS(TM) product, we charge a fee to
customers, which varies based upon 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
17
approximately 75% of our current LocatePLUS(TM) 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 our costs 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 expired on June 30, 2002. We anticipate
that we will enter into a new agreement to acquire real property records, but we
can give no assurance as to the timing of that amendment. 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. 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. Non-payment was in
violation of the provisions of two 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. We are currently negotiating to resolve this matter with the
data providers and we do not currently anticipate that this default will result
in any disruption in our operations (although we can give no assurance that this
will be the case). 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.
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 consists of earnings on our cash and cash equivalents.
Interest expense is primarily 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 mandatorily
converted into [1,655,395] shares of Class A Voting Common Stock on the
consummation of our initial public offering.
We have incurred significant net losses since our inception. We incurred
net losses of approximately $5.8 million in 2000, $4.4 million in 2001, and $1.1
million for the three months ended March 31, 2002. Our accumulated deficit as of
March 31, 2002 was approximately $15.4 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. Our planned
operations will require $175,000 cash per month in excess of our current net
revenue from operations. We have experienced a reduction in the cash used by
operations principally as a result of cost reductions in data sets and increases
in revenue. 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.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
REVENUE. Revenue from our Worldwide InformationTM CD-ROM product
decreased to $66,494 for the three months ended March 31, 2002 from $90,556 for
the three months ended March 31, 2001, a decrease of 27%. This decrease was the
result of our redirection of our sales efforts away from our Worldwide
Information(TM) product in favor of our LocatePLUS(TM) product. Revenue from our
Internet-based product, LocatePLUS(TM), increased to $281,661 for the three
months ended March 31, 2002 as compared to $129,009 for the three months ended
March 31, 2001, an increase of 118%. This increase is attributable to an
increase in customers and usage.
COSTS OF REVENUE. For the three months ended March 31, 2002, our costs
of revenue for Worldwide InformationTM was $26,173, as compared to $22,871 for
the three months ended March 31, 2001, an increase of 14%. This increase is
primarily attributable to the acquisition of data from additional states. For
the three months ended March 31, 2002, our costs of revenue associated with
LocatePLUS(TM) was $190,983, as compared to $236,277 for the three months ended
March 31, 2001, a decrease of 19%. This decrease is primarily attributable to a
reduction in fees associated with certain data contracts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the
three months ended March 31, 2002 were $274,980, as compared to $188,280 for the
three months ended March 31, 2001, an increase of approximately 46%. This
increase in expenses is attributable primarily to an increase in our sales force
and commissions associated with increased sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended March 31, 2002 were $903,581 as compared to
$535,167 for the three months ended March 31, 2001, an increase of 69%. This
increase is primarily attributable to non-cash compensation recorded for
consulting and advisory services, as well as increased expenses associated with
the maintenance of our stockholder records.
INTEREST EXPENSE. Interest expense decreased to $34,744 for the three
months ended March 31, 2002, from $321,390 for the three months ended March 31,
2001, a decrease of 89%. This decrease is attributable to non-recurring non-cash
interest expense associated with debt issued with detachable warrants in 2001.
INTEREST INCOME. Interest income increased to $16,426 for the three
months ended March 31, 2002, from $6 for the three months ended March 31, 2001.
This increase is attributable to interest earned on a certain $1,000,000 note
issued to us, of which $150,000 of principal remains outstanding.
OTHER INCOME. During 2000, we entered into a series of agreements with
IntelliCorp, Ltd., an unaffiliated Ohio-based database provider. The terms of
these agreements provided for us to acquire all of the issued and outstanding
membership units of IntelliCorp in exchange for cash and shares of our Common
Stock. Pursuant to that proposed acquisition, we loaned $500,000 to IntelliCorp.
These loans were evidenced by certain promissory notes convertible into
ownership interests in IntelliCorp at IntelliCorp's discretion. In 2001, after
completion of our due diligence and further negotiations with IntelliCorp, we
agreed with IntelliCorp to terminate the proposed acquisition. After reading
IntelliCorp's unaudited management accounting information, we recorded a bad
debt reserve for the full amount of our loan to IntelliCorp during 2000, as we
concluded that repayment of the loan was not reasonably assured. On January 22,
2002, both parties agreed to cancel IntelliCorp's right to issue Intellicorp
equity interests in payment of the promissory notes and to provide for 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 the proceeds remitted to
us under this arrangement will be treated as repayment of the $500,000 plus
accrued interest through January 20, 2002 and the balance
19
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. As of March 31, 2002, payments of $6,171 have been received
under this agreement, of which $2,057 repayment has been recorded as "other
income".
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue from our Worldwide InformationTM 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%. This decrease resulted from our
redirection of sales efforts toward our Internet-based product, LocatePLUS(TM).
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.
COSTS OF REVENUE. For the year ended December 31, 2001, our costs of
revenue for Worldwide InformationTM 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 payroll
cost reductions. These cost-cutting measures were initiated to preserve cash for
operations while we secured additional funding. In 2001, we were able to secure
additional funding, and we anticipate that our costs of revenue will increase in
2002 as we 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 that product. For the year ended December 31, 2001, our costs of
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 (described above) and anticipate
that our costs of revenue will increase in 2002 as we add additional data sets
to our product. 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 costs of revenue in the future.
COSTS OF ENGINEERING REVENUE. For the year ended December 31, 2001, our
costs of engineering revenue was $49,347. Costs 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 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
20
approximately $294,000 in interest expense relating to the beneficial conversion
features of that convertible debt.
LOSS ON INVESTMENT. During 2000, we entered into a series of agreements
with IntelliCorp, Ltd., an unaffiliated Ohio-based database provider. The terms
of these agreements provided for us to acquire all of the issued and outstanding
membership units of IntelliCorp in exchange for cash and shares of our Common
Stock. Pursuant to that proposed acquisition, we loaned $500,000 to IntelliCorp.
These loans were evidenced by certain promissory notes convertible into
ownership interests in IntelliCorp at IntelliCorp's discretion. In 2001, after
completion of our due diligence and further negotiations with IntelliCorp, we
agreed with IntelliCorp to terminate the proposed acquisition, and we amended
the promissory notes to terminate IntelliCorp's right to convert the notes.
After reading IntelliCorp's unaudited management accounting information, we
recorded a bad debt reserve for the full amount of our loan to IntelliCorp
during 2000, as we concluded that repayment of the loan was not reasonably
assured. We will record the repayment of this loan on a cash basis, as "other
income".
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.
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 and for the three months ended March 31, 2002, we used
approximately $3.1 and $0.9 million in operating activities, respectively,
principally to fund our net losses. Also during 2001, we loaned $1.0 million to
an unaffiliated leasing company because of the loan's favorable interest rate
and terms. As of the date of this prospectus, $850,000 of this note has been
repaid. We have extended the payment terms of this note to permit repayment of
the remaining $150,000 of principal (plus accrued interest) by July 2002.
On May 22, 2002 we received $190,000 by issuing subordinated promissory
notes with simple interest at 10% per annum. The terms of the notes call for
their repayment on June 1, 2003.
On June 4, 2002, we received $745,400, net of issuance costs of $4,600,
from Gemstone Investment Company, Inc. by issuing a promissory note secured by
all of our assets and a personal guarantee by our Chief Executive Officer
(including a pledge of 5 million shares of our Chief Executive Officer's
LocatePlus Holdings Corporation Class A Voting Common Stock and a mortgage of
certain of his other personal assets). The terms of this loan call for its
repayment by the earlier of September 3, 2002 or two business days after the
closing of the our initial public offering. If the note is paid in full by July
3, 2002, then we will pay $50,000 in interest; if this loan is repaid after July
3, 2002, we will pay $100,000 in interest. We will use the proceeds of this loan
to purchase certain datasets and accelerate their integration into our
LocatePlus(TM) product.
The financial statements included in this prospectus have been prepared
assuming that we will continue as a going concern, and contemplates continuity
of operations, realization of assets and the
21
satisfaction of liabilities and commitments in the normal course of business. We
have incurred an accumulated deficit of approximately $15.4 million through
March 31, 2001 and used approximately $3.1 million of cash in operations during
2001 and $.9 million during the three months ended March 31, 2002. The cash
required to fund our planned operations exceeds our cash anticipated to be
generated from our planned operations by approximately $175,000 per month, and
thus we estimate that we will require approximately $2.1 million in cash to fund
our planned operations for the next twelve months.
[On August [__], 2002, we consummated our initial public offering of
securities. Pursuant to this offering, we sold [12,000,000] Units for $0.30 per
Unit, each Unit consisting of one share of Class B Non-voting Common Stock and a
three year redeemable warrant to purchase one share of our Class A Voting Common
Stock with an exercise price of $0.50 per share. After deducting offering
expenses of [$412,000], we received net proceeds of $[2,936,000].]
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
Through February 2002, 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 $465,731.
LICENSE AGREEMENTS
We have entered into various data acquisition agreements under which we are
required to make minimum payments totaling $785,000 through 2004.
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. This note matured on September 9, 2001. We have
continued to make interest payments under this note but we are currently in
default with respect to the repayment of the principal of this loan. Although we
have not been presented with a formal waiver of this default, the holder has
informally indicated that she currently does not intend to demand payment on
this note. We currently intend to obtain a formal waiver of this default from
the holder. This note is 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
22
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 recorded may be
materially misstated during a reporting period.
RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
Mr. Thomas Garlock, a member of our Board of Directors, and Mr. Gregory
Lindae, a former member of our Board of Directors, have performed strategic
advisory, shareholder relations and acquisition planning 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 strategic advisory services rendered by Mr. Lindae. 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
additional strategic advisory services rendered by Mr. Lindae, for which we
recorded an expense of $161,026.
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 shareholder relations services rendered by Mr.
Garlock. 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 (Mr. Garlock and Mr. John Houlihan).
LOANS FROM DIRECTORS
During 2001, we issued convertible notes with detachable warrants to
Messrs. Lindae and Houlihan in exchange for an aggregate of $215,000 in cash.
Expenses in 2001 include $74,900 related to the conversion of convertible debt
into equity securities by Mr. Lindae.
23
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 our Chief Executive Officer, Mr. Jon Latorella, and our
Chief Financial Officer, Mr. Robert Goddard. These loans were intended to
provide a bonus to Messrs. Latorella and Goddard for services rendered in
conjunction with the development and launch of the LocatePLUS(TM) product and to
deter them from terminating their employment with us.
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. Based on our current financial condition, we do not anticipate 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.
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 fiscal 2001, our
financial position and results of operations would not have been effected.
24
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 InformationTM, 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,
private investigation and financial institutions. We 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).
25
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 admission cards or
private investigator licenses. Individuals involved in law enforcement must
provide similar 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:
III Law Enforcement Comprehensive Criminal Records
Restricted Motor Vehicle Records
Certain Credit Reporting Data
===== ============================= ============================================
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.
26
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 March 31, 2002, there were approximately 6,600 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
o vessel registrations o phone numbers
We intend to continue integration of datasets into our LocatePLUS(TM)
product, including:
o certain criminal arrest, conviction o certain professional licenses
and incarceration records
o certain fingerprint files
o certain hunting and fishing licenses
o Federal Aviation
o certain facial image files 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.
27
LOCATEPLUS POCKET(TM)
We recently developed a version of our LocatePLUS(TM) product that is
accessible through wireless personal digital assistants and e-mail capable
pagers, 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 March 31, 2002, there were approximately 2,700 pre-screened
purchasers of our Worldwide InformationTM CD-ROM product.
We currently expect to expand our Worldwide InformationTM 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 expired on June 30, 2002.
We anticipate that we will enter into a new agreement to acquire real property
data upon the expiration of this agreement, but we can give no assurance that
this will be the case.
In July 1999, we entered into a three year data acquisition agreement to
acquire credit file header information. This agreement is currently terminable
by the data provider at the data provider's discretion, with or without cause.
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
28
periods unless terminated by either party prior to renewal.
Payments under these agreements are based on monthly usage, subject to monthly
minimums. 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.
Non-payment was in violation of the provisions of two 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. We are currently negotiating to resolve this
matter with the data providers and we do not currently anticipate that this
default will result in any disruption in our operations (although we can give no
assurance that this will be the case). 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.
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 operations, our products,
including our LocatePLUS(TM) product, and our operations.
Federal and state law prohibits us from selling information about 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. This agreement is expected to terminate in August
2003, but may be extended
29
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. 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. 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 March 31, 2002, we had 35 employees. We believe that our relations
with our employees are good.
30
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.
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.
Steven W. Silva 39 Vice President of Business Development
Thomas Garlock 45 Director
John P. Houlihan(1)(2) 56 Director
Gerard Scalley(1)(2) 46 Director
Dr. Richard B. Yules(1)(2) 61 Director
(1) Member of our Audit Committee.
(2) Member of our Compensation Committee.
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.
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 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
31
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.
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.
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.
GERARD SCALLEY has been employed by the Woburn, Massachusetts Police
Department for the past 22 years, where he currently holds the rank of
Lieutenant. His current responsibilities include supervision of that
department's detective bureau and its Drug Abuse Resistance Education (DARE)
program. He has also worked as a crime prevention officer and as commander of
the North Eastern Massachusetts Law Enforcement Council Regional Drug Task
Force. Mr. Scalley has been affiliated with numerous law enforcement related
organizations during his career, including the National Technical Investigator's
Association, the Narcotic Enforcement Officer's Association, the National DARE
Officer's Association and the Irish American Police Officer's Association. Mr.
Scalley also lectures at the University of Massachusetts at Lowell on criminal
justice matters. Mr. Scalley received a Bachelor of Arts in Criminal Justice
from Salem State College in 1998, and a Master of Arts in Criminal Justice from
the University of Massachusetts at Lowell in 2000.
DR. RICHARD B. YULES served in the United States Air Force from 1969 to
1998, when he retired with the rank of Brigadier General and ANG Assistant to
the Assistant Secretary of Defense for Health Affairs. Presently, he serves as
consultant and member of numerous corporate boards in the medical and
biotechnology area. He serves on the Board of Directors of MedSafe, Inc., WANG
Healthcare, Inc. and PKC, Inc., and as an Advisor to the Board of Directors of
the Massachusetts Technology Collaborative, Global Water Technology Incorporated
and Correctional Medical Services, Inc. He has served for 20 years as Managing
Director of the Haelen Medical Center, and as Chairman of the Worcester County
City Hospital ENT Department for 13 years. He received his Bachelor of Arts and
Medical Doctorate degrees from Yale University. Dr. Yules joined our Board of
Directors in June 2002.
We do not have any employment agreements with any of our employees.
BOARD OF DIRECTORS
We currently have six 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.
32
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 accountants 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 Dr.
Yules, and Messrs. Houlihan and Scalley.
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 Dr. Yules, and Messrs. Houlihan and
Scalley.
DIRECTORS' COMPENSATION
On February 1, 2002, we adopted a Non-employee Director Stock Option
Policy. Under the Non-employee Director Stock Option Policy, we will make annual
grants (beginning on the date of adoption of the policy or the first day that a
director is elected to our Board of Directors, if later) 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 be immediately exercisable and 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.
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 further 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
33
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. In June 2002, Dr. Yules and Messrs. Houlihan and Scalley, 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".
401(K) PLAN
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. Employees are eligible to participate after one year of
service. Contributions vest ratably over a five-year period. We pay the
administrative expenses of this plan.
34
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(1) 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 September
of 2000. On June 17, 2002, the Board of Directors voted to return Mr.
Latorella's salary to his pre-reduction salary of $150,000 per annum.
(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 provide that they will accelerate in
the event that Mr. Latorella or Mr. Goddard, as applicable, terminates his
employment with us. The loans also include certain cancellation features if
Mr. Latoralla and Mr. Goddard, as applicable, remain employed by us for a
period of three years. The loans were intended to deter Messrs. Latorella
and Goddard from terminating their services for us as well as to provide
executive compensation. These loans are described in further detail in the
section of this prospectus titled "Certain Transactions", beginning on page
38.
(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.
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
35
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 in
consideration for his services on the Advisory Board, 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.
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.
CHARLES LYONS
On November 20, 2001, our Board of Director appointed Charles Lyons to the
Advisory Board. 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
36
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.
37
CERTAIN TRANSACTIONS
On June 17, 2002, the Board of Directors of the Company adopted our
Interested Parties Transaction Policy, pursuant to which the Company will not
enter into any agreement, arrangement or understanding with any director,
officer, or 5% or greater stockholder of the Company unless (I) the terms of
such agreement, arrangement or understanding are consistent with the terms of
equivalent agreements or arrangements that the Company could obtain from third
parties; and (II) the agreement, arrangement or understanding is fair to the
Company.
JON R. LATORELLA
Mr. Latorella is our President and Chief Executive Officer and is Chairman
of our Board of Directors.
INCENTIVE LOAN
On January 3, 2000, the Board of Directors approved, and we made, a term
loan to Mr. Latorella for $275,000, which we refer to as Mr. Latorella's
"Incentive Loan." This Incentive 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 and to deter Mr. Latorella from terminating his
employment with us. 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.
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.
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. Based on our current
financial condition, and assuming the minimum number of Units are sold in this
offering, we do not anticipate that we will make a call on these notes in the
foreseeable future.
This loan is being accounted for by us as compensation expense over its
term. We currently anticipate that this loan will be cancelled in 2003.
TEMPORARY SALARY WAIVER
Mr. Latorella elected to reduce his annual salary to $50,000 in September
2000. On June 17, 2002, the Board of Directors voted to return Mr. Latorella's
salary prospectively to its pre-reduction level of $150,000 per annum.
INCENTIVE STOCK OPTION
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 services rendered. This
option expires on November 16, 2004.
38
USE OF COMPANY CARS.
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.
ROBERT A. GODDARD
Mr. Goddard is our Chief Financial Officer.
INCENTIVE LOAN
On January 3, 2000, the Board of Directors approved, and we made, a term
loan to Mr. Goddard for $125,000, which we refer to as Mr. Goddard's "Incentive
Loan." This Incentive 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 and to deter Mr. Goddard from terminating his employment
with us. 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,
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.
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. Based on our current
financial condition, and assuming the minimum number of Units are sold in this
offering, we do not anticipate that we will make a call on these notes in the
foreseeable future.
