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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
Commission file number: 000-49957
LOCATEPLUS HOLDINGS CORPORATION
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(Name of small business issuer in its charter)
DELAWARE 04-3332304
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 CUMMINGS CENTER, SUITE 235M,
BEVERLY, MASSACHUSETTS 01915
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(Address of principal executive offices) (Zip Code)
(978) 921-2727
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
CLASS A VOTING COMMON STOCK, PAR VALUE $0.01
--------------------------------------------
(Title of class)
CLASS B NON-VOTING COMMON STOCK, PAR VALUE $0.01
------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
Revenues for the most recent fiscal year are: $3,398,777.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the average bid and ask price of such
common equity on March 19, 2004, is $70,057,770.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of March 19, 2004 there were
84,731,612 and 72,898,596 shares of Class A Voting Common and Class B Non-Voting
Common shares outstanding respectively.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1 Description of Business 1
ITEM 2 Description of Property 5
ITEM 3 Legal Proceedings 6
ITEM 4 Submission of Matters to a Vote of Security Holders 6
PART II
ITEM 5 Market for Common Equity and Related Stockholder
Matters 6
ITEM 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 7 Financial Statements 15
ITEM 8 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 16
ITEM 8A Controls and Procedures 16
PART III
ITEM 9 Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of
the Exchange Act 17
ITEM 10 Executive Compensation 20
ITEM 11 Security Ownership of Certain Beneficial
Owners and Management 21
ITEM 12 Certain Relationships and Related Transactions 23
ITEM 13 Exhibits and Reports on Form 8-K 27
ITEM 14 Principal Accountant Fees and Services 29
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
OVERVIEW
LocatePLUS Holdings Corporation, through itself and its wholly-owned
subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Certifion
Corporation and Dataphant, Inc. (collectively, the "LocatePLUS Group"), are
business-to-business, business-to-government and business-to-consumer providers
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 , which enables users to search certain motor vehicle records and
driver's license information in multiple states. Since March 1, 2000, we have
maintained a database that is accessible through the Internet, known as
LocatePLUS. Our LocatePLUS 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. On September 1, 2003, our newly formed wholly-owned subsidiary,
Certifion Corporation, acquired all of the assets of Project Entersect
Corporation a provider of data technology. Certifion provides self-screening
for both resume and online dating services and has filed for patent protection
for both of these services. In October 2003, our newly formed wholly-owned
subsidiary, Dataphant, Inc. acquired Voice Power Technology through a merger.
Through this merger, Dataphant now has information on virtually every land-based
phone number in the United States and approximately 25% of the cell phone
numbers in the United States.
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.
Non-traditional users, such as individuals using job search and on-line
dating service sites, have also begun to avail themselves of background
information in response to concerns about identity theft.
A considerable amount of background information about individuals in the
United States is publicly available. Examples of such public data include:
- - names and addresses - property ownership
- - aliases - bankruptcies
- - nationwide court records - 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, users 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 certain information sources, there have 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 is integrated in a manner that allows easy and rapid access to data.
1
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
reports) or our ability to provide certain otherwise "unlisted" telephone
information).
OUR TARGET MARKET AND SCREENING OF USERS
Our products have historically been 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 have been used in:
- - crime and terrorism investigation (e.g., in conjunction with federal and
state investigations in the aftermath of the September 11th terrorist attacks
and the subsequent anthrax incidents);
- - detection of fraud;
- - "skip tracking" (i.e., the location of debtors and individuals in
violation of parole or bail restrictions);
- - background checks;
- - legal due diligence; and
- - risk management.
In addition, Certifion offers data for self-certification purposes in
connection with job search and Internet dating services.
Our LocatePLUS and Worldwide Information products are generally marketed and
sold only to pre-screened business and government end users. Before obtaining
access to our LocatePLUS database or our Worldwide Information 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 data, we have adopted a three-tier
security schema for our LocatePLUS and Worldwide Information products.
LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS
I General Business Names, Addresses and Phone Numbers
Past Residences, Neighbors and Affiliates
Real Property
II Private Investigators Level I Data, plus:
Insurance Liens and Judgments
Attorneys/Law Firms Drivers' Records
Government Certain Motor Vehicle Records
Corporate Security
III Law Enforcement Level I and II Data, plus:
Comprehensive Criminal Records
Restricted Motor Vehicle Records
Certain Credit Reporting Data
2
LOCATEPLUS
We launched our LocatePLUS Internet site in March 2000. Our LocatePLUS
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
database consists of approximately five billion individual data entries.
According to our estimates, we have data entries relating to approximately 205
million adult individuals in the United States (or approximately 98% of the
adult population of the United States, based on the 2000 United States Census).
As of December 31, 2003, there were approximately 14,184 pre-screened users of
our LocatePLUS database.
Datasets currently integrated in our LocatePLUS product include nationwide
records relating to:
- - names and addresses
- - aliases - real estate records
- - dates of birth - prior residences
- - Social Security numbers - recorded bankruptcies
- - driver's license information - liens
- - residential address information - motor vehicle records
(including dates of residence) - certain death records
- - certain criminal arrest, conviction - phone numbers
and incarceration records - vessel registrations
We intend to continue integration of datasets into our LocatePLUS product,
including:
- - certain hunting and fishing licenses - certain professional licenses
- - certain facial image files - certain fingerprint files
- - certain gun licenses - Federal Aviation Administration records
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 product at all.
We believe that one of the significant advantages of our LocatePLUS
product, in comparison with many products with which we compete, is the ability
of LocatePLUS to "tie" data associated with a given individual to produce a
single report. Our LocatePLUS 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.
