[LOGO] MAXIMUM OF 12,000,000 UNITS
LOCATEPLUS HOLDINGS CORPORATION MINIMUM OF 6,000,000 UNITS
$0.30 PER UNIT
We are offering for sale up to 12,000,000 Units. Each Unit consists of one
share of our Class B Non-voting Common Stock and a three-year redeemable warrant
to purchase one share of our Class A Voting Common Stock for $0.50, which we
refer to as a "Class A Redeemable Warrant."
OUR CLASS B NON-VOTING COMMON STOCK DOES NOT HAVE ANY VOTING RIGHTS ON
MATTERS PRESENTED FOR APPROVAL BY OUR STOCKHOLDERS, BUT IS OTHERWISE IDENTICAL
TO OUR CLASS A VOTING COMMON STOCK.
---------------------
INVESTING IN THESE UNITS INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY
REVIEW THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS", WHICH BEGINS ON
PAGE 5, BEFORE YOU MAKE AN INVESTMENT DECISION. NO PUBLIC MARKET EXISTS FOR ANY
OF OUR SECURITIES, INCLUDING THESE UNITS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
AUTHORITY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR THEIR OFFER OR
SALE, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Our underwriter will sell our Units on a minimum/maximum "best efforts"
basis and will receive a commission with respect to those sales. This offering
will end on October 11, 2002. Our underwriter has informed us that any sales of
Units will be made pursuant to a subscription agreement. Subscriptions for our
Units will be deposited into escrow with American Pacific Bank through our
transfer agent, Transfer Online, Inc., until a minimum of $1,800,000 of
subscriptions have been received. In the event that we do not receive a minimum
of $1,800,000 of subscriptions by October 11, 2002, escrowed funds will be
promptly returned to subscribers without interest or deduction. In the event
that a minimum of $1,800,000 in subscriptions is received by American Pacific
Bank by October 11, 2002, we will close on those funds and promptly issue the
Units in one or more closings.
==================================== ========================== ================================= ===================
PUBLIC OFFERING PRICE UNDERWRITING COMMISSIONS PROCEEDS TO US(1)
- ------------------------------------ -------------------------- --------------------------------- -------------------
Per Unit........................... $0.30 $0.021 $0.279
- ------------------------------------ -------------------------- --------------------------------- -------------------
Total if minimum sold.............. $1,800,000 $126,000 $1,674,000
- ------------------------------------ -------------------------- --------------------------------- -------------------
Total if maximum sold.............. $3,600,000 $252,000 $3,348,000
==================================== ========================== ================================= ===================
(1) Before filing fees, legal and accounting fees and expenses, and
miscellaneous expenses of approximately $160,000.
OFTRING & COMPANY, INC.
This prospectus is dated August 12, 2002.
NOTICE TO RESIDENTS OF THE STATE OF CALIFORNIA
Because of our current unprofitability and certain restrictions imposed on
us by California securities laws and regulations, each purchaser of Units in
California, and each transferee thereof, must meet, along with their spouses,
one of the following suitability standards: (I) a net worth (excluding home,
furnishings and automobiles) of $250,000 or more and gross annual income during
2001 and estimated during 2002 of $65,000 from all sources; or (II) a net worth
(excluding home, furnishings and automobiles) of $500,000 or more; or (III) a
net worth (inclusive of home, furnishings and automobiles) of $1,000,000 or
more; or (IV) gross annual income during 2001 and estimated during 2002 of
$200,000 or more from all sources. Each California resident purchasing
securities hereby will be deemed to represent that he, she or it comes within
one of the aforementioned categories and that it will not sell or otherwise
transfer any of such securities to a California resident unless the transferee
comes within one of the aforementioned categories and that he, she or it will
advise the transferee of this condition which transferee, becoming such, will be
deemed to be bound by the same restrictions on resale.
NOTICE TO RESIDENTS OF THE STATE OF NEW HAMPSHIRE
Because of certain restrictions imposed by New Hampshire securities laws
and regulations, each purchaser of Units must meet the following suitability
standards: (i) a minimum annual taxable income of $50,000 and a minimum net
worth (excluding home, home furnishings and automobiles) of $125,000; or (ii) a
minimum net worth (excluding home, home furnishings and automobiles) of
$250,000. Each New Hampshire resident must execute a subscription agreement that
includes a representation that he, she or it comes within one of the
aforementioned categories prior to purchasing any of our Units.
NOTICE TO RESIDENTS OF THE COMMONWEALTH OF VIRGINIA
Because of certain restrictions imposed by Virginia securities laws and
regulations, each purchaser of Units in Virginia must meet, one of the following
suitability standards: (i) a net worth (inclusive of home, furnishings and
automobiles) of $1,000,000 or more; or (ii) gross annual income during each of
2001 and 2000 and estimated during 2002 of $200,000 or more from all sources.
Each Virginia resident must execute a subscription agreement that includes a
representation that he, she or it comes within one of the aforementioned
categories prior to purchasing any of our Units.
NOTICE TO RESIDENTS OF THE STATE OF WASHINGTON
Because of certain restrictions imposed by Washington securities laws and
regulations, each purchaser of Units must meet the following suitability
standards: (i) a minimum annual gross income of $65,000 and a minimum net worth
(excluding house, home furnishings and automobiles) of $65,000; or (ii) a
minimum net worth (excluding house, home furnishings and automobiles) of
$150,000. Each Washington resident purchasing securities hereby will be deemed
to represent that he, she or it comes within the aforementioned categories.
TABLE OF CONTENTS
-----------------
PAGE
----
Prospectus Summary..........................................................1
Risk Factors................................................................5
Forward-Looking Statements..................................................14
Use of Proceeds.............................................................15
Determination of Offering Price.............................................15
Dividend Policy.............................................................16
Capitalization..............................................................17
Dilution....................................................................18
Selected Consolidated Financial Data........................................19
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................21
Business....................................................................30
Executive Officers and Directors............................................36
Organization Within the Past Five Years.....................................42
Certain Transactions........................................................44
Principal Stockholders......................................................48
Description of Capital Stock................................................50
Plan of Distribution........................................................53
Shares Eligible for Future Sale.............................................54
Transfer Agent and Registrar................................................55
Legal Matters...............................................................55
Experts.....................................................................55
Additional Information......................................................55
Index to Financial Statements...............................................F-1
* * *
Until November 11, 2002, 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 UNITS).
OUR COMPANY
-----------
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions.
Since 1996, we have sold a CD-ROM-based product, which we refer to as
Worldwide Information(TM), that enables 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 Pocket(TM). We are currently testing a pre-production or "beta"
version of LocatePLUS Pocket(TM), and we anticipate that the commercial launch
of LocatePLUS Pocket(TM) will take place in 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
Information(TM) CD-ROM product.
HOW TO CONTACT US
-----------------
Our executive offices are located at 100 Cummings Center, Suite 235M,
Beverly, Massachusetts 01915. Our phone number is (978) 921-2727. Our website is
HTTP://WWW.LOCATEPLUS.COM. Information on our website is not intended to be
incorporated into this prospectus.
1
THE OFFERING
------------
SECURITIES OFFERED... 12,000,000 Units for $0.30 per Unit.
Each Unit consists of one share of our Class B Non-voting
Common Stock and a Class A Redeemable Warrant to purchase
one share of our Class A Voting Common Stock for $0.50.
The Class A Redeemable Warrant will be exercisable for a
period of three years from the date of the consummation
of this offering. The Units will trade as a single
security, and each Class A Redeemable Warrant will not
detach from the share of Class B Non-voting Common Stock
to which it is attached, until 30 days from the date of
consummation of this offering (unless the Class A
Redeemable Warrant is exercised, in which case the Class
B Non-voting Common Stock and Class A Voting Common Stock
so purchased will trade separately upon exercise). We may
repurchase the Class A Redeemable Warrants for $0.001 per
warrant upon 30 days' notice to the holders of the Class
A Redeemable 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.