This loan is being accounted for by us as compensation expense over its
term.
INCENTIVE STOCK OPTION
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
Mr. Garlock is a member of our Board of Directors.
CASH PAYMENTS FOR SERVICES RENDERED
We paid Mr. Garlock $228,992 in 2001, $223,795 in 2000 and $178,395 in 1999
for strategic consulting and investor relations services (including acting as
our transfer agent). We have no formal agreement with Mr. Garlock with respect
to Mr. Garlock's services.
39
EQUITY COMPENSATION FOR SERVICES RENDERED
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 strategic advisory and shareholder relations 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.
NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY
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
Mr. Houlihan is a member of our Board of Directors.
DEBT FINANCING OF LOCATEPLUS HOLDINGS CORPORATION
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.
NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY
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 was a member of our Board of Directors until he resigned
on April 12, 2001.
CASH PAYMENTS FOR SERVICES RENDERED
Mr. Lindae and his wholly-owned corporation, Castlerock Ventures, provided
investment banking 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 early 2001.
40
EQUITY COMPENSATION FOR SERVICES RENDERED
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 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 investment banking
services rendered by Mr. Lindae.
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
investment banking services rendered by him.
DEBT FINANCING OF LOCATEPLUS HOLDINGS CORPORATION
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 at
$0.10 per share.
* * *
41
PRINCIPAL STOCKHOLDERS
As of March 31, 2002, we had 53,108,580 shares of Class A Voting Common
Stock and 56,640,726 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 March 31, 2002, 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:
o reflects the issuance of [12,000,000] Units in our initial public
offering;
o assumes that all public warrants issued as part of the Units are
exercised (resulting in the issuance of [12,000,000] shares of our
Class A Voting Common Stock); and
o reflects the conversion of certain mandatorily convertible debt upon
the consummation of our initial public 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.
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% 41.4% - * *
SONIA P. BEJJANI 2,000,000(2) 3.6% 2.9% - * *
THOMAS GARLOCK 1,577,838(3) 2.9% 2.3% 359,581(4) * *
JOHN P. HOULIHAN 550,000(5) 1.0% 1.0% 2,360,000(6) 4.2% 3.4%
GERARD SCALLEY - * * - * *
RICHARD B. YULES - * * - * *
OFFICERS
ROBERT A. GODDARD 1,000,000(7) 1.9% 1.5% - * *
5% STOCKHOLDERS
GREGORY LINDAE 700,000(8) 1.3% 1.0% 6,300,000(9) 10.8% 9.0%
P.O. Box 9062
Truckee, CA 96162
All directors and 32,818,338(10) 57.2% 46.3% 2,719,581(11) 4.7% 4.0%
executive officers
as a group (5 persons)
- ---------------------------
* 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 (I) 433,476 shares held by the Kenai River Trust, over which Mr.
Garlock has voting and dispositional authority; and (II) includes 1,034,720
shares issuable upon exercise of fully vested stock options, with a
weighted average exercise price of $0.20 per share.
(4) Consists of (I) 324,581 shares issuable upon exercise of immediately
exercisable warrants with an exercise price of $0.15 per share and (II)
options to purchase 35,000 shares with an exercise price of $0.15 per share
pursuant to a warrant granted on under our Non-employee Directors Stock
Option Policy.
(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 immediately exercisable warrants with an
exercise price of $0.20 per share.
(6) Includes (I) 425,000 shares held by the Houlihan Trust, over which Mr.
Houlihan has voting and dispositional authority; (II) 66,667 shares held by
Failte Investments, over which Mr. Houlihan has voting and dispositional
authority; and (III) warrants to purchase 35,000 shares with an exercise
price of $0.15 per share granted under our Non-employee Directors Stock
Option Policy.
(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 564,840 shares issuable upon the exercise of fully vested options
with an exercise price of $0.20 per share.
(9) Includes (I) 500,000 shares issuable upon the exercise of immediately
exercisable warrants with an exercise price of $0.10 per share, and (II)
1,177,680 shares issuable upon the exercise of immediately exercisable
warrants with an exercise price of $0.15 per share.
(10) Includes 4,299,720 shares issuable upon the exercise of convertible
securities.
(11) Includes 394,581 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 until [September __, 2002] (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 March 31, 2002, there were 53,108,580 shares of Class A Voting Common
Stock and 56,640,726 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 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 our initial public offering and
ending on the three year
44
anniversary of the issuance of the warrant, [August __, 2005], 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, although we can give no guarantee that
such registration will be permitted under applicable state law.
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.
REDEMPTION
We may repurchase the public warrants for $0.001 per warrant upon 30 days'
notice to the holders of the public warrants in the event that the closing bid
on the Over the Counter Bulletin Board for our Class A Voting Stock is at or
above $1.25 per share for five consecutive days.
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 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 converted into shares of our Class A Voting Common Stock at the
rate of $0.24 per share upon the consummation of our initial public 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 our initial public offering). Each Bridge Warrant
became exercisable for a 20-day period beginning on the effective date of
conversion of the Bridge Notes (I.E., the consummation of our initial public
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. On [August __, 2002],
their note collectively converted into 1,655,395 shares of Class A Voting Common
Stock.
45
RESTRICTED WARRANTS
We have issued restricted warrants to purchase an aggregate of 869,239
shares of our Class A Voting Common Stock, for which the weighted average
exercise price of these warrants is $0.41 per share. We have also issued
restricted warrants to purchase an aggregate of 3,772,455 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 but we are currently in
default with respect to the payment of this loan. Although we have not been
presented with a formal waiver of this default the holder has informally
indicated that she currently does not currently intend to demand payment on this
note. We are currently in the process of obtaining a formal waiver. This note is
convertible into 44,444 shares of our Class A Voting Common Stock at the
election of the holder.
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
46
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
The selling security owners will act independently of us in making
decisions with respect to the timing, manner and size of each sale. In the event
that our securities are quoted on the OTC Bulletin Board, the selling security
owners may sell the shares from time to time
o at market prices prevailing on the OTC Bulletin Board at the time of
offer and sale, or
o at prices related to such prevailing market prices, or
o in negotiated transactions, or
o in a combination of such methods of sale.
The selling security owners may effect such transactions by offering and
selling the shares directly to or through securities broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of the shares
for whom such broker-dealers may act as agent or to whom the selling
stockholders may sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
The selling security owners and any broker-dealers who act in connection
with the sale of their shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any discounts, concessions or commissions
received by them and profit on any resale of the shares as principal may be
deemed to be underwriting discounts, concessions and commissions under the
Securities Act.
Prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling security owners that they and
any securities broker-dealers or others who may be deemed to be statutory
underwriters will be governed by the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the Securities
Exchange Act, any person engaged in a distribution of any of the shares may not
simultaneously engage in market activities with respect to the common stock for
the applicable period under Regulation M prior to the commencement of such
distribution. In addition and without limiting the foregoing, the selling
security owners will be governed by the applicable provisions of the Securities
and Exchange Act, and the rules and regulations thereunder, including without
limitation Rules 10b-5 and Regulation M, which provisions may limit the timing
of purchases and sales of any of the shares by the selling stockholders. All of
the foregoing may affect the marketability of our securities.
Prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling security owners that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security owners and
any of their affiliates. We have informed the selling security owners that they
may not:
o engage in any stabilization activity in connection with any of the
shares;
o bid for or purchase any of the shares or any rights to acquire the
shares, or attempt to induce any person to purchase any of the shares
or rights to acquire the shares other than as permitted under the
Securities Exchange Act;
47
o effect any sale or distribution of the shares until after the
prospectus shall have been appropriately amended or supplemented, if
required, to describe the terms of the sale or distribution.
Prior to the effectiveness of the registration statement to which this
prospectus is a part, we will also informed the selling security owners that
they must effect all sales of shares in broker's transactions, through
broker-dealers acting as agents, in transactions directly with market makers, or
in privately negotiated transactions where no broker or other third party, other
than the purchaser, is involved.
The selling security owners may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act. Any
commissions paid or any discounts or concessions allowed to any broker-dealers,
and any profits received on the resale of shares, may be deemed to be
underwriting discounts and commissions under the Securities Act if the
broker-dealers purchase shares as principal.
In the absence of the registration statement to which this prospectus is a
part, certain of the selling security owners would be able to sell their shares
only pursuant to the limitations of Rule 144 promulgated under the Securities
Act.
Under Section 16 of the Securities Exchange Act, executive officers,
directors, and 10% or greater stockholders of LocatePLUS Holdings Corporation
will be liable to us for any profit realized from any purchase and sale, or any
sale and purchase, of common stock within a period of less than six months,
unless such transaction is otherwise exempted from the provisions of Section 16.
SELLING STOCKHOLDERS
Our selling stockholders are registering a total of [2,725,078] shares of
our Class A Voting Common Stock (including shares underlying securities
convertible into Class A Voting Common Stock) and [60,413,181] shares of Class B
Non-voting Common Stock (including shares underlying warrants to purchase Class
B Non-voting Common Stock.
The term "selling security owners" also includes any transferees, pledges,
donees, or other successors in interest to the selling security owners named in
the table below.