LOCATEPLUS ANYWHERE
We also offer a version of our LocatePLUS product that is accessible
through wireless personal digital assistants and e-mail capable pagers, which we
refer to as LocatePLUS AnyWhere. LocatePLUS AnyWhere was commercially launched
in mid-December 2002. This product is being marketed primarily to law
enforcement. The product is sold on a subscription fee basis, permitting
unlimited access to our LocatePLUS database for a flat monthly fee provided that
that the user agrees to a fixed term commitment. As of December 31, 2003, we
had realized only nominal revenue from this product.
3
WORLDWIDE INFORMATION
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 . Our Worldwide Information 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 product enables users to rapidly identify
vehicles or drivers using complete or partial search criteria. We believe that
this ability to search partial data is a valuable tool in circumstances in which
incomplete information is available, as is often the case in criminal
investigations. Unlike data provided by Internet-based services, searches on
our CD-ROM product are confidential and unavailable to any person other than the
user of our CD-ROM product. We believe that the confidential nature of this
CD-ROM product makes it particularly attractive to law enforcement agencies,
which must often conduct criminal investigations in strict secrecy.
As of December 31, 2003, there were approximately 2,000 pre-screened purchasers
of our Worldwide Information CD-ROM product.
ENTERSECT
On September 1, 2003, our newly formed wholly-owned subsidiary, Certifion
Corporation, acquired all of the assets of Project Entersect Corporation a
provider of data technology. Certifion operates under the trade name of
"Entersect," and it provides self-screening for both resume and online dating
services a.
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 five primary sources, as well as over
twenty other ancillary sources (including both private and government sources).
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 such 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 limited 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. 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 product, and our operations.
4
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 product and through the mail in the case of our Worldwide
Information CD-ROM) and through "channel partner" arrangements, by which third
parties access our databases in consideration for a royalty (such as through
online job search and dating sites, in the case of our Entersect product. 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 seven channel partnerships. For
the year ending December 31, 2003, we have recognized revenue on all of these
agreements.
COMPETITION
Current competitors for our LocatePLUS product include Accurint,
ChoicePoint, Confi-chek.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 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 product.
EMPLOYEES
As of December 31, 2003, the LocatePLUS Group had 59 employees. We
believe that our relations with our employees are good.
ITEM 2 - DESCRIPTION OF PROPERTY
FACILITIES
LocatePLUS Holdings Corporation and 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.
Worldwide Information, Inc., is presently located in Byfield, Massachusetts,
where it leases approximately 2,700 square feet. The lease on the Byfield
facility expired on March 1, 2003, and we are currently a tenant-at-will in this
facility. Our annual lease payments on that facility in 2003 were approximately
$25,000. We are currently negotiating to extend this lease to February 2005.
Dataphant, Inc., is located in Austin, Texas, where it leases approximately
3,000 square feet pursuant to a month-to-month lease (which includes the use of
office equipment, with current monthly rent of $3,680).
Certifion Corporation, (which does business under the name "Entersect"), is
located in Santa Ana, California, where it leases approximately 700 square feet
pursuant to a month-to-month lease with current monthly rent of $800.
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.
5
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 as a trademark with the United States
Patent and Trademark Office. We maintain LOCATEPLUS, WORLDWIDE INFORMATION ,
ENTERSECT , CareerScan , and TrustmeID 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.
In 2003, we filed for patent protection covering certain aspects of two of
our products. We have filed for patent protection covering certain aspects of
our unique search product, "Bull's Eye," that electronically matches database
information with current public phone and utility information to identify
current information. We also filed, through our Certifion subsidiary, for
patent protection covering certain aspects of our self validation products
Career Screen and TrustmeID .
ITEM 3 - 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were presented to stockholders for approval, through
solicitation or otherwise, in the fourth quarter of fiscal year 2003.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
We have three securities that began trading on the Over the Counter
Bulletin Board on December 12, 2002:
- - shares of our Class A Voting Common Stock are quoted under the symbol
"LPLHA";
- - shares of our Class B Non-Voting Common Stock are quoted under the symbol
"LPLHB"; and
- - our public warrants (redeemable warrants to purchase one share of our
Class A Voting Common Stock with an exercise price of $0.50 per share) are
quoted under the symbol "LPLHW".
6
The following tables set forth the high and low closing sales prices per share
(and per public warrant), for our Class A Voting Common Stock, Class B
Non-voting Common Stock and public warrants as reported by OTC Bulletin Board
since our initial listing of these securities on the Over the Counter Bulletin
Board in December 2002.
Q4 2002(1) Q1 2003(2) Q2 2003(3) Q3 2003(4) Q4 2003(5)
---------- ---------- ---------- ---------- ----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---------- ---------- ---------- ---------- ---------- ---- ---- ---- ---- ----
LPLHA.OB 0.50 0.15 0.40 0.14 0.42 0.12 0.38 0.28 0.34 0.24
- -------- ---------- ---------- ---------- ---------- ---------- ---- ---- ---- ---- ----
LPLHB.OB 0.95 0.12 0.29 0.10 0.29 0.10 0.35 0.20 0.25 0.13
- -------- ---------- ---------- ---------- ---------- ---------- ---- ---- ---- ---- ----
LPLHW.OB 0.05 0.02 0.10 0.00 0.12 0.00 0.13 0.03 0.09 0.05
- -------- ---------- ---------- ---------- ---------- ---------- ---- ---- ---- ---- ----
(1) The three months ended December 31, 2002.
(2) The three months ended March 31, 2003.
(3) The three months ended June 30, 2003.
(4) The three months ended September 30, 2003.
(5) The three months ended December 31, 2003.
The quotations set forth above reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent action transactions.
HOLDERS
As of March 19, 2004 there were:
- - approximately 377 holders of record of our Class A Voting Common Stock,
- - approximately 366 holders of record of our Class B Non-Voting Common
Stock, and
- - approximately 80 holders of record of our public warrants.