The Units are described in further detail in the section
of this prospectus titled "Description of Capital Stock",
beginning on page 50.
USE OF PROCEEDS...... The proceeds from this offering will be used to repay
certain debt to Gemstone Investment Company, Inc.,
acquire additional datasets, enhance our LocatePLUS(TM)
product, launch our LocatePLUS(TM) Pocket product,
acquire customers (through advertisements and attendance
at trade shows and through an increase in our sales
force) and for payroll (including executive compensation)
and working capital. A summary of our intended use of the
proceeds of this offering is set forth in the section of
this prospectus titled "Use of Proceeds", beginning on
page 15.
INVESTMENT........... We are offering Units on a "best efforts" minimum/maximum
basis through our underwriter. Our underwriter has
informed us that any sales of Units will be made pursuant
to a subscription agreement.
Subscriptions for our Units will be deposited into escrow
with American Pacific Bank through our transfer agent,
Transfer Online, Inc., until a minimum of $1,800,000 of
subscriptions have been received.
In the event that we do not receive a minimum of
$1,800,000 of subscriptions by October 11, 2002, escrowed
funds will be promptly returned to subscribers without
interest or deduction.
In the event that a minimum of $1,800,000 in
subscriptions is received by American Pacific Bank by
October 11, 2002, we will close on those funds and
promptly issue the Units in one or more closings. For
more information on the process of investing, you should
review the section of this prospectus titled "Plan of
Distribution", beginning on page 53.
Our officers, directors and principal shareholders have
agreed not to purchase any of the Units offered pursuant
to this prospectus.
2
OUR CAPITAL STRUCTURE AND 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, within 10 days of the effectiveness of the
Registration Statement to which this prospectus is a part, either through our
planned registration of those securities in separate registration statements or
through the provisions of the Securities and Exchange Commission's Rule 144(k).
On July 5, 2002, we filed a registration statement with the Securities and
Exchange Commission (Registration No. 333-92026) covering 2,725,078 shares of
Class A Voting Common Stock (including 1,655,395 shares underlying convertible
securities which will convert into shares of Class A Voting Common Stock upon
the consummation of this offering, assuming this offering is consummated by
August 31, 2002), and 60,413,818 shares of Class B Non-voting Common Stock
(including shares underlying warrants to purchase 3,772,455 shares of Class B
Non-voting Common Stock). A copy of that second registration statement will be
made available upon request to us, without cost, to subscribers or potential
subscribers. We anticipate that we will seek effectiveness of that registration
statement no earlier than ten (10) days following the consummation of this
offering. For more information on this matter, you should review the section of
this prospectus titled "Shares Eligible for Future Sale", beginning on page 54
of this prospectus.
The following table outlines our capital stock immediately following the
consummation of this offering, assuming the maximum number of Units are sold in
this offering:
Units offered for sale................................... 12,000,000
Class A Voting Common Stock outstanding after
this offering............................................ 54,763,975(1)(2)
Class B Non-voting Common Stock outstanding
after this offering...................................... 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 this
offering (assuming that this offering is consummated on August 31, 2002).
(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 Class A Redeemable Warrants offered
hereby);
o options to purchase up to 14,995,000 shares of Class A Voting Common
Stock under our equity compensation plan; or
o debt convertible into 44,444 shares of Class A Voting Common Stock at
the election of one debtholder.
(3) Assuming no exercise or conversion of warrants and options to purchase
3,772,455 shares of Class B Non-voting Common Stock.
IMPORTANT NOTES CONCERNING OUR FINANCIAL CONDITION
--------------------------------------------------
Subscribers in this offering should make particular note of the following:
o 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 this
offering (of which we can give no assurance), the proceeds from this
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
3
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 21.
o 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 guaranty by our Chief Executive Officer
(including a pledge of five million shares of our Class A Voting Common
Stock held by Mr. Latorella and a mortgage of certain of his other personal
assets). This loan was entered into as part of a mezzanine or "bridge"
financing, which we intend to repay using the proceeds from this offering.
The terms of this loan call for its repayment by the earlier of September
3, 2002 or two business days after the closing of our initial public
offering. The loan arrangement provides that we will pay $100,000 in
interest (in addition to repayment of principal). Additionally, if we were
to be in default under this loan arrangement, Gemstone has the right to
foreclose on our assets to satisfy our obligations to Gemstone. Any such
foreclosure would materially disrupt our business and could cause investors
to lose all or a portion of their investment.
***
4
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 assurance 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 (such as our LocatePLUS(TM)Pocket),
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.
GEMSTONE INVESTMENT COMPANY, INC. HAS A LIEN ON ALL OF OUR ASSETS (AND A
PERSONAL GUARANTY BY OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, MR. JON R.
LATORELLA) THAT WAS GRANTED IN CONNECTION WITH A $750,000 LOAN TO US BY
GEMSTONE. IN THE EVENT THAT WE WERE TO DEFAULT UNDER THIS LOAN, GEMSTONE COULD
FORECLOSE UPON OUR ASSETS. ANY SUCH FORECLOSURE WOULD SIGNIFICANTLY DISRUPT OUR
BUSINESS AND MAY RESULT IN A LOSS OF INVESTMENT BY PURCHASERS IN THIS OFFERING.
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 guaranty by our Chief Executive Officer
(including a pledge of five million shares of our Class A Voting Common Stock
held by Mr. Latorella 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 our initial public offering. The
loan arrangement requires us to pay $100,000 in interest (in addition to
repayment of principal). We intend to repay this loan and the accrued interest
using the proceeds from this offering. However, if we were to be in default
under this loan arrangement, Gemstone has the right to foreclose on our assets
to satisfy our obligations to Gemstone. Any such foreclosure would materially
disrupt our business and could cause investors to lose all or a portion of their
investment.
5
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. Two of our data providers may terminate our right to
use their data in their sole discretion and without any recourse to us. One of
our data providers currently provides data to us pursuant to an informal
arrangement. Another of our data providers is currently providing data to us
pursuant to an agreement which expired in July 2002, and we can give no
assurance that we will be able to extend the term of that agreement or enter
into a new agreement with that provider. If our access to certain data sources
is restricted, 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
August 31, 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.
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
6
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 and our financial condition would 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.
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.
7
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 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 commercially available encryption software and other
technologies to provide system security and to effect secure transmission of
confidential information, such as credit card numbers. 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.
8
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
21.
OUR PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HAVE ADVERSE EFFECTS ON OUR
CUSTOMER RELATIONS AND FINANCIAL RESULTS.
Datasets as complex as those that we develop may contain undetected defects
or errors. For example, our products may contain unknown defects due to errors
in the data that we purchase from our data providers. Despite testing, defects
or errors may occur in our existing or new products, which could make them less
attractive to our target markets. As a result, defects and errors in our
datasets could result in loss of revenue or market share, failure to achieve
market acceptance, diversion of development resources, injury to our reputation
and an adverse effect on our business, financial condition and results of
operation.
DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS 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 industry 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.
9
CERTAIN OF OUR OFFICERS WILL PERSONALLY BENEFIT FROM THE USE OF THE PROCEEDS OF
THIS OFFERING.
Part of the proceeds of this offering will be used to pay compensation to
our employees, including compensation paid to our executive management. We have
outlined our currently anticipated use of the proceeds of this offering in the
section of this prospectus titled "Use of Proceeds", beginning on page 15.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS; THE LOSS OF ANY OF OUR
KEY EMPLOYEES COULD DELAY OUR PLANNED GROWTH AND LIMIT OUR ABILITY TO ACHIEVE
PROFITABILITY.
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 planned growth while
we worked 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.
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.
10
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.