Because the selling security owners may offer all or some of our securities
pursuant to this prospectus, and to our knowledge there are currently no
agreements, arrangements or understanding with respect to the sale of any of the
shares that may be held by the selling shareholders after completion of the
offering, we can give no estimate as to the amount of shares that will be held
by the selling security owners after completion of the offering.
The following table sets forth certain information regarding the selling
security owners and the shares offered by them in this prospectus. None of the
selling stockholders within the past three years has had any material
relationship with us or any of our affiliates, except as noted below.
CLASS A VOTING COMMON STOCK
[TO BE FILED BY AMENDMENT]
CLASS B NON-VOTING COMMON STOCK
Gregory Lindae (1) 4,622,320
Dennis Devlin 1,750,000
Elis S. Lyon TTCC UTD 9/23/96 FBO Elis S. Lyon Rev
Liv Trust 1,576,870
John P. Houlihan (2) 1,266,668
Ralph Caruso 1,150,000
Cappers, LLC 1,000,000
James Aulbach 972,222
June E. Aierstock 900,000
John P. Houlihan, Trustee (2) 858,334
William A. Tedeschi, Jr. Trust 825,000
Kelly Carson 809,900
Lawrence M. Volpe 764,500
AVSRC, LLC 675,000
Cheryl Lynn Tebo, Trustee of the Cheryl Lynn Tebo Trust 666,668
Detlev & Mary Lindae Living Trust dated June 12, 1996 618,500
William A. Tedeschi 600,000
Daniel Gilmartin 600,000
National Trust 547,000
Ralph & Christopher Caruso 540,000
David M. Glaude & Marcel A. Glaude & Lillian G. Glaude,
JTWROS 530,000
James V. Cardwell & Sara M. Katz, JTWROS 504,560
William Don Combs 504,200
The June E. Aierstock Revocable Trust Dtd. 11/29/1999 500,000
John E. & Carolyn A. Schmock, JTWROS 456,900
Albert Snyder 450,000
Eugene Walter Klocek 421,800
Robert S. Colliss 409,654
Marcia Sweany - Volpe 405,000
James R. Larson 403,333
Norwich Radiology Group, P.C. Pension Trust Directed
Account, Daniel Gilmartin 400,000
Ronald Greenspan 400,000
John Aulbach 390,000
Phyllis L. Lyons Trust 376,668
CJS & SBS Trust 360,000
Donald L. & Sharon K. Epps 333,340
Bruce Schadow 333,333
Opal W. Pounds Trust Acct 333,333
TTK Trust Dated 2/26/00 333,333
George W. Bierman 328,000
Trust Co. of American C/F Euclid Arnold Isbell, Jr.,
M.D.#23140 316,668
Lionel D. Axelrod, Trustee, Lionel D. Axelrod
Revocable Trust Dated Aug. 21, 1998 304,000
Stev Y. Parker 303,000
David and Marla Russo JTWROS 300,000
Mary A. Kalcic irrevocable Trust U/A/D 11-11-87,
Paul A. Kalcic, TTEE 300,000
Sergio P. Galvez and Maria S. Galvez, JTWROS 300,000
Surendra K. Bhat and Nirmala Bhat, JTWTOS 300,000
Christian T. & Heather C. Williamson, JTWROS 300,000
New Ventures Assoc LLC 300,000
Arthur A. Theobald 290,000
James F. Laurence 285,000
David G. & Andrea J. Duchesneau, JTWROS 282,000
Frederick C. Greenhalge, Jr. 275,000
Gary Vaughn 275,000
Steven R. Russo 270,278
Stuart Brower 266,667
Helga M. Lindae 266,667
Mel Milhem 256,100
Claude M. Moore 255,000
Dr. Manuel V. Moreno 250,000
Mark J. Vandenbosch 250,000
Jean M. Vermilyea 250,000
Patrick R. Lavery & Elizabeth J. Doll 249,500
David Skerrett 248,500
Matthew M. Parker 232,500
Catherine Bude 221,500
Lloyd G. & Dee Chelli - JTWROS 213,334
Ralph & Rose Caruso 211,500
Kenneth P. and Betty L. Hussey, JTWROS 210,000
Trust Company of American C/F Manuel V. Moreno-#52201 200,000
Alexandra Post, Phd. 200,000
Hannelore Wiseman 200,000
John James McMonigle 200,000
John P. Houlihan, Investments (2) 200,000
Kent J. Homnick, MD 200,000
Nissco Restaurant Dealer Group, Inc. 200,000
Per A. and Ruth O. Larson 1995 Trust 200,000
Roy & Jeanne Neville 200,000
Viraj Deo Jha 200,000
John F. Atwood 196,334
Albert Chariton 190,000
William W. Porter Family Trust dtd 30 April, 1992 183,340
Trust Company of America C/F Samuel Green #24111 180,000
Lee F. Oldenburg 180,000
Steven Nawrocki 180,000
Duncan J. Murphy 175,000
The Thomas H. Metcalfe Family Trust dtd. 3-17-98,
Thomas H. Metcalfe, TTEE 170,000
Kim T. Crowe 166,667
David B. Russell 166,667
Anne M. Houlihan 166,667
Sheila R. Patenaude, Trustee 166,667
Paul R. Simonini 165,000
Agnes C. Song 158,834
Redwood Limited 155,000
Robert F. and Linda A. McKenna, JTWROS 153,000
Thomas R. Aurand 150,000
The Herbert L. Hunter Trust, Dated March 19, 1998,
Herbert L. Hunter TTEE 150,000
Wayne A. Andreae, III and Tiffany A. Andreae, JTWROS 150,000
Trust Company of America C/F Lionel Axelrod #23662 150,000
Doyle Knudson 150,000
Timothy A. Shand 150,000
Dennis Xavier DeSouza 150,000
John M. McDermott, Jr 150,000
Peter D. Merloni 150,000
Thomas J. and Maria Lenci, JTWROS 150,000
Boston Power Crushing Corp. 150,000
Eloise L. Baker 150,000
Jared M. & Charlene A. McCoy, JTWROS 147,700
Raymond L. and Phyllis M. Tedeschi 142,500
Kenneth E. and Nancy L. Pulkrabek 140,000
Renaud Builders 140,000
Gary E. Oldenburg 135,000
Accutrade Securities C/F Patrick R. Lavery 135,000
Belinski Living Trust 133,333
Chung K. and Song J. Lee 133,333
Rosina Gabriele 133,333
Steve C. Runty 133,333
Alan R. Lidolph 133,000
The Stephen P. Abdo Family Trust dtd. 2-26-1990 125,000
George Ragsdale 115,000
Bryan D. Wallpe 112,500
John & Cynthia Rodrigues 112,500
Elizabeth J. and Arthur K. Raudio, JTWROS 106,500
Robert Kim 105,000
Dr. Kent Moss 105,000
Christopher M. Parker 105,000
Alison Baker Leeds 105,000
Charles E. Schuldt 105,000
Karl & Lois Peterson 105,000
John F. Blais 100,000
Martha E. Humbert 100,000
William J. & Patricia A. Ralph, JTWROS 100,000
Dale Para 100,000
Dawn M. Luongo and Richard A. Losanno, Jr., JTWROS 100,000
Denise Hayes 100,000
Donald R. Wilson 100,000
Robin Ratcliffe & Kenneth N. Ratcliffe, Jr. JTWROS 100,000
Andrew Everard Munsey 100,000
Anthony Deban 100,000
Catherine M. and Jeremy B. Kudan 100,000
George Van Dyke Tiers 100,000
Jerome H. Grossman 100,000
John W. Hergert 100,000
Jon F. Matousek 100,000
Myron E. Hunzeker 100,000
Ragsdale Chevrolet, Inc. 100,000
Richard D. Jacklow 100,000
Robert A. Frazier 100,000
Marvin P. Osman 95,000
Christopher Nesbit 93,000
William J. Ackerman 88,000
Paul Charles Dwyer 85,000
James W. Martin, Jr. 84,000
Karl A. Parker and Margery I. Parker Trust 80,000
Juanita Munoz Combs 75,000
William David Combs 75,000
William Derek Combs 75,000
Azucena Duarte 75,000
John H. & Sharon P. Losch, JTWROS 75,000
Keith Malsberger 75,000
James W. Paustian 75,000
Robert F. Robison 75,000
Arthur H. Allwood 75,000
Robert Frazier, TTEE FBO Robert Frazier Co., Inc.