DIVIDENDS
We have never declared or paid dividends on our Common Stock. We do not
anticipate that we will declare or pay dividends in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table reflects equity compensation granted or issued by us as
of December 31, 2003, 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 WEIGHTED- NUMBER OF
SECURITIES TO AVERAGE SECURITIES
BE ISSUED EXERCISE PRICE REMAINING
UPON EXERCISE OF OUTSTANDING AVAILABLE FOR
OF OUTSTANDING OPTIONS, WARRANTS FUTURE ISSUANCE
OPTIONS, WARRANTS AND RIGHTS UNDER EQUITY
AND RIGHTS - COMPENSATION
PLANS(1)
----------------- ------------------ ----------------
EQUITY COMPENSATION
PLANS APPROVED
BY SECURITY
HOLDERS:
Class A Voting
Common Stock. . . . . 19,775,766 $ 0.42 18,804,784
Class B Non-voting
Common Stock. . . . . 5,700,000 0.20 19,300,000
- --------------------- ----------------- ------------------ ----------------
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS:
Class A Voting
Common Stock 4,082,239 $ 021 N/A
Class B Non-voting
Common Stock. . . . . 10,283,249 $ 0.20 N/A
- --------------------- ----------------- ------------------ ----------------
TOTAL:
Class A Voting
Common Stock. . . . . 23,858,005 $ 0.36 N/A
Class B Non-voting
Common Stock. . . . . 15,983,249 $ 0.20 N/A
- --------------------- ----------------- ------------------ ----------------
(1) Excludes securities reflected in column titled "Number of securities to
be issued upon exercise of outstanding options, warrants and rights".
7
RECENT SALES OF UNREGISTERED SECURITIES
- - From November 1999 to December 31, 2003, we granted options to purchase
28,347,716 shares of both classes of our Common Stock (Class A Voting Common
Stock and Class B Non-Voting) to 79 employees and consultants under the terms of
our Incentive and Non-qualified Stock Option Plan. These options have varying
exercise prices. Of these options to purchase 28,347,716 shares, options to
purchase 1,419,450 shares of Common Stock have been exercised by eleven
employees and consultants and options to purchase 1,452,500 shares of Common
Stock have been canceled by employees who terminated their employment. The offer
and sale of these securities were exempt from registration under the Securities
Act pursuant to Rules 701 and 506 promulgated thereunder.
- - In April 2001, we made a non-transferable offer to our accredited
stockholders to sell three shares of our Class B Non-voting Common Stock for
$0.10 per share for each share of Class A Voting Common Stock held by each
stockholder. Pursuant to that offer, we sold approximately 31.6 million shares
of Class B Non-voting Common Stock to 270 of our stockholders. The offer and
sale of these securities were exempt from registration under the Securities Act
under the provisions of Rule 506 promulgated thereunder, as we received
representations from all offerees that they were accredited investors at the
time of the offer and sale and no general solicitation was undertaken.
- - At various times from November 17, 2000 to March 12, 2002, we issued
warrants to purchase an aggregate of 537,902 shares of Class A Voting Common
Stock to 11 accredited investors serving as consultants and to members of our
Advisory Board in consideration for services rendered. The offer and sale of
these securities were exempt from registration under the Securities Act under
the provisions of Rule 506 and 508 promulgated thereunder, as we received
representations from all offerees that they were accredited investors at the
time of the offer and sale and no general solicitation was undertaken. A Form D
Notice of Sale of Securities Pursuant to Regulation D was not filed with the
Securities and Exchange Commission in a timely manner.
- - From August 2001 to April 2002, we issued warrants to purchase an
aggregate of 3,272,455 shares of Class B Non-Voting Common Stock to 17
accredited consultants and to members of our Advisory Board in consideration for
services rendered. The offer and sale of these securities were exempt from
registration under the Securities Act under the provisions of Rule 506 and 508
promulgated thereunder, as we received representations from all offerees that
they were accredited investors at the time of the offer and sale and no general
solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to
Regulation D was not filed with the Securities and Exchange Commission in a
timely manner.
- - From September 2001 through February 13, 2002, we sold 20,421,510 shares
of Class B Non-voting Common Stock to 175 accredited investors (of which 82 were
existing stockholders) for $0.15 per share. The offer and sale of these
securities were exempt from registration under the Securities Act under the
provisions of Rule 506 promulgated thereunder, as we received representations
from all offerees that they were accredited investors at the time of the offer
and sale and no general solicitation was undertaken.
- - On August 27, 2002, we issued warrants to purchase an aggregate of 70,000
shares of Class B Non-voting Common Stock to two members of our Board of
Directors pursuant to our Non-employee Director Stock Option Policy. The offer
and sale of these securities was exempt from registration under the Securities
Act under the provisions of Rule 506 and Rule 508 promulgated thereunder, as
both recipients are accredited and no general solicitation was undertaken.
8
- - In December 2002, we issued a one year term note with ten year, fully
vested detachable warrants to an individual who, as a condition of his
investment, required that he be appointed to the Board of Directors of the
Company. The note bears interest at the rate of 10% per annum and is payable in
one lump sum at maturity. The detachable warrants provide for the purchase of
250,000 shares of our Class B Non-Voting Common Stock with an exercise price of
$0.22 per share. The offer and sale of these securities was exempt from
registration under the Securities Act under the provisions of Rule 506 and Rule
508 promulgated thereunder, as both recipients are accredited and no general
solicitation was undertaken.
- - On March 28, 2003, we issued warrants to purchase 105,000 shares of Class
B Non-voting Common Stock to three members of our Board of Directors pursuant to
our Non-employee Director Stock Option Policy. The offer and sale of these
securities was exempt from registration under the Securities Act under the
provisions of Rule 506 and Rule 508 promulgated thereunder, as the recipient was
accredited and no general solicitation was undertaken.