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES
-----------------------------------------------------
THE INITIAL PUBLIC OFFERING PRICE OF OUR UNITS MAY NOT ACCURATELY REFLECT THEIR
FUTURE MARKET PERFORMANCE.
We unilaterally determined the initial public offering price of the Units.
This offering price may not be indicative of future value or market performance
and may bear no relationship to the price at which our Units, or the underlying
Class B Non-voting Common Stock or Class A Redeemable Warrants, will trade (if
our securities are traded at all).
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 CLASS A REDEEMABLE 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 the maximum number of Units are sold in this offering and
the Class A Redeemable 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 or less than $0.01 per
share. Although he has not informed us of any intention to do so, Mr. Latorella
is not restricted from purchasing Units in this offering, and any such purchases
would further concentrate Mr. Latorella's ownership of our securities.
In addition to electing the Board of Directors, stockholders must approve,
among other things:
o mergers or consolidations;
11
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
IMMEDIATELY AFTER OR SHORTLY FOLLOWING THIS OFFERING. SALES OF THESE SECURITIES
COULD CAUSE THE PRICE OF OUR SECURITIES, IF PUBLICLY TRADED, TO DECLINE.
Sales of a large number of shares of our securities in the public markets
after this offering, or the potential for such sales, could decrease the trading
price of our securities and could impair our ability to raise capital through
future sales of our securities. Immediately following the consummation of this
offering, and assuming no exercise of warrants, options or other convertible
securities, we will have 54,763,975 shares of Class A Voting Common Stock issued
and outstanding (including 1,655,395 shares which will be issued upon the
conversion of certain debt and accrued interest upon the consummation of this
offering, assuming that this offering is consummated on August 31, 2002) 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 within 60 days after the consummation of this offering, either as a
result of the Securities and Exchange Commission's Rule 144(k) or as a result of
our planned registrations of those issued and outstanding securities through
separate resale registration statements. For more information on this matter,
you should review the section of this prospectus titled "Shares Eligible for
Future Sale", beginning on page 54.
IN ADDITION TO THE CLASS A REDEEMABLE WARRANTS THAT WE ARE OFFERING AS PART OF
THE UNITS, 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.
After completion of this offering and assuming it is fully subscribed,
there will be 13,025,239 shares of Class A Voting Common Stock issuable upon the
exercise of warrants (consisting of 12,000,000 Class A Redeemable Warrants and
1,025,239 restricted warrants). We will 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. After completion of
this offering, there will also be 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 value of the interests of our other security holders. Our
ability to obtain additional financing during the period these convertible
securities are
12
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 of the outstanding 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.
YOU MAY NOT BE ABLE TO EXERCISE YOUR CLASS A REDEEMABLE WARRANTS IF WE DO NOT
MAINTAIN AN EFFECTIVE FEDERAL REGISTRATION STATEMENT AND OBTAIN AND MAINTAIN
APPROPRIATE STATE REGISTRATIONS OR QUALIFICATIONS.
We are required to use commercially reasonable efforts to maintain a
registration statement relating to the offer and sale of the Class A Voting
Common Stock underlying the Class A Redeemable Warrants, and to register or
otherwise qualify these Class A Redeemable Warrants and the underlying Class A
Voting Common Stock for sale in jurisdictions in which their holders reside
unless an exemption from such registration or qualification is available. If
such registration is not obtained and maintained, the holders of the Class A
Redeemable Warrants included in the Units may not be able to exercise them.
THERE HAS NEVER BEEN A MARKET FOR OUR SECURITIES, AND WE CANNOT GUARANTEE THAT A
MARKET FOR OUR SECURITIES WILL DEVELOP.
There has been no public market for our securities and there can be no
assurance that a public trading market for our securities will develop or, if
developed, will be sustained. We have entered into preliminary discussions with
a prospective market maker for quotation of our securities on the Over the
Counter Bulletin Board (which we refer to as the "OTC Bulletin Board"), but we
can 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.
13
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.
14
USE OF PROCEEDS
Assuming that we sell all of the Units that we are offering, we anticipate
that we will receive net cash proceeds of approximately $3,188,000 after
deduction of underwriting commissions, fees and offering expenses of
approximately $412,000. In the event that the minimum number of Units is sold
under this offering, we will receive net proceeds of approximately $1,514,000
after deduction of underwriting commissions, fees and offering expenses of
approximately $286,000.
We anticipate that we will use the proceeds of this offering primarily to
repay outstanding debt, and to acquire additional datasets, enhance our
LocatePLUS(TM) product, launch our LocatePLUS Pocket(TM) product, acquire
customers (such as through advertisement and attendance at trade shows and
through increases in our sales force), and for payroll and working capital.
The table below outlines our projected uses of the proceeds of this
offering in the order of our priority of such uses, both in cash amounts and as
a percentage of the funds that may be raised through this offering.
ASSUMING MINIMUM(1) ASSUMING MAXIMUM(2)
------------------- -------------------
Repayment of debt to Gemstone(3).......... $ 850,000 56% $ 850,000 26%
Launch of LocatePLUS Pocket(TM)........... $ 150,000 10% $ 150,000 5%
Increases in payroll costs
including compensation for
executive management...................... $ 200,000 13% $ 250,000 8%
Acquisition of additional datasets........ - 0% $ 640,000 20%
Customer acquisition and marketing........ $ 250,000 17% $ 925,000 29%
Working capital........................... $ 64,000 4% $ 373,000 12%
---------- --- ---------- ---
Total....................... $1,514,000 100% $3,188,000 100%
(1) Assumes 6,000,000 Units are sold in this offering.
(2) Assumes 12,000,000 Units are sold in this offering.
(3) 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 five 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 our initial public offering. The loan arrangement provides
that we will pay $100,000 in interest, which represents an effective annual
rate of interest of approximately 53% (in addition to repayment of
principal) assuming repayment on September 3, 2002.
(4) Including data sets relating to additional credit header files, multi-state
motor vehicle information, phone number, supplementary address files, and
criminal records.
DETERMINATION OF OFFERING PRICE
Since none of our securities are listed or quoted on any exchange or
quotation system and since our underwriter is selling shares on a "best efforts"
basis, the offering price of our Units was unilaterally determined solely by our
Board of Directors.
15
The facts we considered in determining that offering price were:
o our financial condition and prospects;
o our limited operating history;
o the general condition of the securities market;
o our underwriter's informal prediction of demand for securities such as
the Units; and
o recent sales of our securities in private placements.
The offering price is not an indication of and is not based upon the actual
value of the Company. The offering price bears no relationship to our book
value, assets or earnings or any other recognized criteria of value. The
offering price should not be regarded as an indicator of the future market price
of our securities.
DIVIDEND POLICY
We have never declared or paid a cash dividend. At this time, we do not
anticipate paying dividends in the future. We are under no legal or contractual
obligation to declare or to pay dividends, and the timing and amount of any
future cash dividends and distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business and to fund future growth. You should not purchase our
Units on the expectation of future dividends.