Employees Profit Sharing Plan 75,000
Nancy J. Friz 75,000
Bill Kapper 75,000
Ronald C. & Janet L. Mackenzie, JTWROS 75,000
Dennis A. Raber 75,000
Susan P. & Peter M. Muller, JTWROS 75,000
Bruce J. Frazier/Bruce T. Frazier-Bruce J. Frazier
Revocable Living Trust 75,000
Charles M. Bergin 75,000
David P. Burke 75,000
Gary L. Sedlack 75,000
Julie M. Marsland - Trust 75,000
Michael Henriques 75,000
Richard D. Marjercik and Richard D. Majercik, II JTWROS 75,000
Robert H. Gillig 75,000
The Richard & Charlotte Buse Revocable Trust 75,000
Thomas Gregory Associates Insurance Agency, Inc 75,000
Thomas Ian Gregory, lll 75,000
Vachik Kachatourian 75,000
William J. Surette 75,000
William T. Pueschel 75,000
Michael Borislow 75,000
Steve Collatta 75,000
Stoddard Pyle 75,000
Catherine Foti 75,000
Scott J. Ksobiech 75,000
Josef Matuschka 74,900
Dean B. Fickes 72,000
Ginny Proncuniar 70,000
Frederick B. and Patricia E. Tuttle, Jr. 70,000
James Murphy 70,000
Michael Phillips / Thomas Kuhn 70,000
Albert Miripol & Jeffrey Miripol, JTWROS 66,667
David & Elizabeth Belinski 66,667
Douglas D. Schreurs 66,667
Edward Joseph Banas, Jr. 66,667
James Lindsay Clark 65,000
Ali Mohazab & Gitanaz Malek Mohamadi, JTWROS 65,000
Blair & Tamra Fisher 65,000
Kenneth A. Mehaffey Revocable Trust 65,000
Emily S. Kiewel 65,000
Georgette Valenti 62,900
The George T. and Nancy M. Robinson Trust 62,000
J & H Enterprises a Unincorporated Business Trust
Organization (UBTO) 60,000
Darrell J. & Marjorie B. Flieder Family Trust 60,000
Dale A. Lisembee 57,000
Reid & Beth Ofseur 56,000
Tom & Aurelia Ellis 55,500
Mike King 55,500
Anthony D. Hahn 54,000
John Cross 50,000
Tommy and/or Barbara A. McKay, JTWROS 50,000
Philipp and Gerhilde Rometsch, JTWROS 50,000
Richard L. & Michelle G. Allen. JTWROS 50,000
Loraine P. Currier 50,000
Michael T. Lister 50,000
Everett Schoen & Shirley B. Schoen JTWROS 50,000
J. Travis Yadon 50,000
Gerald J. & Rosemarie Harkins, JTWROS 50,000
Jean T. Gillespie and Julie K. Anthony, JTWROS 50,000
John E. Distafano 50,000
Kathleen R. Krommer, TTEE, The Kiel R. Krommer Trust
UA Dtd 12/22/98 FBO 50,000
Kiel R. Krommer
William and Lisa McKenna, JTWROS 50,000
David F. MacKenzie 50,000
James Edward Pilley 50,000
Tillman D. Mallory 48,000
Betsy Timmerman 47,000
Bradley Hostert 46,667
Joann E. Weinmann 45,000
Dale C. Jenkins 45,000
David R. Buse 45,000
Arthur A. & Marilyn C. Geary 45,000
Charles E. Schuldt Jr. and Pamela J. Schuldt 45,000
Oliver D. Fernandez, Jr. & Ralph Caruso 45,000
Seyed Ali Mohazab Hosseinian 45,000
Transcorp C/F David M. Melamed, M.D. 90104 44,400
John G. Chapin 42,500
Marianne Jenkins 41,900
The Vilius A. Juska Trust DTD. 02-02-93 40,000
Terry Magowan 40,000
Ashleyville Cemetery Assoc. Inc. Arthur Theobald, President 40,000
Edward and Lorraine Currier 40,000
Lewis A. Enstedt 40,000
William K. Degnan and Patricia N. Degnan 40,000
Scott L. Ruther 37,500
Alfred G.and Rita P. Morin 37,450
Alfred G. Morin, Jr. 37,450
Alton P. Johnston 35,000
Paul F. Armitage 35,000
Thomas E. Murphy 35,000
Andrew A. Buchel 34,000
Patrick J. Molohon 34,000
Joseph E. & Susan M. Rader 33,400
Brenda K. Schladweiler 33,334
Edward & Euphemia Banas 33,334
Timothy G. and Marjorie Sweebee Tan-Thronso 33,334
Daniel W. Thornell 33,333
John M. McDermott Jr. - Trustee 33,333
Nancy J. Vajcovec 33,333
Paul H. and Deborah M. Wiater 33,333
Todd M. Faber 33,333
Steven L. Froemming 33,300
Dennis E. Johnson Declaration fo Trust 32,200
Henry Brown 32,000
Albert J. Costa & Ralph Caruso 31,500
Andrea Costa & Ralph Caruso 31,500
Dominic Miguel Costa & Ralph Caruso 31,500
William H. & Mayford N. Chin Trust 30,000
John Jacques 30,000
Peter A. & Margaret I. Schyvinch 30,000
Shale K. Parker 30,000
James F. Marr 30,000
James W. Edge 30,000
John P. & Kimberly A. Sliney 30,000
Neil A. Schneider 30,000
Paul F. Berlenbach, III 30,000
Paul Silva 30,000
Steve & Susan Chelli JTWROS 30,000
Michael A. Buse 30,000
Gloria Devore Revocable Trust 30,000
James V. & Lorraine P. Russo 29,900
Alessandro Leone 27,000
Tim A. and Carol A. Byrd 26,700
Joseph C. Davis 26,500
Paul R. & Denise L. Millhorn, JTWROS 25,000
Shlomo & Galya Orr, JTWROS 25,000
Robert M. & Mary E. Mullin, JTWROS 25,000
American Enterprise Investment Services Acct#15047491
C/F Philip M. Rodriguez 25,000
Philippe Jacques 25,000
Preston Urquhart 25,000
Richard P. Nortman 25,000
Richard Murray 25,000
Robert J. Verburg 25,000
Robert Smith 25,000
Scott Smith 25,000
Donald Tracy Rumford 24,000
William Scott Jenkel 22,500
Arthur J. and Marjorie M. Rauseo 22,500
Roman V. Dvorak and Ludmila M. Tesarkova, JTWROS 22,500
David J. and Laurie J. Benoit 22,500
Elizabeth Grinder 22,500
Ernest Bassi 22,500
Ernest Nickole 22,500
James D. and Carol A. Linehan 22,500
Ronald C. Kaufman & William L. Musser 22,500
Leo J. Christian & Julia S. Christian, JTWROS 20,000
Marvin & Phyllis Miller, JTWROS 20,000
James A. Hinds, Jr. 20,000
Loren R. Lugar 20,000
Gina J. Chin 20,000
Dennis M. Spiker 20,000
E. Elizabeth Grinder 20,000
Roseann D. and David H. Moore 20,000
Thomas P. & Christine Gingrich 20,000
David D. and June F. Matthias JTWROS 17,000
Anthony McLain 16,000
Gil J. & Barbara P. Rodrigues 15,700
David J. Cleary 15,300
Denise C. Leonard 15,000
Gary L. Irving 15,000
Jeffrey J. Chin 15,000
James M. Gill 15,000
Joseph D. Tagliente 15,000
Ralph W. Sevinor 15,000
David B. Stackhouse 15,000
John J. Dowd Jr. & Maureen M. Dowd 15,000
Mark S. & Laurie H. Carleton 15,000
Diana L. & Stephen J. Russo 15,000
Mary J. Nitsch 15,000
Gertrude E. Schneider 15,000
Orest & Cheryl Lechnowski 15,000
Paul J. O'Riordan 15,000
Jack Quon 14,000
Robert Browning 13,333
Robert C. Lofte 13,333
Dennis P. Cashell 12,500
Daniel D. Lyon 12,500
Santiago Chee 12,100
Dale C. Jenkins, III and Marianne Jenkins 12,000
Victoria Munoz 12,000
George D. Rider, Jr. 11,200
The JTB Trust 11,200
Alfred Svanoe 10,000
Myrle L. & Barbara G. Cornelius. JTWROS 10,000
George M. Toran, Jr. 10,000
Gordon C. Chin 10,000
Isabella Fong 10,000
Marie L. Carter 10,000
Lawrence W. Anderson Trust U/A Dated 8/20/1984 10,000
Robert E. Burton 10,000
Veenstra, Inc. 10,000
Christy M. Grider 10,000
Joseph E. Trodella 9,000
Michael Flaherty 9,000
Jesse R. Munoz 9,000
David B. & Sandra J. Moore, JTWROS 8,000
Chester W. Stott 7,000
Mary F. Jenkins & Dale C. Jenkins, Sr. 6,000
Mike Tassabhji & Susan Afandi 5,000
Jodi Lobel 5,000
Leslie E. Goodman 5,000
W. Howard Shale 5,000
Lisa R. Barton 5,000
Alison A. Barton 5,000
Ted S. Lyon 5,000
Jody Lyon 5,000
Richard and Angela Topham held for the benefit of
Brittany Topham under the Massachusetts Uniform
Transfers to Minors Acts 4,500
Brian Good 3,000
Gayle Harrington 3,000
Mary J. Barletta 3,000
David Bocanegra 3,000
Vanessa Bocanegra 3,000
Julie A. McNeill 3,000
Ashell Scott 2,200
Lee B Whittemore, Sr. & Betty A. Whittemore, JTWROS 2,000
Steven Anthony & Shirl Ann Harrington, JTWROS 2,000
Angela Topham 1,500
Stephanie Bocanegra 1,500
Richard Topham 1,500
Mario D. and Mary A. Ciroli, JTWROS 1,400
Eugene H. Fields 1,000
Kim A. Wies 1,000
Ruth L. Harrington 1,000
Daniel A. Parker 1,000
Joseph W. Parker 1,000
Rosalea S. Parker 1,000
Megan I. Schyvinch 1,000
Abigail A. Schyvinch 1,000
Heidi Dane 1,000
Robert Carrier 100
(1) Mr. Lindae is a former employee and former member of our Board of Directors.