- - During 2003, we issued various eighteen month term notes with proceeds to
us of $1.6 million, net of issuance costs. These notes provided for simple
interest ranging from 10% to 12% per annum. These notes included with ten year
fully vested detatchable warrants to purchase an aggregate of 2,500,000 shares
of Class B Non-Voting Common Stock with a weighted average exercise price of
$0.14. The offer and sale of these securities was exempt from registration
under the Securities Act under the provisions of Rule 506 and Rule 508
promulgated thereunder, as the recipient was accredited and no general
solicitation was undertaken.
- - During 2003, we received $398,000 by issuing units at $0.16 per unit.
Each unit consisted of one share of Class A Voting Common Stock and a warrant
which is convertible into three shares of Class A Voting Common Stock with an
exercise price at $0.16 per share. A price adjustment mechanism included in the
warrants provides that, if the stock price decreases, the warrants will
nevertheless permit the holder to receive, upon a cashless exercise of the
warrants, at least one share of Class A Voting Common Stock per warrant without
any cash payment. The offer and sale of these securities was exempt from
registration under the Securities Act under the provisions of Rule 506 and Rule
508 promulgated thereunder, as the recipient was accredited and no general
solicitation was undertaken.
- - During June 2003, we issued 2,500,000 shares of Class A Voting Common
Stock to one investor and 125,000 shares of Class B Non-Voting Common Stock to
three different investors. The offer and sale of these securities were exempt
from registration under the Securities Act under the provisions of Rule 506 and
Rule 508 promulgated thereunder, as the recipient was accredited and no general
solicitation was undertaken.
- - During August we canceled a put we issued to one investor, which provided
that the Company, subject to certain limitations, may sell up to $5 million in
shares of Class A Voting Common Stock. We subsequently entered into a similar
put with the same investor which provided that the Company, subject to certain
limitations, may sell up to $5 million in shares of Class A Voting Common Stock.
The offer and sale of these securities was exempt from registration under the
Securities Act under the provisions of Rule 506 and Rule 508 promulgated
thereunder, as the recipient was accredited and no general solicitation was
undertaken.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our securities during 2003.
9
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Annual Report. 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 below.
OVERVIEW
The LocatePLUS Group is 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 , 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. Our
LocatePLUS 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. Since
September 2003, our wholly-owned subsidiary, Certifion, has offered personal
information for self-certification purposes through its Entersect product.
We distribute our content both directly (through the Internet in the case
of our LocatePLUS product and through the mail in the case of our Worldwide
Information CD-ROM) and through "channel partner" arrangements, by which
third-party database providers obtain access to our databases in consideration
for a royalty (such as job search and on-line dating sites, in the case of our
Entersect product).
On September 1, 2003, through our newly formed wholly-owned subsidiary
Certifion Corporation, we acquired all the assets of Project Entersect
Corporation in consideration for $62,662. The acquisition was accounted for as
a purchase and is recorded and reflected with our operations from the time of
purchase. The subsidiary operates under the trade name Entersect. Entersect
provides a self-identification and validation service for online job posting
and dating sites.
On October 17, 2003, through our newly formed wholly-owned subsidiary,
Dataphant, Inc., we acquired Voice Power Technologies, Inc., a Texas-based
provider of data technology. In connection with this acquisition, Voice Power
Technologies, Inc. merged with and into Dataphant, Inc. As consideration for
the merger, shareholders of Voice Power Technologies, Inc. received an aggregate
of 2,500,000 shares of LocatePLUS Class B Non-voting Common Stock. Through this
acquisition, we now have information concerning virtually all landline phone
numbers in the United States and approximately 25% of United States cell phone
numbers. This data has been integrated into our current product lines.
Although our products generally 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 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. We have also sought patent
protection with respect to aspects of our marking and search technology
(referred to as our "Bull's Eye" feature) and aspects of our CareerScan and
TrustmeID products.
10
Revenue associated with our Worldwide Information 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 product is updated and released either quarterly or twice
a year. In the case of our LocatePLUS product, we charge a fee to customers,
which varies based upon the type and quantity of information requested. Revenue
from our LocatePLUS 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 (approximately 60% of our current LocatePLUS customer
base) or invoice customers for such fees on a monthly basis (approximately 40%
of our current customer base). In the case of our Entersect products, we charge
a fee to customers that varies based upon the type of certification requested.
Revenue from our Entersect product is recognized when certifications are
purchased online (and paid for via credit card) and collectibility is reasonably
assured. In the case of Dataphant, all sales are made to our other wholly
owned subsidiaries and eliminated on consolidation.
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 obtain our data
from multiple sources and we have entered into various license agreements with
the related data providers. In 2003 and 2002, we recorded $1,738,849 and
$665,366, respectively, in costs related to these agreements. In the event that
any of our primary sources of data became unavailable to us, we believe that we
would be able to integrate alternate sources of data without significant
disruption to our business or operations, as there are currently a number of
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, cash equivalents and
short term investments. Interest expense is primarily attributable to various
notes issued through the year ended December 31, 2003. As of December 31, 2003,
we had notes payable (current and long-term) totaling $2,157,328.
We have incurred significant net losses since our inception. We incurred
net losses of approximately $3.9 million in 2002 and $4.4 million in 2003. Our
accumulated deficit as December 31, 2003 was approximately $22.7 million. We
raised approximately $2.4 million from sales of our equity during 2003. Our
ultimate success is still dependent upon our ability to secure additional
financing to meet our working capital and ongoing project development needs. We
believe our current sources of liquidity, funding, and customer demand are
adequate to sustain our current level of operations through the end of 2004.
However, we anticipate that we will increase our sales and marketing, product
development and general and administrative expenses during 2004 and for the
foreseeable future. To achieve our business objectives, we must raise
additional capital, which may consist of future debt or equity offerings. Any
such financings may be dilutive to existing investors.