16
CAPITALIZATION
The table below sets forth our capitalization as of March 31, 2002, on an
actual basis and on a PRO FORMA, as adjusted, 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, the
issuance of 6,000,000 Units (the minimum that may be sold by us in this
offering) and the issuance of 12,000,000 Units (the maximum number that may be
sold by us in this offering) 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 21
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
------ -----------
(ASSUMES MINIMUM) (ASSUMES MAXIMUM)
DEBT:
Current portion of convertible debt
and capital lease obligations ...... $ 167 $ 167 $ 167
======== ======== ========
Capital lease obligations, net of
current portion .................... 167 167 167
Mandatorily convertible debt ............ 376 -- --
-------- -------- --------
Total long-term debt ............... 543 167 167
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.01 per share:
Class A Voting Common Stock,
150,000,000 shares authorized;
53,108,580, 54,673,318 and
54,673,318 shares issued and
outstanding, respectively ............ 531 547 547
Class B Non-voting Common Stock,
250,000,000 shares authorized;
56,640,726, 62,640,726, and
68,640,726 shares issued and
outstanding, respectively ............ 566 626 686
Additional paid-in capital .............. 15,321 16,826 18,037
Warrants ................................ 733 1,136 1,539
Accumulated deficit ..................... (15,348) (15,442) (15,442)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY .............. 1,803 3,693 5,367
-------- -------- --------
TOTAL CAPITALIZATION .................... $ 2,513 $ 4,027 $ 5,701
======== ======== ========
17
DILUTION
ASSUMING MAXIMUM NUMBER OF UNITS SOLD
As of March 31, 2002, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
conversion of certain convertible debt and accrued interest into 1,564,736
shares of Class A Voting Common Stock and assuming the sale of 12,000,000 Units
in the offering (the maximum number of Units that we are offering for sale) at
the offering price of $0.30 per Unit, less the estimated offering expenses
including underwriting commissions, the PRO FORMA as adjusted net tangible book
value of each of the assumed outstanding shares of common stock would have been
$0.05. This would have resulted in dilution of $0.25 to new investors purchasing
Units in the offering. At the same time, our current stockholders would have
realized an increase in PRO FORMA net tangible book value of $0.03 after the
offering without further cost or risk to themselves.
The following table illustrates this per share dilution, assuming
12,000,000 Units are sold:
Initial public offering price, per Unit.......................... $0.30 100 %
PRO FORMA net tangible book value per share
before the initial public offering............................... $0.02 7 %
Increase in PRO FORMA as adjusted net tangible book value
per share attributable to investors in the offering.............. $0.03 10 %
PRO FORMA as adjusted net tangible book value per share
after the offering............................................... $0.05 17 %
Dilution per share to new investors.............................. $0.25 83 %
ASSUMING MINIMUM NUMBER OF UNITS SOLD
As of March 31, 2002, without taking into account any changes in our net
tangible book value subsequent to that date other than to give effect to the
conversion of certain convertible debt and accrued interest into 1,564,736
shares of Class A Voting Common Stock and assuming the sale of 6,000,000 Units
in the offering (the minimum number of Units that we may sell and receive any
proceeds from this offering) at the offering price of $0.30 per Unit, less the
estimated offering expenses including underwriting commissions, the PRO FORMA as
adjusted net tangible book value of each of the assumed outstanding shares of
common stock would have been $0.03. This would have resulted in dilution of
$0.27 to new investors purchasing Units in the offering. At the same time, our
current stockholders would have realized an increase in PRO FORMA net tangible
book value of $0.01 after the offering without further cost or risk to
themselves.
The following table illustrates this per share dilution, assuming 6,000,000
Units are sold:
Initial public offering price, per Unit.......................... $0.30 100 %
PRO FORMA net tangible book value per share
before the initial public offering............................... $0.02 7 %
Increase in PRO FORMA as adjusted net tangible book value
per share attributable to investors in the offering.............. $0.01 3 %
PRO FORMA as adjusted net tangible book value per share
after the offering............................................... $0.03 10 %
Dilution per share to new investors.............................. $0.27 90 %
18
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 assuming the
conversion of certain outstanding mandatorily convertible debt into common stock
as of March 31, 2002 pursuant to this offering.
These historical results are not necessarily indicative of results to be
expected for any future period. See Note 14 in the Notes to the Consolidated
Financial Statements for a description of the computation of net loss per share
and the number of shares used in the per share calculation.
19
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
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS TOGETHER WITH "SELECTED FINANCIAL
DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS BECAUSE OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE PRESENTED IN THE SECTION TITLED "RISK FACTORS" BEGINNING ON
PAGE 4 AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions. Since 1996, we have
sold a CD-ROM-based product, which we refer to as Worldwide Information(TM),
that enables users to search certain motor vehicle records and driver's license
information in multiple states through a dynamic search engine, using complete
or partial information. Since March 1, 2000, we have maintained a database that
is accessible through the Internet, known as LocatePLUS(TM). Our LocatePLUS(TM)
product contains searchable and cross-referenced public information on
individuals throughout the United States, including individuals' names,
addresses, dates of birth, Social Security numbers, prior residences, and, in
certain circumstances, real estate holdings, recorded bankruptcies, liens,
judgments, drivers' license information and motor vehicle records. We anticipate
that the majority of our future revenues will be derived from our LocatePLUS(TM)
product.
We distribute our content both directly (through the Internet in the case
of our LocatePLUS(TM) product and through the mail in the case of our Worldwide
Information(TM) CD-ROM) and through "channel partner" arrangements, by which
third-party database providers obtain access to our databases in consideration
for a royalty. We have executed one channel partner agreement to date, which was
entered into in 2001. However, that channel partnership did not generate any
revenue until January 2002 and, as of this date, revenue generated from this
channel partnership has not been material. We 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
21
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 from First American Real Estate Solutions, LLC. This
agreement expired on June 30, 2002. We are currently using data from this
provider pursuant to an informal arrangement and we are in negotiations with
respect to a new agreement relating to real property data. In July 1999, we
entered into a three-year data acquisition agreement to acquire credit file
header information from TransUnion Corporation. This agreement may be cancelled
by the data provider upon 90 days' notice, with or without cause. We are
currently in negotiations with this provider with respect to a new license
agreement relating to credit file header information. In August 1999, we entered
into a one-year data acquisition agreement to acquire bankruptcy, liens, and
judgments information from Hogan Information Services Co. 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.
Hogan may terminate this agreement at any time at its discretion by providing
notice to us. 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. Nonpayment was in violation of the provisions of the since
expired agreement with First American and the initial agreement with Hogan. As
we have entered into the November 27, 2001 agreement with Hogan and are
currently negotiating a new agreement with First American, we do not currently
anticipate that these prior defaults 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 will
mandatorily convert into 1,655,395 shares of Class A Voting Common Stock upon
the consummation of this offering (assuming that this offering is consummated on
August 31, 2002).
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. To operate
for the next twelve months, we will require an average of $150,000 per month or
$1.8 million in cash in excess of our anticipated 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.
22
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
2001
REVENUE. Revenue from our Worldwide Information(TM) 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. The number of customers increased to 6,669 at
March 31, 2002 from 2,956 at March 31, 2001, or an increase of 126%.
COSTS OF REVENUE. For the three months ended March 31, 2002, our costs
of revenue for Worldwide Information(TM) 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 reconciliation and consolidation of various 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
23
of the $500,000 plus accrued interest through January 20, 2002 and the balance
will be recorded as revenue. On full repayment of the $500,000 plus accrued
interest, the revenue sharing arrangement will change to a 50:50 basis. Interest
on the note ceased to accrue on January 21, 2002 in accordance with the
arrangement. As of that date, interest receivable of $76,280 was due but not
recorded as income. 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 Information(TM) CD-ROM product
decreased to $268,701 for the year ended December 31, 2001 from $490,480 for the
year ended December 31, 2000, a decrease of 45%. 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. The number of customers increased to 5,159 at
December 31, 2001 from 1,875 at December 31, 2000, or an increase of 175%. 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 Information(TM) was $96,561, as compared to $169,782, for
the year ended December 31, 2000, a decrease of 43%. This decrease is primarily
attributable to cost-cutting measures initiated in early 2001, including 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 as we intend 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).
We anticipate that our costs of revenue will increase in 2002 as we add
additional data sets to our product. We anticipate that if we sell more than the
minimum number of Units in this offering 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 to comply with the requirements of 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
24
attributable to approximately $130,000 in increased interest on borrowings, an
increase of approximately $127,000 in interest expense relating to warrants
issued with certain convertible debt, and an increase of approximately $294,000
in interest expense relating to the beneficial conversion features of 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 Andover Secure Resources, Inc.