(2) Mr. Houlihan is a member of our Board of Directors.
CLASS A VOTING COMMON STOCK UNDERLYING CONVERTIBLE SECURITIES
[TO BE FILED BY AMENDMENT]
CLASS B NON-VOTING COMMON STOCK UNDERLYING WARRANTS
[TO BE FILED BY AMENDMENT]
48
SHARES ELIGIBLE FOR FUTURE SALE
Investors should note that, with the exception of shares held by our
affiliates, all of our issued and outstanding shares of Class A Voting Common
Stock and Class B Non-voting Common Stock, as well as shares of Class A Voting
Common Stock and Class B Non-voting Common Stock underlying all of our issued
options, warrants and convertible debt, are anticipated to be available for
public resale, without restriction, either through our registration of those
securities or through the provisions of the Securities and Exchange Commission's
Rule 144(k).
The following table outlines our capital stock as of the date of this
prospectus:
Class A Voting Common Stock outstanding..................[56,763,975](1)(2)
Class B Non-voting Common Stock outstanding..............[68,640,726](3)
- --------------
(1) Includes shares issued in connection with the mandatory conversion of
certain convertible promissory notes (and accrued interest) into
[1,655,395] shares of Class A Voting Common Stock upon the consummation of
our initial public offering.
(2) Assuming no exercise or conversion of:
o warrants to purchase up to [13,025,239] shares of Class A Voting Common
Stock;
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
3,772,455 shares of Class B Non-voting Common Stock.
As of the date of this prospectus, our affiliates hold 28,518,618 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 [567,639] shares (in the
case of Class A Voting Common Stock) and [686,407] shares (in the case
of our Class B Non-voting Common Stock); 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.
49
LEGAL MATTERS
The validity of the securities 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 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.
* * *
50
LOCATEPLUS HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and
2001, and March 31, 2002 (unaudited) F-3
Consolidated Statements of Operations for the years ended
December 31, 2000 and 2001, and for the three months ended
March 31, 2001 (unaudited) and 2002 (unaudited) F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2000 and 2001, and for
the three months ended March 31, 2002 (unaudited) F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 2001, and for the three months ended
March 31, 2001 (unaudited) and 2002 (unaudited) F-6
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.
Pricewaterhouse Coopers LLP
Boston, Massachusetts
February 13, 2002
F-2
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
PRO FORMA
DECEMBER 31, (NOTE 2)
---------------------------- MARCH 31, MARCH 31,
2000 2001 2002 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 915,864 $ 757,859 $ 757,859
Short term investments -- -- 1,000,000 1,000,000
Accounts receivable, less allowance for doubtful
accounts of $34,740 and $8,900 at December 31, 2000
and 2001 respectively and $15,589 at March 31, 2002 91,159 153,590 204,703 204,703
Prepaid expenses and other current assets 82,923 194,847 435,348 435,348
Note receivable -- 1,000,000 250,000 250,000
------------ ------------ ------------ ------------
Total current assets 174,082 2,264,301 2,647,910 2,647,910
Property and equipment, net 1,543,253 1,414,938 1,461,812 1,461,812
Security deposits 132,389 148,236 97,998 97,998
Notes receivable - related parties, net 276,389 143,056 109,723 109,723
------------ ------------ ------------ ------------
Total assets $ 2,126,113 $ 3,970,531 $ 4,317,443 $ 4,317,443
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Cash overdraft $ 16,395 $ -- $ -- $ --
Accounts payable 1,226,582 1,061,336 1,094,105 1,094,105
Accrued expenses 326,075 467,392 406,123 406,123
Deferred revenue 319,193 270,004 304,399 304,399
Current portion of capital lease obligation 169,826 139,250 156,700 156,700
Convertible debt -- 10,000 10,000 10,000
------------ ------------ ------------ ------------
Total current liabilities 2,058,071 1,947,982 1,971,327 1,971,327
Capital lease obligations, net of current portion 182,937 172,619 167,233 167,233
Mandatorily convertible debt 310,975 362,838 375,537 --
------------ ------------ ------------ ------------
Total liabilities 2,551,983 2,483,434 2,514,097 2,138,560
------------ ------------ ------------ ------------
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 and March 31, 2000 and
2001, and 54,673,318 issued and outstanding pro forma 531,086 531,086 531,086 531,086
Class B common stock, $0.01 par value, 250,000,000
shares authorized; 48,527,054 shares issued and
outstanding at December 31, 2001, 56,640,726 issued
and outstanding March 31, 2002 and pro forma -- 485,270 566,407 566,407
Additional paid-in capital 8,846,452 14,213,637 15,321,073 15,774,847
Warrants 126,732 547,994 732,507 732,507
Common stock subscriptions receivable -- (4,500) -- --
Accumulated deficit (9,930,140) (14,286,395) (15,347,727) (15,441,611)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit) (425,870) 1,487,092 1,803,346 2,178,883
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,126,113 $ 3,970,531 $ 4,317,443 $ 4,317,443
============ ============ ============ ============
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 FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------- ----------------------------
2000 2001 2001 2002
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues
Information Sales - CD Rom $ 490,480 $ 268,701 $ 90,556 $ 66,494
Information Sales - Online 98,632 752,109 129,009 281,661
Engineering Services -- 388,187 -- --
------------ ------------ ------------ ------------
Total revenues 589,112 1,408,997 219,565 348,155
------------ ------------ ------------ ------------
Costs and expenses:
Costs of revenues
CD Rom 169,782 96,561 22,871 26,173
Online 1,293,297 986,240 236,277 190,983
Engineering -- 49,347 -- --
Selling and marketing 1,010,621 799,486 188,280 274,980
General and administrative 3,439,251 3,317,128 535,167 903,581
------------ ------------ ------------ ------------
Total operating expenses 5,912,951 5,248,762 982,595 1,395,717
------------ ------------ ------------ ------------
Operating loss (5,323,839) (3,839,765) (763,030) (1,047,562)
Other income (expense):
Interest income 19,605 67,768 6 16,426
Interest expense (43,110) (590,970) (321,390) (34,744)
Loss on investment (500,000) -- -- --
Other income 13,902 6,712 1,878 4,548
------------ ------------ ------------ ------------
Net loss $ (5,833,442) $ (4,356,255) $ (1,082,536) $ (1,061,332)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.11) $ (0.04) $ (0.02) $ (0.01)
Shares used in computing basic and
diluted net loss per share 51,916,934 99,613,673 53,108,580 108,397,027
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CLASS A CLASS B TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL COMMON STOCK STOCKHOLDERS'
------------------------ --------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS RECEIVABLE DEFICIT (DEFICIT)
----------- ----------- -------- ----------- -------- --------- ------------ ----------- -----------
Balance at December 31,
1999 49,681,080 $ 496,811 $ 5,669,855 $(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 3,422,500 34,225 3,175,647 3,209,872
Issuance of common stock
upon exercise of stock
options at $0.20 per
share 5,000 50 950 1,000
Issuance of warrants to
purchase common stock
in exchange for
services $ 126,732 126,732
Net loss (5,833,442) (5,833,442)
---------- ----------- ----------- -------- ----------- -------- --------- ------------ -----------
Balance at December 31,
2000 53,108,580 531,086 8,846,452 126,732 -- (9,930,140) (425,870)
Issuance of detachable
warrants to purchase
common stock in
conjunction with
convertible debt 126,541 126,541
Issuance of options and
warrants to purchase
common stock in
exchange for services 101,488 101,488
Beneficial conversion
feature on
convertible debt 293,912 293,912
Issuance of common
stock at $0.10 per
share, net of issuance
costs of $1,750 30,209,121 $302,091 2,717,071 (4,500) 3,014,662
Issuance of common
stock in exchange for
services 75,000 750 6,750 7,500
Issuance of common stock
at $0.15 per share,
net of issuance costs
of $22,558 12,307,836 123,078 1,700,472 1,823,550
Issuance of warrants to
purchase common stock
in exchange for
services 294,721 294,721
Exchange of convertible
notes payable to
related party plus
accrued interest at
$0.075 per share 2,996,000 29,960 269,640 299,600
Exchange of convertible
notes payable plus
accrued interest at
$0.10 per share 2,672,430 26,724 240,519 267,243
Exchange of convertible
notes payable plus
accrued interest at
$0.15 per share 266,667 2,667 37,333 40,000
Net loss (4,356,255) (4,356,255)
---------- ----------- ----------- -------- ----------- -------- --------- ------------ -----------
Balance at December 31,
2001 53,108,580 531,086 48,527,054 485,270 14,213,637 547,994 (4,500) (14,286,395) 1,487,092
Payment of stock
subscription receivable 4,500 4,500
Issuance of common
stock at $0.15 per
share, net of issuance
costs of $22,558 8,113,672 81,137 1,107,436 1,188,573
Issuance of warrants to
purchase common stock
in exchange for services 184,513 184,513
Net loss three months
ended March 31, 2002 (1,061,332) (1,061,332)
---------- ----------- ----------- -------- ----------- -------- --------- ------------ -----------
Balance at March 31,
2002 (unaudited) 53,108,580 $ 531,086 56,640,726 $566,407 $15,321,073 $732,507 -- $(15,347,727) $ 1,803,346
========== =========== =========== ======== =========== ======== ========= ============ ===========
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 FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- ---------------------------
2000 2001 2001 2002
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED)
Net loss $ (5,833,442) $ (4,356,255) $ (1,082,536) $ (1,061,333)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of property and equipment 318,797 421,542 99,993 117,387
Provision for doubtful accounts 41,587 -- (6,225) 6,689
Interest on convertible debt converted into common stock -- 26,943 -- --
Interest expense related to warrants issued with convertible debt -- 126,541 33,351 --
Interest expense related to beneficial conversion features -- 293,912 262,242 --
Interest expense recorded on mandatorily convertible debt 4,975 45,863 11,031 12,699
Loss on disposal of property and equipment 6,610 4,940 -- --
Amortization of notes receivable from related parties 123,611 133,333 33,333 33,333
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 21,857 184,513
Loss on investment 500,000 -- -- --
Changes in assets and liabilities:
Accounts receivable (34,052) (62,431) (31,336) (57,802)
Prepaid expenses and other assets (82,923) (111,924) 8,177 (240,501)
Accounts payable 633,148 (165,246) 215,458 32,769
Accrued expenses 256,236 141,317 55,543 (61,269)
Notes receivable - related parties (400,000) -- -- --
Deferred revenue 46,396 (49,189) (35,083) 34,395