During August 2003, we issued a put to one investor, which provides us, subject
to certain limitations, the right to sell, at our discretion, up to $5 million
in shares of our Class A Voting Common Stock to the investor at a purchase price
equal to 95% of the lowest closing bid price for our Class A Voting Common Stock
during a ten-day pricing period. The number of shares that we may sell to that
investor is limited by the trading volume of our Class A Voting Common Stock and
certain customary closing conditions. Pursuant to this put, we sold 2,708,637
shares of Class A Voting Common Stock, resulting in $651,068 in net proceeds
through December 31, 2003. The value of shares available under the put at
December 31, 2003 was $4,348,932.
11
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenue from our Worldwide InformationTM CD-ROM product
increased to $478,278 for the year ended December 31, 2003 from $345,003 for the
year ended December 31, 2002, an increase of 39%. The increase was due to an
increase in customers in 2003 from 2002. Revenue from our LocatePLUS and
Entersect products, increased to $2,543,581 for the year ended December 31, 2003
as compared to $1,471,188 for the year ended December 31, 2002, an increase of
73%. This increase is attributable to an increase in customers and usage of our
new product offerings launched in 2003. The number of users of our LocatePLUS
and Entersect products increased to 14,184 at December 31, 2003 from 10,966 at
December 31, 2002, an increase of 29%. In 2003, we launched criminal records
searches, corporate record searches, and our enhanced phone number search. In
2002, we began substantial delivery of our LocatePLUS and Entersect products
through channel partnerships. Revenue from our channel partners increased to
$263,834 for the year ended December 31, 2003 as compared to $32,284 for the
year ended December 31, 2002 an increase of 717%. The increase is attributed to
the addition of new channel partners and our commencement of sales and channel
partnerships. As part of deploying channel partner agreements, we occasionally
provide engineering services. In 2003 we recognized $105,667 in engineering
revenue as compared to $53,333 recognized in 2002. These services are not
recurring and are dependent on customer needs. In 2002, we launched our
LocatePLUS Anywhere wireless product. We recognized revenue of $7,417 in 2003
as compared to $1,980 in 2002, an increase of 275%. We expect online, wireless,
and channel revenue to increase and CD-ROM revenue to be stable during the next
twelve months.
Costs of revenues. For the year ended December 31, 2003, our costs of revenue
for Worldwide InformationTM were $91,775 as compared to $90,397 for the year
ended December 31, 2002 Data cost are relatively fixed even as revenue from the
product increases, no marked increase in costs is realized. For the year ended
December 31, 2003, our costs of revenue associated with LocatePLUS and channel
partner sales were $2,606,875, as compared to $1,217,809 for the year ended
December 31, 2002, an increase of 114%. This increase is primarily attributable
to costs associated with the acquisition of new data sets. Costs of revenues
are expected to stabilize at about $3.5 million annually, as that amount
represents the cost for the required data sets. As revenue increases, costs of
revenue are not expected to increase proportionately. Costs of engineering
services were allocated based on time spent for engineering services. Costs of
wireless revenues are primarily the cost of wireless connectivity and the
amortized cost of devices sold to end users.
Selling and marketing expenses. Selling and marketing expenses for the year
ended December 31, 2003 were $1,049,381, as compared to $1,001,529 for the year
ended December 31, 2002, an increase of approximately 5%. This increase in
expenses is attributable primarily to an increase in our sales force and
commissions associated with increased sales volume. We expect selling and
marketing expense to increase over the next twelve months as we focus greater
efforts on increasing revenue.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 2003 were $3,804,200 as compared to $3,257,546
for the year ended December 31, 2002, a increase of 17%. This increase is
attributable primarily to an increase in costs associated with investor
relations activities. We anticipate general and administrative expenses to
increase over the next twelve months.
Interest income. Interest income increased to $137,253 for the year ended
December 31, 2003, from $53,835 for the year ended December 31, 2002. This
increase is attributable to interest earned on a certain $1,000,000 note issued
to us in 2002, of which $838,508 of principal remained outstanding as of
December 31, 2003. As of March 19, 2004, $603,500 on this loan remains
outstanding.
12
Interest expense. Interest expense increased to $686,315 for the year
ended December 31, 2003, from $397,674 for the year ended December 31, 2002, an
increase of 73%. This increase is attributable to notes payable issued in 2003.
Other Income. Other income increased to $40,605 for the year ended
December 31, 2003, from $21,122 for the year ended December 31, 2002. This
increase is attributable to miscellaneous sales and to income recorded for the
repayment of previously written off debt.
LIQUIDITY AND CAPITAL RESOURCES
From our incorporation in 1996 through December 31, 2003, we raised
approximately $22.3 million through a series of private placements and public
offerings of equity and convertible debt to fund marketing and sales efforts and
develop our products and services.
As of December 31, 2003, our cash and cash equivalents totaled $1,522,922.
During 2003, we used approximately $3.6 million in operating activities
principally to fund our net losses.
During 2002, we loaned $1.0 million to Andover Secure Resources, Inc, an
unaffiliated third party leasing company, due to the favorable terms of this
loan. As of December 31, 2003, $838,508 on this loan remained outstanding. As
of March 19, 2004, $603,500 on this loan remained outstanding.
During 2003, we received $1.6 million, net of issuance costs, by issuing
subordinated promissory notes bearing simple interest ranging from 10% and 12%
per annum. In conjunction with the issuance of these notes, warrants to
purchase 2,500,000 shares of Class B Non-Voting Common stock with a weighted
average exercise price of $0.14 were also issued.
We raised approximately $2.4 million of equity during 2003. Management
believes our current sources of liquidity, funding, and customer demand are
adequate to sustain our current level of operations through the end of 2004.