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. Andover is an unaffiliated
third party leasing company. There is no business relationship between Andover
and any of our officers or directors, nor is there any affiliation between
Andover and Oftring & Company, Inc. or, to the knowledge of our management, any
5% or greater stockholder of LocatePLUS Holdings Corporation. We have extended
the payment terms of this note to permit repayment of the remaining $150,000 of
principal (plus accrued interest) by August 31, 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 five 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). Gemstone Investment Company, Inc. is an
unaffiliated third party lender that specializes in loans to start-up and early
stage businesses. There is no business relationship between Gemstone and
25
any of our officers or directors, nor is there any affiliation between Gemstone
and Oftring & Company, Inc. or, to our knowledge, any 5% or greater stockholder
of LocatePLUS Holdings Corporation. The terms of this loan call for its
repayment by the earlier of September 3, 2002 or two business days after the
closing of our initial public offering. The loan arrangement provides that we
will pay $100,000 in interest (in addition to repayment of principal) which
represents an effective annual interest rate of 53% assuming repayment on
September 3, 2002. We entered into this loan arrangement so that we would have
adequate capital to enter into data acquisition agreements with certain third
parties. We intend to use a portion of the proceeds of this offering to repay
the loan from Gemstone.
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 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 for the next twelve months exceeds our cash anticipated to be
generated from our planned operations by an average of approximately $150,000
per month, and thus we estimate that we will require approximately $1.8 million
in cash to fund our planned operations for the next twelve months. As a result,
we believe that additional financing will be required during 2003 to fund our
planned operations. There can be no assurance that such financing will be
available to us on favorable terms, or at all. In the event that our operations
are not profitable or do not generate sufficient cash to fund our business, or
if we fail to obtain additional financing, we will have to substantially reduce
our level of operations. These circumstances raise substantial doubt about our
ability to continue as a going concern. The financial statements included in
this prospectus do not include any adjustments that might result from the
outcome of this uncertainty.
Our management estimates that, if the minimum number of Units are sold in
this offering, the proceeds from this offering (together with income from
operations) will be sufficient to permit us to continue our operations for at
least twelve months from the date of this prospectus.
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 note is convertible into 44,444 shares of
our Class A Voting Common Stock at the election of the holder. This convertible
promissory note bears interest at the rate of 12% per annum. This note matured
on September 9, 2001. On July 23, 2002, the holder of the note agreed with us to
convert the
26
note into a demand note providing for quarterly payment of interest on the note
until the principal of the note is repaid or converted.
LEGAL PROCEEDINGS
We are from time to time subject to legal proceedings and claims that arise
in the normal course of our business. There are currently no pending or known
actions for which the amount of ultimate liability could have a material adverse
effect on our financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations are
discussed throughout this section where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 2 in the Notes to the Consolidated
Financial Statements included elsewhere in this prospectus. Note that our
preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
Our accounting policies that are the most important to the portrayal of our
financial condition and results, and which require the highest degree of
management judgment relate to revenue recognition and the provision for
uncollectible accounts receivable. We estimate the likelihood of customer
payment based principally on a customer's credit history and our general credit
experience. To the extent our estimates differ materially from actual results,
the timing and amount of revenues recognized or bad debt expense 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, investment banking and public relations
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, investment
banking and public relations 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
27
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.
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 calling
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
28
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.
***
29
BUSINESS
OVERVIEW
We are a business-to-business and business-to-government provider of public
information via our proprietary data integration solutions. Since 1996, we have
sold a CD-ROM-based product, which we refer to as Worldwide Information(TM),
that enables users to search certain motor vehicle records and drivers' license
information in multiple states. Since March 1, 2000, we have maintained a
database that is accessible through the Internet, known as LocatePLUS(TM). Our
LocatePLUS(TM) product contains searchable and cross-referenced public
information on individuals throughout the United States, including individuals'
names, addresses, dates of birth, Social Security numbers, prior residences,
and, in certain circumstances, real estate holdings, recorded bankruptcies,
liens, judgments, drivers' license information and motor vehicle records.
INDUSTRY BACKGROUND
We are a background information provider. Users of background information
have historically included law enforcement, other government agencies, law
firms, investigation companies, private investigators and insurance companies.
Information is used by those entities for various activities ranging from legal
discovery to employment screening to the detection of fraud and the prevention
of crime and terrorism. Additional users, such as large businesses, have
increasingly availed themselves of background information services in connection
with their hiring practices and other business decisions. The business market
for online public information was $1.5 billion to $2.0 billion in 1998 and is
expected to reach $4.0 billion by 2003, according to Argus Research.
A considerable amount of background information about individuals in the
United States is publicly available. Examples of such public data include:
o names and addresses o property ownership
o aliases o bankruptcies
o nationwide court records o certain criminal records
The sources of these types of public data, however, are often fragmented
and geographically dispersed. In addition, the reliability of this information
and the data provided by various sources may not be consistent. In this
environment, businesses and government agencies that wish to use public
information are faced with the time-consuming, costly and difficult task of
gathering data from numerous locations and sources, verifying the information
acquired and organizing it into a useful format. While services and technologies
have developed to enable remote access to information sources, there has
historically been few comprehensive access points for information available
about individuals. Traditional sources of information, including credit
reporting services and other database services, make available only limited
types of information for specific purposes, such as verifying credit worthiness.
Such services may also be limited by applicable law to specified uses and users.
Almost none of those sources are integrated in a manner that allows easy and
rapid access to data.
BUSINESS STRATEGY
Our business plan is to provide an entire suite of information products and
services for professionals in law enforcement agencies, human resources, law
firms, insurance underwriting, fraud investigation, private equity funds,
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).
30
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
===== ======================= ==============================================
I General Business Names, Addresses and Phone Numbers
Past Residences, Neighbors and Affiliates
Real Property
===== ======================= ==============================================
Private Investigators Level I Data, plus:
II Insurance Liens and Judgments
Attorneys/Law Firms Drivers' Records
Government Certain Motor Vehicle Records
Corporate Security
===== ======================= ==============================================
Level I and II Data, plus:
Comprehensive Criminal Records
III Law Enforcement Restricted Motor Vehicle Records
Certain Credit Reporting Data
===== ======================= ==============================================
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.
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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
(including dates of residence) o phone numbers
o vessel registrations
We intend to continue integration of datasets into our LocatePLUS(TM)
product, including:
o certain criminal arrest, conviction o certain professional 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.
32
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 Information(TM) CD-ROM product.
We currently expect to expand our Worldwide Information(TM) product to
include data from additional states, and to develop a DVD-ROM-based version of
this product, although we can give no assurance as to the timing of such product
launches or whether such products will be developed at all. We expect that a
DVD-ROM-based version of this product, if developed, would permit multi-state
Worldwide Information(TM) databases to reside on a single medium.
SOURCES OF OUR DATA
Our operations depend upon information derived from a wide variety of
automated and manual sources. External sources of data include public records
information companies, governmental authorities and on-line search systems. We
license or otherwise obtain our data from three primary sources, as well as over
twenty other ancillary sources (including both private and government sources).
In March 1999, we entered into a data acquisition agreement to acquire
information related to real property with First American Real Estate Solutions,
LLC. This agreement expired on June 30, 2002. We are currently using data from
this provider pursuant to an informal arrangement and we are in negotiations
with respect to a new agreement relating to real property data.
In July 1999, we entered into a three-year data acquisition agreement to
acquire credit file header information from TransUnion Corporation. This
agreement may be cancelled by the data provider upon 90 days' notice, with or
without cause. We are currently in negotiations with this provider with respect
to a new license agreement relating to credit file header information.
In August 1999, we entered into a one-year data acquisition agreement to
acquire bankruptcy, liens, and judgments information with Hogan Information
Services Co. This agreement was renewable for successive periods of one year
unless terminated upon 90 days' prior written notice. This agreement was
33
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. Hogan Information Services Co. may
terminate this agreement at any time at its discretion by providing notice to
us.