Security deposits (57,887) (15,847) (1,968) 50,238
------------ ------------ ------------ ------------
Net cash used in operating activities (4,350,212) (3,087,892) (416,163) (948,881)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of note receivable -- (1,000,000) -- --
Proceeds form sale of portions of note receivable -- -- -- 750,000
Purchase of Short Investments -- -- -- (1,000,000)
Purchases of property and equipment (986,987) (310,167) (11,964) (112,006)
Proceeds from sale of property and equipment 3,900 12,000 45,000 --
Investment in notes receivable (500,000) -- -- --
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities (1,483,087) (1,298,167) 33,036 (362,006)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash overdraft -- (16,395) (16,395) --
Cash overdraft 16,395 -- -- --
Repayment of convertible debt -- (30,000) -- --
Proceeds from issuance of convertible debt 306,000 551,000 521,000 --
Payments of obligations under capital lease (170,547) (40,894) (62,365) (40,191)
Proceeds from issuance of common stock and collection of stock
subscriptions receivable, net of issuance costs 3,889,873 4,838,212 -- 1,193,073
------------ ------------ ------------ ------------
Net cash provided by financing activities 4,041,721 5,301,923 442,240 1,152,882
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,791,578) 915,864 59,113 (158,005)
Cash and cash equivalents, beginning of year 1,791,578 -- -- 915,864
------------ ------------ ------------ ------------
Cash and cash equivalents, end of year $ -- $ 915,864 $ 59,113 $ 757,859
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 38,135 $ 97,711 $ 3,735 $ 22,045
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of property and equipment under capital leases $ 496,249 $ 18,460 $ 52,255
Exchange of convertible debt into common stock $ 505,000
Relative fair value of detachable warrants issued in conjunction
with convertible debt 126,541 115,537
Value ascribed to beneficial conversion features on convertible debt 293,912 262,242
Issuance of common stock for subscription receivable 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of the Company for the
three months ended March 31, 2001 and 2002 have been prepared in accordance
with accounting principles generally accepted in the United States of
America. In the opinion of management, these interim financial statements
reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position, results of operations,
and cash flows at March 31, 2002, and for the three months ended March 31,
2001 and 2002. Although the Company believes that the disclosures in these
financial statements are adequate to make the information not misleading,
certain information normally included in the footnotes prepared in
accordance with generally accepted accounting principles has been condensed
or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The results for the three months ended March 31, 2002,
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002, or any future period.
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 9) 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.
F-7
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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.
The Company considers investments with original maturities greater than
ninety days and less than one year when purchased to be short-term
investments.
NOTE RECEIVABLE
At December 31, 2001, note receivable consisted solely of a promissory note
due on May 31, 2002. On January 4, 2002, February 1 and 5, 2002, and May
14, 2002, the Company sold portions of the note receivable back to the
issuer resulting in total proceeds of $850,000. Those proceeds were
subsequently deposited in the Company's primary operating cash account. The
remaining note receivable approximates $150,000 with the remaining balance
and accumulated interest scheduled to be repaid by July 2002, under
renegotiated terms (see note 17).
CONCENTRATION OF RISK
Financial instruments that subject the Company to credit risk consist of
cash equivalents, short-term investments, accounts receivable, note
receivable, and the note receivable-related parties. The risk with respect
to cash equivalents, and short-term investments 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 an original twelve-month
maturity with payment terms for a portion of the note extended to July
2002(see above). Consequently, the carrying value of cash equivalents,
short-term investments, 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 operations. 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.
F-8
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
REVENUE RECOGNITION
The Company provides access to public information such as bankruptcies,
real estate transactions and motor vehicles and drivers' licenses. The
Company provides this information as an online service through its website
or through licenses of the information on compact disks. The Company
updates the information contained on compact disks either quarterly or
semi-annually. 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
collectibility is reasonably assured. Upon upfront purchase of an annual
supply of compact disks, the purchase price is allocated equally based on
the number of compact disks to which the customer is entitled. Deferred
revenue principally relates to undelivered compact disks.
Online customers are charged fees, which vary based on the type of
information requested. Revenue is recognized when the information requested
is downloaded, there is evidence of an arrangement, the fees are 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.
Channel partners are charged royalty fees, which vary based on the type of
information requested. Revenue is recognized when the information requested
is downloaded, there is evidence of an arrangement, the fees are fixed or
determinable, and collectibility is reasonably assured.
LocatePlus Pocket customers will be charged a monthly subscription fee
billed in arrears. Revenue is recognized on a monthly basis when there is
evidence of an arrangement, the fees are fixed or determinable, and
collectibility is reasonably assured.
COSTS OF REVENUES AND SOFTWARE DEVELOPMENT COSTS
Costs of revenues relating to CD Rom sales consist primarily of costs for
data acquisition, materials and costs associated with compilation of
compact disks, such as labor. Costs of revenues relating to online sales
consist primarily of costs for license agreements related to data
acquisition, software development and maintenance costs and costs
associated with delivery of such services that include labor and
depreciation.
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
relating to 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
F-9
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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
March 31, 2002 pursuant to our initial public offering.
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.
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, or the three months ended March 31, 2001
and 2002.
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.
F-10
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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 fiscal
2001, 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 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
F-11
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
under this arrangement will be treated as repayment of the $500,000 plus
accrued interest and the balance will be recorded as revenue (see note 17).
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:
ESTIMATED DECEMBER 31, MARCH 31,
USEFUL LIFE ---------------------- 2002
(IN YEARS) 2000 2001 (UNAUDITED)
---------- ---------- ---------- ----------
Equipment 3-5 $ 868,238 $1,091,353 $1,255,614
Vehicles 5 82,526 115,278 104,379
Software 3 127,990 152,990 152,990
Furniture and fixtures 7 382,978 388,493 388,493
Leasehold improvements 5 516,207 516,892 516,892
---------- ---------- ----------
1,977,939 2,265,006 2,418,368
Less accumulated depreciation
and amortization (434,686) (850,068) (956,556)
---------- ---------- ----------
Property and equipment, net $1,543,253 $1,414,938 $1,461,812
---------- ---------- ----------
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.
During the three months ended March 31, 2002, the Company returned to a
leasing company a vehicle with a gross book value of $10,899, and no
carrying value. The vehicle lease had been recorded as a capital lease. No
gain or loss was recorded on the transaction.
F-12
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
DECEMBER 31, MARCH 31,
------------------ 2002
2000 2001 (UNAUDITED)
-------- -------- --------
Payroll and related taxes $154,418 216,454 243,607
Sales tax 40,893 44,974 45,551
Accounting, legal and professional fees 35,000 117,625 70,000
Other 95,764 88,339 46,965
-------- -------- --------
Total $326,075 467,392 $406,123
======== ======== ========
7. LICENSE AGREEMENTS
The Company obtains 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. Payment
terms under this contract included monthly royalty payments of 25% of
revenue generated by the Company's use of licensed material, with a monthly
minimum of $10,000. 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. Non-payment was in violation of the
provisions of two of these agreements. The 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 the primary sources of data are no longer
available to the Company, management believes that it would be able to
integrate alternate sources of data without significant disruption to the
business or operations, as there are currently a number of providers of
such data.
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. 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-13
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. Had the debt been
settled in stock on December 31, 2001 assuming a conversion price of $0.16
per share, $90,709 would have been recorded as interest expense.
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.
F-14
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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-15
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).
F-16
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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. On January 31, 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 and recorded an expense of $161,026 associated with the
warrants.
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. 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 and
recorded an expense of $9,569 associated with the warrants.
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).
The fair value of the options granted in 2001 to purchase shares of Class A
Voting Common Stock 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.
The fair value of the warrants granted in 2001 and 2002 to purchase shares
of Class B Non-voting Common Stock 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 B Voting Common Stock value of $0.15
per share.