However, to execute our current planned expansion of operations, additional
financing would be necessary. Under the put, we sold 2,708,637 shares for a
total $651,068 in net proceeds through December 31, 2003. The remaining
available under the put at December 31, 2003 was $4,348,932. Through March 19,
2004, we have issued 7,915,427 shares of Class A Voting Common Stock in
connection with our exercise of the put, resulting in net proceeds of $2,797,914
to the Company. Management's plans include increasing sales, expanding
infrastructure, and hiring additional staff. To accomplish this, we intend to
identify sources of additional capital and seek funding from such sources.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease office space and equipment under various operating lease
agreements which terminate on various dates through 2005. Rent expense amounted
to $579,419 and $494,466 during 2003 and 2002, respectively.
CAPITAL LEASES
Through December 31, 2003, we entered into certain long-term equipment
lease agreements. These agreements are classified as capital leases and expire
in 2007. Future minimum lease payments under our non-cancelable capital leases
total $1,381,502.
13
LICENSE AGREEMENTS
We have entered into various data acquisition agreements under which we are
required to make minimum payments totaling $2,751,083 through 2006.
The following represents the contractual obligation and commercial commitments
as of December 31, 2003.
Payments Due by Period
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS. . . . . TOTAL 1 YEAR YEARS YEARS 5 YEARS
Long-Term Debt including current $2,157,328 $1,931,819 $ 225,509 $ - $ -
Capital Leases 1,381,502 1,023,457 358,045 - -
Operating Leases 609,032 522,027 87,005 - -
License Agreements 2,750,992 2,051,427 699,565 - -
Total $6,898,854 $5,528,730 $1,370,124 $ - $ -
---------- ---------- ---------- ---------- ---------
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 Annual Report. 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.
CERTAIN RELATED PARTY TRANSACTIONS
LOANS FROM DIRECTORS
In December 2002, we issued a one-year term note for $250,000 with ten
year, fully vested detachable warrants to Robert Kite. As a condition of his
investment, Mr. Kite required that he be appointed to the Board of Directors of
the Company. The note bears interest at the rate of 10% per annum and is
payable in one lump sum at maturity. The detachable warrants provide for the
purchase of 250,000 shares of our Class B Non-Voting Common Stock with an
exercise price of $0.22 per share. This note was repaid January 2004.
NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY
On March 28, 2003, and pursuant to our Non-employee Directors' Stock Option
Policy, we granted warrants to purchase an aggregate of 105,000 shares of Class
B Non-voting Common Stock, with an exercise price of $0.15, to three of our
Directors (Robert Kite, John Houlihan, and Thomas Garlock).
On November 3, 2003, and pursuant to our Non-employee Directors' Stock
Option Policy, we granted options to purchase an aggregate of 500,000 shares of
Class B Non-voting Common Stock, with an exercise price of $0.20, and paid an
aggregate $50,000 to five of our Directors (Messrs. Kite, Houlihan and Garlock,
Gerard Scalley and Thomas Murphy).
14
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 $89,635 as of December 31, 2003.
NOTES RECEIVABLE FROM RELATED PARTIES
During 2000, we issued cash loans of $400,000 and received, in exchange,
promissory notes from two of our officers, Mr. Jon Latorella and Robert A.
Goddard. Although the notes were due January 3, 2010, their terms provided
that, if, as of January 3, 2003, the officers were still employed by us, then
the obligations and debt evidenced by the notes were to be canceled without
further action, and we are to pay to the officers, no later than February 29,
2004, an amount in cash sufficient to fulfill the officers' tax liabilities
attributable to the cancellation of the notes. As such, we have been expensing
the principal of the notes on a monthly basis and in 2003 and 2002, recognized
$9,722 and $133,000 of amortization expense respectively on notes receivable
from related parties. Additionally, we have accrued approximately $6,701 in
2003 and $71,480 in 2002 ($215,929 cumulative through December 31, 2003)
relating to an estimate of their tax liability expected to be reimbursed by us.
As of January 3, 2003, both Mr. Latorella and Mr. Goddard were employed by
us and, accordingly, the notes were cancelled as of that date. Mr. Goddard
ceased employment with the Company on March 31, 2003.
For more information, see Certain Relationships and Related Transactions,
below.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based
Compensation and Disclosure - an amendment of FASB Statement No.123" (SAS 148).
This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to
provide alternative transition methods for a voluntary change to fair value
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.The Company has not adopted the fair value recognition
principles of SFAS 123; therefore this Statement has had no effect upon the
Company's consolidated financial condition or results of operations. The
Company has provided the additional disclosure required by SFAS 148.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company has no off-balance-sheet arrangements currently in effect or in
effect during the year ended December 31, 2003, including but not limited to any
guarantee contracts that has the characteristics defined in paragraph 3 of FASB
Interpretation No. 45 (November 2002), as amended; any retained or contingent
interest in assets transferred to an unconsolidated entity or similar
arrangement, any obligation that could be accounted for as a derivative
instrument, or any obligation arising out of a variable interest (as referenced
in FASB Interpretation No. 46, as amended).
ITEM 7 - FINANCIAL STATEMENTS
Our financial statements as of and for the twelve months ended December 31,
2003 are set forth in the section of this Annual Report beginning on page F-1.
15
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective January 8, 2003, our audit committee dismissed our former
accountants, PricewaterhouseCoopers LLP ("PwC") as our independent accountants
for the year ending December 31, 2002.
The report of PwC on our financial statements for the fiscal year ended
December 31, 2001 was modified to express substantial doubt regarding our
ability to continue as a going concern. Except as described in the prior
sentence, the reports of PwC on our financial statements for either of the past
two fiscal years did not contain any adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.
In addition, during our two most recent fiscal years and through January 8,
2003, there was no disagreement with PwC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of PwC, would have
caused PwC to make reference to the subject of that disagreement in its reports
on our financial statements for those fiscal periods. During the year ended
December 31, 2002 and the subsequent interim period preceding PwC's dismissal no
event occurred that is required to be disclosed pursuant to 304(a)(1)(iv) of
item 304 of regulation S-B.