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.
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 or canceled prior to that date under certain limited
conditions.
34
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.
35
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
36
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.
37
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 Mr. Houlihan.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews and recommends
to the Board of Directors the salaries, benefits and stock option grants of all
employees, consultants, directors and other individuals compensated by us. The
Compensation Committee also administers our equity compensation plan and other
employee benefits plans that we may adopt from time to time. Currently, the
members of the Compensation Committee are Dr. Yules and Mr. Houlihan.
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
38
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 Mr. Houlihan, the members of our
Compensation Committee, were appointed co-administrators of the equity
compensation plan.
PLANS NOT APPROVED BY SECURITY HOLDERS
From time to time, we have issued options or warrants to employees and
non-employees (such as directors, consultants, advisors, vendors, customers,
suppliers and lenders) in exchange for services or other consideration provided
to us. These issuances have not been made pursuant to a formal policy or plan,
but instead are issued with such terms and conditions as may be determined by
our Board of Directors from time to time. Generally, our stockholders have not
approved or disapproved these issuances.
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 2,480,797 $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".
39
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 in the 401(k) Plan
after one year of service. Our matching contributions vest ratably over a
five-year period. We pay the administrative expenses of this plan.
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 $100,000 (the "Named Executive Officers").
SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- --------------------------- ---------- ---------------- ------------------ ------------------- ------------------
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 10,000(7) 1,000,000(8) 1,064(9)
(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 through
January 3, 2003. 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
44.
(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 received a $10,000 signing bonus in October 25, 1999.
(8) 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.
(9) Mr. Goddard received an aggregate of $1,064 in automobile allowances for
November and December 1999.
40
None of our Named Executive Officers were granted options or issued shares
in the past fiscal year. The table below outlines the value, as of December 31,
2001, of options granted to our Named Executive Officers in prior years that
remain exercisable.
Aggregated Fiscal Year End Option Values
Number of securities
underlying unexercised Value of unexercised in-the-money
options at December 31, 2001 options at December 31, 2001
(#) ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ------------------------------- ----------------------------------------- ---------------------------------
Jon R. Latorella 190,000 / 0 $ 15,200 / 0
President and
Chief Executive Officer
Robert A. Goddard 1,000,000 / 0 $100,000 / 0
Chief Financial Officer
Treasurer and Secretary
(1) Assumes, for the purposes of this presentation only, that the value of the
Class A Voting Common Stock underlying the options was equal to $0.30 per
share (the offering price of the Units being issued in this offering). There
has been no public market for any of our securities, including the Class A
Voting Common Stock which may be issued upon the exercise of these options.
ADVISORY BOARD
On December 2, 1999, our Board of Directors authorized the formation of an
Advisory Board to provide ongoing advice and consultation to the Board of
Directors to enhance the development and operation of our LocatePLUS(TM)
product. The Advisory Board will consist of up to eight members (none of which
will be employees or directors) selected by the Board of Directors based on each
candidate's experience, accomplishments and national recognition in the fields
encompassed by our target markets. Compensation for members of our advisory
board consists of expense reimbursement and a grant of a fully vested
non-qualified stock option or immediately exercisable warrant as set forth
below. The Advisory Board meets informally from time to time with management.
DALE C. JENKINS, JR.
On December 2, 1999, we appointed Dale C. Jenkins, Jr., as the first member
of our Advisory Board. In 1999, Mr. Jenkins was appointed to the position of
Special Assistant for Law Enforcement and Public Safety to the Chancellor of
Higher Education of the Commonwealth of Massachusetts. Mr. Jenkins was also
appointed to the Advisory Board of the U.S. Commission on Civil Rights and the
Massachusetts Governor's Crime Watch Committee and was a consultant to the U.S.
Department of Justice. In addition, Mr. Jenkins directed the Lead Advanced
Security Team for Presidents Ronald Reagan and George H. W. Bush and acted as
Deputy Director of Inaugural Security for then President-Elect George H. W.
Bush. On November 17, 1999, our Board of Directors granted a ten-year option to
Mr. Jenkins to purchase 25,000 shares of our Class A Voting Common Stock with an
exercise price of $0.20 per share as compensation for his services on the
Advisory Board.
JAMES A. CORRY
On July 20, 2000, our Board of Directors appointed James A. Corry as the
second member of our Advisory Board. Since July 2001, Mr. Corry has been the
Chief Operating Officer of Abel Telecom, Inc., based in Scottsdale, Arizona.
Prior to that, Mr. Corry was a criminal investigation and security expert for
the United States Secret Service. During his more than twenty years with that
agency, Mr. Corry worked
41
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 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"
42
beginning on page 5) 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.
43
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 call this note in the foreseeable
future. Although the Company has been amortizing this loan assuming its
cancellation as of January 3, 2003, the entire balance plus accrued interest
remains outstanding.
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.
44
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 call this note in the foreseeable
future. Although the Company has been amortizing this loan assuming its
cancellation as of January 3, 2003, the entire balance plus accrued interest
remains outstanding.
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.
45
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 service as a member of our Board of Directors and for
shareholder relations services.
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 paid 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. Mr. Lindae and his wholly-owned corporation, Castlerock
Ventures, provided a variety of public relations and investment banking services
for us, and worked with our sales force in connection with the launch of our
LocatePLUS(TM) product in California.
CASH PAYMENTS FOR SERVICES RENDERED
In 1999, Mr. Lindae was paid $4,310 and Castlerock Ventures was paid
$39,300. We had no formal agreement with respect to the payment of these
amounts. 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.
46
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 strategic advisory,
investment banking and public relations 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
strategic advisory, investment banking and public relations 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.
* * *
47
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 assumes that:
o the maximum number of Units are sold in this offering;
o all Class A Redeemable 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 the conversion of certain mandatorily convertible debt upon the
consummation of this offering into shares of Class A Voting Common
Stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock underlying options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after the
effective date of the offering are deemed outstanding, while such shares are not
deemed outstanding for computing percentage ownership of any other person.
For the purpose of this table, "Class A Stock" refers to our Class A Voting
Common Stock and "Class B Stock" refers to our Class B Non-voting Common Stock.
To our knowledge, except as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by such
stockholder.
Each of our directors and executive officers can be contacted at 100
Cummings Center, Suite 235M, Beverly, Massachusetts 01915.
48
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%
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 (7 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 500,000 shares issuable upon the exercise of immediately
exercisable warrants with an exercise price of $0.10 per share, and
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.
49
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 Class A Redeemable Warrant to purchase a share of our
Class A Voting Common Stock (also described below). The Class B Non-voting
Common Stock and Class A Redeemable Warrants will trade only as a Unit for
30-days following this offering (unless a Class A Redeemable 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.
CLASS A REDEEMABLE WARRANTS
GENERAL
Each Class A Redeemable 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
Class A Redeemable Warrant certificate and as summarized below. Our Class A
Redeemable Warrants may be exercised at any time after the consummation of this
offering and
50
ending on the three year anniversary of the issuance of the warrant, which is
its expiration date. Those of our Class A Redeemable Warrants which have not
previously been exercised will expire on the expiration date. A Class A
Redeemable 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 Class A
Redeemable Warrant has been properly exercised.
EXERCISE
A Class A Redeemable Warrant holder may exercise our Class A Redeemable
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 Class A Redeemable 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
Class A Redeemable Warrants and to qualify for sale the shares of Class A Voting
Common Stock in each U.S. jurisdiction in which our Class A Redeemable Warrant
holders reside, although we can give no guarantee that such registration will be
permitted under applicable state law.
Our Class A Redeemable Warrants may be exercised by delivering to our
Transfer Agent the applicable Class A Redeemable 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 Class A Redeemable 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 Class A Redeemable
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 Class A
Redeemable Warrant.