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.
F-17
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
Future minimum payments under non-cancelable 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 (see note 7) under
which the Company is required to make minimum payments as follows:
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
F-18
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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
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.
F-19
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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 $1,188,573, net of issuance costs of $22,558.
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
F-20
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
expense of $90,945 and $242,450, respectively, associated with these
options and warrants.
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).
The fair value of the options and warrants to purchase shares of Class A
Voting Common Stock 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.
The fair value of the warrants to purchase shares of Class B. Non-voting
Common Stock 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 B Voting Common Stock value of $0.15 per share.
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. The
following table presents activity under the Plan for the years ended
December 31, 2000 and 2001:
F-21
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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-22
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.
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 THREE MONTHS
DECEMBER 31, ENDED
---------------------------- MARCH 31,
Historical: 2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
Net loss $ (5,833,442) $ (4,356,255) $ (1,061,332)
Weighted average of common shares used in
net loss per share - basic and diluted 51,916,934 99,613,673 108,397,027
Net loss per share - basic and diluted $ (0.11) $ (0.04) $ (0.01)
Pro forma (unaudited)
Historical net loss $ (4,356,255) $ (1,061,332)
Interest on mandatorily convertible debt 45,863 12,699
------------ ------------
Pro forma net loss $ (4,310,392) $ (1,048,633)
============ ============
Weighted average number of common shares 99,613,673 108,397,027
Weighted average number of common shares upon
conversion of mandatorily convertible debt 1,300,000 1,300,000
------------ ------------
Total weighted average number of common
shares used in computing pro forma net loss
per share 100,913,673 109,697,027
============ ============
Pro forma net loss per share -
basic and diluted $ (0.04) $ (0.01)
F-23
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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 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 CD ROM segment provides information on motor vehicles and
drivers' licenses, contained on compact disks. The online 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, or assets and liabilities relate to the CD ROM segment.
FOR THE YEAR ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -----------------------
2000 2001 2001 2002
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Information sales:
CD Rom $ 490,480 $ 268,701 $ 90,556 $ 66,494
Online 98,632 752,109 129,009 281,661
---------- ---------- ---------- ----------
Total information sales 589,112 1,020,810 219,565 348,155
========== ========== ========== ==========
Costs of revenues:
CD Rom 169,782 96,561 22,871 26,173
Online 1,293,297 986,240 236,277 190,983
---------- ---------- ---------- ----------
Total costs of information sales $1,463,079 $1,082,801 $ 259,148 $ 217,156
========== ========== ========== ==========
17. SUBSEQUENT EVENTS (UNAUDITED)
As of March 31, 2002, payments of $6,171 have been received under the
IntelliCorp agreement, of which $2,057 repayment has been recorded as other
income. (see Note 4).
On May 1, 2002, payment terms of a note receivable were renegotiated. The
original terms called for repayment by May. The repayment terms were
extended to require the note to be repaid by July 2002. The remaining
principal balance is $150,000.
On May 22, 2002 the Company received $190,000 by issuing subordinated
promissory notes with simple interest at 10% per annum. The terms of the
notes require repayment on June 1, 2003.
F-24
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
On June 4, 2002, the Company raised $745,400, net of issuance costs of
$4,600, from Gemstone Investment Company by issuing a promissory note
secured by the assets of the Company and a personal guarantee by the
Company's Chief Executive Officer including a pledge of 5 million shares of
the Chief Executive Officer's LocatePlus Holdings Corporation Class A
Voting common stock and other assets. The terms of the note require
repayment by the earlier of September 3, 2002 or two business days after
the closing of the Company's initial public offering. If the note is paid
in full by July 3, 2002, the Company will pay $50,000 in interest and if
paid after July 3, 2002, the Company will pay $100,000 in interest.
F-25
TABLE OF CONTENTS PHC
----------------- LOCATEPLUS HOLDINGS CORPORATION
[LOGO]
Prospectus Summary........................1
Risk Factors..............................4
Forward-Looking Statements................12
Use of Proceeds...........................13
Determination of Offering Price...........13 Please read this
Dividend Policy...........................13 prospectus carefully. It
Capitalization............................14 describes our business,
Selected Consolidated Financial Data......15 products and services,
Management's Discussion and and financial condition
Analysis of Financial Condition and results of
and Results of Operations.................17 operations.
Business..................................25
Executive Officers and Directors..........31 We have prepared this
Organization Within the Past Five Years...37 prospectus so that you
Certain Transactions......................38 will have the information
Principal Stockholders....................42 necessary to make an
Description of Capital Stock..............44 informed investment
Plan of Distribution......................47 decision. You should rely
Shares Eligible for Future Sale...........49 only on the information
Transfer Agent and Registrar..............49 contained in this
Legal Matters.............................50 prospectus. The
Experts...................................50 information contained in
Additional Information....................50 this prospectus is
Index to Financial Statements............F-1 accurate only as of its
date, regardless of the
* * * time this prospectus is
delivered or that the
UNTIL [90 DAYS FROM THE DATE OF Units are sold.
EFFECTIVENESS], ALL DEALERS EFFECTING
TRANSACTIONS IN THESE SECURITIES MAY BE Our selling security
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN owners are offering to
ADDITION TO THE OBLIGATIONS OF DEALERS TO sell our securities and
DELIVER A PROSPECTUS WHEN ACTING AS seeking offers to buy our
UNDERWRITERS. securities only in
jurisdictions where such
offers and sales are
permitted.
PART I
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.................... $ [___]
Legal fees and expenses................. 40,000
Accounting fees and expenses............ 55,000
Miscellaneous........................... 24,000
------
Total................................... $[____]
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 but non-accredited investors in
this offering. 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 were exempt from registration under the
Securities Act under Rules 701 and 506 promulgated under the Securities Act.
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
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.
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 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 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 Rule 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 that security was exempt from registration under the Securities Act under the
provisions of 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 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 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.
At various times from November 17, 2000 to March 12, 2002, the Registrant
issued warrants to purchase an aggregate of 537,902 shares of Class A Voting
Common Stock to 11 accredited consultants and members of the Registrant's
Advisory Board in consideration for services rendered. The offer and sale of
these securities were exempt from registration under the Securities Act under
the provisions of Rule 506 and 508 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, but a Form D was not filed in a timely manner.
From August 2001 to April 2002, the Registrant issued warrants to purchase
an aggregate of 3,272,455 shares of Class B Non-Voting Common Stock to 17
accredited consultants and members of the Registrant's Advisory Board in
consideration for services rendered. The offer and sale of these securities
were exempt from registration under the Securities Act under the provisions of
Rule 506 and 508 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,
but a Form D was not filed in a timely manner.
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 under
the provisions of 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.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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.**
4.11 Amended form of Warrant Certificate.**
4.12 Amended and Restated Warrant and Unit Agreement by and between
LocatePLUS Holdings Corporation and Transfer Online, Inc., dated
June 20, 2002.**
5.2 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.**
10.8 $750,000 Loan Agreement between LocatePLUS Holdings Corporation and
Gemstone Investment Company, Inc., dated June 4, 2002.**
10.9 Security Agreement between LocatePLUS Holdings Corporation and
Gemstone Investment Company, Inc., dated June 4, 2002.**
10.10 Pledge Agreement between Jon R. Latorella and Gemstone Investment
Company, Inc., dated June 4, 2002.**
10.11 Mortgage between Jon R. Latorella and Gemstone Investment Company,
Inc., dated June 4, 2002.**
10.12 Guaranty Agreement, between Jon R. Latorella and Gemstone Investment
Company, Inc., dated June 4, 2002.**
10.13 $175,000 Ten Year Term Promissory Note, made by Jon R. Latorella,
dated January 3, 2000.**
10.14 $100,000 Ten Year Term Promissory Note, made by Jon R. Latorella,
dated January 3, 2000.**
10.15 $125,000 Ten Year Term Promissory Note, made by Robert A. Goddard,
dated January 3, 2000.**
10.16 $750,000 Promissory Note, made by LocatePLUS Holdings Corporation,
dated June 4, 2002.**
21.1 Subsidiaries of LocatePLUS Holdings Corporation.*
23.3 Consent of Kirkpatrick & Lockhart LLP.***
23.4 Consent of PricewaterhouseCoopers LLP.***
* Filed with the Commission on Form SB-2, filed on March 28, 2002.
** Filed with the Commission on Form SB-2/A, filed on June 21, 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 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 a 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.
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 July 5, 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 Holdings Corporation 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 July 5, 2002
- --------------------- and Chief Executive Officer
Jon R. Latorella
/s/ Robert A. Goddard Chief Financial Officer, July 5, 2002
- --------------------- Treasurer and Secretary
Robert A. Goddard (Chief Accounting Officer)
/s/ Sonia P. Bejjani Director, July 5, 2002
- --------------------- President, Worldwide Information, Inc.
Sonia P. Bejjani
/s/ John P. Houlihan Director July 5, 2002
- ---------------------
John P. Houlihan
/s/ Thomas W. Garlock Director July 5, 2002
- ---------------------
Thomas W. Garlock
/s/ Gerard Scalley Director July 5, 2002
- ---------------------
Gerard Scalley
/s/ Richard B. Yules Director July 5, 2002
- ---------------------
Richard B. Yules