A letter from PwC with respect to this matter was filed with the Securities
and Exchange Commission on Form 8-K on January 24, 2003.
On January 8, 2003, the Company's Audit Committee of the Board of Directors
engaged Carlin, Charron & Rosen, LLP ("Carlin") 446 Main Street, Worcester,
Massachusetts 01608-2359, a member of the Securities and Exchange Commission
practice section of the AICPA, was engaged as our new independent accountants.
During the two most recent fiscal years and the interim period preceding the
engagement of Carlin, we have not consulted with Carlin regarding either: (i)
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
our financial statements, and no written report or oral advice was provided to
us by Carlin that Carlin concluded was an important factor considered by us in
reaching a decision as to the accounting, auditing, or financial reporting
issue; or (ii) any matter that was either the subject of a "disagreement" or a
reportable event, as those terms are used in Item 304(a)(1)(iv) of Regulation
S-B and the related instructions to Item 304 of Regulation S-B.
ITEM 8A - CONTROLS AND PROCEDURES
In accordance with Securities Exchange Act of 1934 (the "Exchange Act"), Rules
13a - 15(c) and 15d - 15(e), we carried out an evaluation, under the supervision
and with the participation of the Chief Executive Officer and Chief Financial
Officer, as well as other key members of our management, of the effectiveness of
our disclosure controls and procedures as of a date within 90 days prior to the
filing of this report. Under the direction of our Chief Executive Officer and
Chief Financial Officer, we evaluated our disclosure controls and procedures and
internal control over financial reporting, and concluded that (i) our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and (ii) no change in
internal control over financial reporting occurred during the quarter ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting.
16
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth specific information regarding our executive
officers and directors as of March 31, 2003.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS
- ---------------------------------- ----------------------------- ------------------------------
Jon R. Latorella . . . . . . . . . 40 Chairman of the Board,
President and Chief Executive
Officer
Sonia P. Bejjani . . . . . . . . . 35 Director; President-Worldwide
Information, Inc.
James C. Fields. . . . . . . . . . 36 Vice President of Finance,
Treasurer and Secretary,
Acting Chief Financial Officer
Steven W. Silva. . . . . . . . . . 42 Vice President of
Business Development
Thomas Garlock(1). . . . . . . . . 47 Director
John P. Houlihan (1) . . . . . . . 58 Director
Robert H. Kite(1). . . . . . . . . 49 Director
Thomas E. Murphy(2). . . . . . . . 45 Director
Gerard Scalley(2). . . . . . . . . 48 Director
(1) Member of our Compensation Committee.
(2) Member of our Audit Committee.
CURRENT DIRECTORS AND OFFICERS
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.
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.
JAMES C. FIELDS was appointed our Vice President of Finance, Treasurer,
Secretary and Acting Chief Financial Officer on March 31, 2003. Prior to that,
Mr. Fields served as our Director of Finance since February 2001. Prior to
joining us, Mr. Fields was the Controller and Vice President of operations at CO
Space, a carrier neutral collocation company. Mr. Fields is a certified public
accountant and holds a Bachelor of Arts in Accounting from the College of St.
Scholastica, which he received in 1992, and a Masters of Business Administration
from Babson College, which he received in 1999.
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 collaboration solutions,
where he 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.
17
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, and is currently a member of our Audit Committee.
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,
and he is currently the Chairman of the Compensation Committee of our Board of
Directors.
ROBERT H. KITE has been President of KFC, Inc., the managing entity of KFC,
LLLP, a private investment entity, since 1981. Mr. Kite has also served on the
Board of National Energy, Inc., a publicly traded energy exploration and
exploitation company, since 1987. National Energy, Inc. filed for Chapter 11
bankruptcy in 1999, and was subsequently reorganized. Mr. Kite is also on the
Board of Directors of the FBI Citizens' Academy (Charter Academy) of Phoenix,
Arizona, and Child Health U.S.A. of Scottsdale, Arizona. Mr. Kite holds a
Bachelor of Science in Political Science and Psychology which he received from
Southern Methodist University 1977. Mr. Kite joined our Board of Directors in
December 2002, and is currently a member of the Compensation Committee of the
Board of Directors.
THOMAS E. MURPHY was employed by Oftring & Company, Inc., a registered
broker-dealer located in Worcester, Massachusetts, from 1989 to 2004, where he
held the title of Senior Vice President. Mr. Murphy holds a Bachelors of the
Arts in Investments from Babson College, which he received in 1981. Mr. Murphy
joined our Board of Directors on March 28, 2003, and he is currently the
chairman of the Audit Committee of our Board of Directors.
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. Mr. Scalley joined our Board of
Directors in June 2002, and is currently a member of our Audit Committee.
Each of the directors holds such his or her office until his or her
successor is duly chosen and qualified, or until his or her earlier resignation
or removal. The Company is not aware of any family relationships between any of
the officers and any of the Company's directors. Each of the officers holds such
office until his or her successor shall have been duly chosen and shall have
been qualified, or until his earlier resignation or removal. We do not have any
employment agreements with any of our employees.
18
FORMER DIRECTORS AND OFFICERS
Dr. Richard B. Yules, a former member of our Board of Directors, resigned
from the Board on March 12, 2003.
Mr. Robert A. Goddard, our former Chief Financial Officer, Treasurer, and
Secretary, ceased employment with us on March 31, 2003.
SECTION 16 COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10% of a registered class of our
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors and greater than 10%
beneficial owners are required to furnish us with copies of all forms they file
pursuant to Section 16(a).
On November 3, 2003, Mr. Scalley, Mr. Murphy, Mr. Kite, Mr. Houlihan, Mr.