REDEMPTION
We may repurchase the Class A Redeemable Warrants for $0.001 per warrant
upon 30 days' notice to the holders of the Class A Redeemable 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 will automatically convert into shares of our Class A Voting
Common Stock at the rate of $0.24 per share upon the consummation of this
offering (which is 80% of the fair market value of our Class A Voting Common
Stock as of the date of conversion of the Bridge Notes, as determined by our
Board of Directors with reference to this offering). Each Bridge Warrant will
become exercisable for a 20-day period beginning on the effective date of
conversion of the Bridge Notes (I.E., the consummation of this offering);
thereafter, the Bridge Warrants will expire by their terms. The exercise price
of the Bridge
51
Warrants will be $0.24 per share, although the Bridge Warrants include "net
issuance" provisions permitting a holder to exchange a portion of the warrant
for shares of Class A Voting Common Stock in lieu of payment of the warrant's
cash exercise price.
RESTRICTED WARRANTS
We have issued restricted warrants to purchase an aggregate of 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 is convertible into 44,444 shares of our
Class A Voting Common Stock at the election of the holder. The note originally
matured on September 9, 2001. On July 22, 2002, the holder of the note agreed
with us to convert the note into a demand note providing for quarterly payments
of interest on the note until the principal of the note is repaid or converted.
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
52
Exchange Commission, this indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and we will follow the
court's determination.
PLAN OF DISTRIBUTION
We are registering 12,000,000 Units for sale through our underwriter on a
minimum/maximum "best efforts" basis at an offering price of $0.30 per Unit.
Subscriptions for our Units will be deposited into escrow with American
Pacific Bank through our transfer agent, Transfer Online, Inc. All subscriptions
amounts paid by check shall be made payable to "American Pacific Bank as Escrow
Agent" and all broker-dealers engaged in the sale of the Units will transmit
such checks directly to the Escrow Agent by noon of the business day following
receipt of such check. All subscription amounts paid by wire transfer shall be
made directly to the LocatePLUS Holdings Corporation Escrow Account maintained
by American Pacific Bank pursuant to wire transfer instructions available from
participating broker-dealers. All proceeds will be held in this escrow until a
minimum of $1,800,000 (6,000,000 Units) of subscriptions have been received. In
the event that we do not receive a minimum of $1,800,000 in subscriptions by
October 11, 2002, subscribed funds will be promptly released to subscribers
without interest or deduction. All purchases and sales of our Units will be
conducted through a subscription agreement.
In the event that a minimum of $1,800,000 in acceptable subscriptions is
received by American Pacific Bank by October 11, 2002, then we will close on
those funds promptly in one or more closings, and issue the Units purchased.
None of our officers or directors or any holder of 10% or greater of either
class of our Common Stock, is permitted to purchase Units in this offering.
Our underwriter has informed us that all sales of Units will be conducted
through a subscription agreement. Our underwriter reserves the right to reject
any subscription, in whole or in part. In the event that our offering is
oversubscribed, we anticipate that our underwriter will accept subscriptions
based upon the date in which funds are received by our transfer agent.
In consideration for our underwriters' services, our underwriter will
receive an underwriting commission of 7%, or $0.021 per Unit sold by them. In
the event that our underwriter does not sell the minimum number of Units
required by this offering, our underwriter will receive no commission or
remuneration from us, other than certain allocated expenses, totaling less than
$3,000 which we have advanced to them. Our underwriter will receive no
commission for purchases by any of our employees.
In February 2002, our underwriter, Oftring & Company, Inc. and related
persons acquired five year options to purchase up to 900,000 shares of our Class
B Non-voting Common Stock with an exercise price of $0.30 in connection with a
private placement financing arranged for us by Oftring. The options are
restricted from sale, transfer or hypothecation for a period of one year from
the effective date of the offering except to officers or partners (not
directors) of Oftring & Company, Inc. and members of the selling group or their
officers or partners.
53
Under the terms of our underwriting agreement, we will indemnify our
underwriter for any losses or expenses it incurs as a result of any actual or
alleged misstatement, error or omission in the registration statement to which
this prospectus is a part. Our underwriter will indemnify us for any losses or
expenses we incur as a result of any actions or omissions by the underwriter in
violation of the securities laws or as a result of any actual or alleged
misstatement or error resulting from information provided to us by the
underwriter.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering and assuming the full subscription of
this offering, we will have Units consisting of 12,000,000 shares of Class B
Non-voting Common Stock and warrants to purchase 12,000,000 shares of our Class
A Voting Common Stock registered under the Securities Act of 1933. Promptly
after the completion of this offering, we intend to register 56,640,726 shares
of Class B Non-voting Common Stock and up to 28,218,130 shares of Class A Voting
Common Stock, all of which are currently issued and outstanding shares owned by
our stockholders.
On July 5, 2002, we filed a registration statement with the Securities and
Exchange Commission (Registration No. 333-92026) covering 2,725,078 shares of
Class A Voting Common Stock (including 1,655,395 shares underlying convertible
securities which will convert into shares of Class A Voting Common Stock upon
the consummation of this offering, assuming this offering is consummated by
August 31, 2002), and 60,413,818 shares of Class B Non-voting Common Stock
(including shares underlying warrants to purchase 3,772,455 shares of Class B
Non-voting Common Stock). A copy of that second registration statement will be
made available upon request to us, without cost, to subscribers or potential
subscribers. We anticipate that we will seek effectiveness of that registration
statement no earlier than 10 days following the consummation of this offering.
We also anticipate that we will register 15,000,000 shares of Class A Voting
Common Stock issued or issuable under our equity compensation plan through a
registration on the Security and Exchange Commission's Form S-8.
Upon the conclusion of the public offering and assuming that the maximum
number of Units is sold in the offering, we will have 54,763,975 shares of Class
A Voting Common Stock issued and outstanding, including shares issued in
connection with the mandatory conversion of certain convertible promissory notes
and accrued interest into 1,655,395 shares of Class A Voting Common Stock upon
the consummation of this offering, assuming this offering is consummated on
August 31, 2002. This assumes no exercise or conversion of warrants to purchase
up to 13,025,239 shares, no exercise of options to purchase up to 14,995,000
shares subject to purchase pursuant to our equity compensation plan, and no
conversion of a convertible promissory note to purchase 44,444 shares. We will
also have outstanding upon the completion of the public offering, assuming that
the maximum number of Units is sold, 68,640,726 shares of Class B Non-voting
Common Stock (assuming no exercise or conversion of warrants and options to
purchase 3,772,455 shares of Class B Non-voting Common Stock).
Of the Class A Voting Common Stock and Class B Non-voting Common Stock, all
of the issued and outstanding shares will be freely tradable (either as a result
of the Securities Exchange Commission's Rule 144(k) or due to our registration
of such securities), except to the extent that such securities are held by
"affiliates," as defined by the SEC. As of the date of this prospectus, our
affiliates hold 28,518,618 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 547,639 shares (in the case
of Class A Voting Common Stock) and 686,407 shares
54
(in the case of Class B Non-voting Common Stock, assuming the minimum
number of Units are sold in this offering) immediately after the
offering; or
o the average weekly trading volume of our Common Stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale.
Sales under Rule 144 are also governed by other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us. Under Rule 144(k), however, a person who is not, and for the three
months prior to the sale of such shares has not been, an affiliate of the
company will be free to sell "restricted securities" (E.G., shares issued in a
private placement) which have been held for at least two years without regard to
the limitations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our securities is Transfer Online,
Inc. Transfer Online's address is 227 SW Pine Street, Suite 300, Portland,
Oregon 97204.
LEGAL MATTERS
The validity of the 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.
* * *
55
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
(NOTE 2)
DECEMBER 31, 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 531,086 531,086 531,086 546,733
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 ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 49,681,080 $ 496,811 -- -- $ 5,669,855
Payment of stock subscription receivable -- -- -- -- --
Issuance of common stock at $1.00 per share,
net of issuance costs of $212,628 3,422,500 34,225 -- -- 3,175,647
Issuance of common stock upon exercise of
stock options at $0.20 per share 5,000 50 -- -- 950
Issuance of warrants to purchase common
stock in exchange for services -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 53,108,580 531,086 -- -- 8,846,452
Issuance of detachable warrants to
purchase common stock in conjunction
with convertible debt -- -- -- -- --
Issuance of options and warrants to
purchase common stock in exchange
for services -- -- -- -- 101,488
Beneficial conversion feature on
convertible debt -- -- -- -- 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
Issuance of common stock in exchange
for services -- -- 75,000 750 6,750
Issuance of common stock at $0.15 per
share, net of issuance costs of $22,558 -- -- 12,307,836 123,078 1,700,472
Issuance of warrants to purchase common
stock in exchange for services -- -- -- -- --
Exchange of convertible notes payable to
related party plus accrued interest at
$0.075 per share -- -- 2,996,000 29,960 269,640
Exchange of convertible notes payable plus
accrued interest at $0.10 per share -- -- 2,672,430 26,724 240,519
Exchange of convertible notes payable plus
accrued interest at $0.15 per share -- -- 266,667 2,667 37,333
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 53,108,580 531,086 48,527,054 485,270 14,213,637
Payment of stock subscription receivable -- -- -- -- --
Issuance of common stock at $0.15 per
share, net of issuance costs of $22,558 -- -- 8,113,672 81,137 1,107,436
Issuance of options to purchase common
stock in exchange for services -- -- -- -- --
Net loss three months ended March 31, 2002 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2002 (unaudited) 53,108,580 $ 531,086 56,640,726 $ 566,407 $ 15,321,073
============ ============ ============ ============ ============
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(continued)
COMMON STOCK TOTAL
SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
WARRANTS RECEIVABLE DEFICIT EQUITY (DEFICIT)
------------ ------------ ------------ ------------
Balance at December 31, 1999 -- $ (679,001) $ (4,096,698) $ 1,390,967
Payment of stock subscription receivable -- 679,001 -- 679,001
Issuance of common stock at $1.00 per share,
net of issuance costs of $212,628 -- -- -- 3,209,872
Issuance of common stock upon exercise of
stock options at $0.20 per share -- -- -- 1,000
Issuance of warrants to purchase common
stock in exchange for services $ 126,732 -- -- 126,732
Net loss -- -- (5,833,442) (5,833,442)
------------ ------------ ------------ ------------
Balance at December 31, 2000 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
Beneficial conversion feature on
convertible debt -- -- -- 293,912
Issuance of common stock at $0.10 per
share, net of issuance costs of $1,750 -- (4,500) -- 3,014,662
Issuance of common stock in exchange
for services -- -- -- 7,500
Issuance of common stock at $0.15 per
share, net of issuance costs of $22,558 -- -- -- 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 -- -- -- 299,600
Exchange of convertible notes payable plus
accrued interest at $0.10 per share -- -- -- 267,243
Exchange of convertible notes payable plus
accrued interest at $0.15 per share -- -- -- 40,000
Net loss -- -- (4,356,255) (4,356,255)
------------ ------------ ------------ ------------
Balance at December 31, 2001 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 -- -- -- 1,188,573
Issuance of options 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) $ 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 THREE MONTHS
FOR THE YEARS ENDED 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 the initial public offering of the Company's
common stock contemplated in this prospectus.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to
amounts and timing of revenue recognition and provisions for doubtful
accounts. Actual results could differ from those estimates.
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
F-11
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
in favor of the Company. One third of proceeds remitted to the Company
under this arrangement will be treated as repayment of the $500,000 plus
accrued interest and the balance will be recorded as revenue (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 MARCH 31,
USEFUL LIFE DECEMBER 31, 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.
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
========== ========== ==========
F-12
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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, of which $337,000 was accrued but not
paid. 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.
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
F-13
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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.
F-14
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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.
F-15
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
This note is convertible into 44,444 shares of our Class A Voting Common
Stock at the election of the holder. This convertible promissory note bears
interest at the rate of 12% per annum. This note matured on September 9,
2001 and was in default at December 31, 2001 (See Note 17).
NOTE PAYABLE
In March 31, 2001 the Company issued a note in exchange for $30,000 in
cash. The note plus accrued interest was payable on April 30, 2001. On
April 27, 2001, the Company repaid $20,000 of the principal plus accrued
interest of $6,000, and the remaining unpaid principal of $10,000 was
settled by the issuance by the Company of 100,000 shares of Class B
Non-voting Common Stock.
9. RELATED PARTY TRANSACTIONS
Certain members of the Company's Board of Directors have performed
consulting services for the Company. Expenses relating to these services
amounted to $223,795 and $303,892 in 2000 and 2001, respectively, and were
recorded as part of general and administrative expenses. The 2001 amount
includes expenses of $74,900 related to the exchange of debt issued to a
member of the Company's Board of Directors (see Note 8).
In 2001, the Company granted options to purchase 119,104 shares of Class A
Voting Common Stock at $0.20 per share for services rendered as a
consultant to a former board member. The Company recorded an expense of
$21,645 associated with the options. 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.
F-16
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
During 2001, the Company issued convertible notes with detachable warrants
to two members of the Company's Board of Directors in exchange for $215,000
(see Note 8).
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.
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
-----------
F-17
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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
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.
F-18
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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
----------- -----------
$ -- $ --
=========== ===========
F-19
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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
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
F-20
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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:
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
===========
F-21
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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%
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
F-22
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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)
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.
F-23
LocatePLUS Holdings Corporation
Notes to Consolidated Financial Statements
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.
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, which
represents an effective annual rate of interest of approximately 53%
assuming repayment on September 3, 2002. The Company entered into this loan
arrangement so that it would have adequate capital to enter into data
acquisition agreements with certain third parties. The Company explored
various financing alternatives each of which was more expensive than the
loan from Gemstone. The rate of interest reflects the Company's history of
losses, its early stage of development, and the risks associated with the
Company's ability to continue as a going concern. The Company intends to
use a portion of the proceeds of this offering to repay the loan from
Gemstone.
On July 22, 2002 the holder of a $10,000 convertible note payable that
matured September 9, 2001 agreed with the Company to convert the note into
a demand note providing for quarterly payment of interest on the note until
the principal of the note is repaid or converted (See note 8).
F-24
TABLE OF CONTENTS
-----------------
Prospectus Summary.........................1
Risk Factors...............................5
Forward-Looking Statements.................14
Use of Proceeds............................15
Determination of Offering Price............15
Dividend Policy............................16
Capitalization.............................17
Dilution...................................18
Selected Consolidated Financial Data.......19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations..................21
Business...................................30
Executive Officers and Directors...........36
Organization Within the Past Five Years....42
Certain Transactions.......................44
Principal Stockholders.....................48
Description of Capital Stock...............50
Plan of Distribution.......................53
Shares Eligible for Future Sale............54
Transfer Agent and Registrar...............55
Legal Matters..............................55
Experts....................................55
Additional Information.....................55
Index to Financial Statements.............F-1
* * *
UNTIL NOVEMBER 11, 2002, 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.
[LOGO]
LOCATEPLUS HOLDINGS CORPORATION
Please read this prospectus carefully. It
describes our business, products and services,
and financial condition and results of
operations.
We have prepared this prospectus so that
you will have the information necessary to make
an informed investment decision. You should rely
only on the information contained in this
prospectus. The information contained in this
prospectus is accurate only as of its date,
regardless of the time this prospectus is
delivered or that the Units are sold.
We are offering to sell our Units and
seeking offers to buy our Units only in
jurisdictions where such offers and sales are
permitted.