Garlock, Mr. Latorella, and Ms. Bejjani were each issued an option to purchase
100,000 shares of Class B Non-Voting Common Stock with an exercise price of
$0.20. None of the above filed a Form 4 in a timely fashion as required by
Section 16(a). The Company subsequently filed a Form 5 with respect to such
issuance on February 17, 2004.
On December 18, 2003, Mr. Latorella was issued options to purchase 4,250,000
shares of Class A Voting Common Stock with an exercise price of $0.25 and
5,000,000 shares of Class A Voting Stock with an exercise price of $1.00. Mr.
Latorella did not file a Form 4 in a timely fashion as required by Section
16(a). The Company subsequently filed a Form 5 with respect to such issuance on
February 17, 2004.
On December 18, 2003, Mr. Fields was issued options to purchase 750,000 shares
of Class A Voting Common Stock with an exercise price of $0.25. Mr. Fields did
not file a Form 4 in a timely fashion as required by Section 16(a). The Company
subsequently filed a Form 5 with respect to such issuance on February 17, 2004.
On December 18, 2003, Ms. Bejjani was issued options to purchase 250,000 shares
of Class A Voting Common Stock with an exercise price of $0.25. Ms. Bejjani did
not file a Form 4 in a timely fashion as required by Section 16(a). The Company
subsequently filed a Form 5 with respect to such issuance on February 17, 2004.
Except as set forth in the proceeding paragraph, and based solely on review
of the copies of such reports furnished to us and written representations from
reporting persons that no other reports were required, to our knowledge, all
such persons complied with all of the Section 16(a) filing requirements
applicable to them with respect to 2003.
AUDIT COMMITTEE.
The Audit Committee of the Board of Directors is responsible for the
appointment, compensation and oversight of our independent auditors, reviews the
scope of the audit services provided by our independent accountants, and reviews
our accounting practices and internal accounting controls. Currently, the
members of the Audit Committee are Messrs. Murphy and Scalley. There is one
vacancy on the Audit Committee of the Board of Directors.
Mr. Murphy serves as the Chairman of the Audit Committee. The Board has
determined that Mr. Murphy is a financial expert for the purposes of the
Securities Exchange Act of 1934, as amended.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews and recommends
to the Board of Directors the salaries, benefits and stock option grants of all
employees, consultants, directors and other individuals compensated by us. The
Compensation Committee also administers our equity compensation plan and other
employee benefits plans that we may adopt from time to time. Currently, the
members of the Compensation Committee are Messrs. Garlock, Houlihan and Kite.
19
Mr. Houlihan serves as the Chairman of the Compensation Committee.
CODE OF ETHICS
The Company has not adopted a Code of Ethics; however, the Board of
Directors has indicated that it intends to adopt such a code at the meeting of
the Board of Directors to be held immediately following the 2004 Annual Meeting
of Stockholders, which is anticipated to be held in May 2004.
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth, for 2003, 2002 and 2001, 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, 2003, 2002 and 2001
exceeded $100,000 (the "Named Executive Officers").
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND ($) ($) (#) ($)
PRINCIPAL POSITION YEAR
JON R. LATORELLA . . . . 2003 58,209(1) - 9,350,000(2) 13,200(3)
------- --------- -------- ------------- ---------
President and. . . . . . 2002 50,100(1) - - 13,200(3)
Chief Executive Officer. 2001 48,850(1) - - 13,200(3)
JAMES C. FIELDS(4) . . . 2003 112,901 - 1,250,000(5) -
Acting Chief Financial . 2002 104,160 - - -
Officer, Treasurer and . 2001 86,673 - 500,000 -
Secretary
ROBERT A. GODDARD(6) . . 2003 61,539 - - -
Former Chief Financial . 2002 123,658 - - 8,079(7)
Officer, Treasurer and . 2001 123,802 - - 8,079(7)
Secretary
(1) Mr. Latorella elected to reduce his annual salary to $50,100 in
September 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.
Notwithstanding the Board's vote, Mr. Latorella decided to forego the increase
and, as a result, his salary was not modified in 2002. Mr. Latorella's salary
was increased to $150,000 per annum in October 2003.
(2) On December 18, 2003, Mr. Latorella was granted incentive stock options
to purchase 4,250,000 and 5,000,000 Class A Voting Common Stock and on November
3, 2003, 100,000 Class B Non-Voting Common Stock with exercise prices of $0.25,
$1.00, and $0.20 per share respectively.
(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) On December 18, 2003, Mr. Fields commenced his employment with us in
2001. Mr. Fields became an executive officer with the Company on March 31,
2003.
(5) Mr. Fields was granted incentive stock options to purchase 1,250,000
shares of Class A Voting Common Stock with an exercise price of $0.25 per share.
(6) Mr. Goddard ceased employment with us on March 31, 2003. As part of a
severance arrangement that we entered into with Mr. Goddard, an incentive stock
option to purchase 1,000,000 shares of Class A Voting Common Stock owned by Mr.
Goddard was cancelled and, in lieu of that option, Mr. Goddard was issued a
fully vested non-qualified stock option to purchase 250,000 shares of Class A
Voting Common Stock with an exercise price of $0.15 per share.
(7) Mr. Goddard received a monthly automobile allowance of $523 and a fuel
allowance as part of his compensation and severance. This benefit terminated on
June 30, 2003.
20
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number Of Percent of
Securities Total
Underlying Options/
Options/SARs SARs Exercise
Granted Granted To Of Base
Employees In Price Expiration
Name (#) Fiscal Year ($/Sh) Date
Jon R. Latorella . . 4,250,000(1) 38% $ 0.25 12/18/2008
------------ ------------ ------- ----------
President and Chief
Executive Officer. . 5,000,000(1) 44% $ 1.00 12/18/2008
100,000(2) 2% $ 0.20 11/03/2008
James C. Fields. . . 500,000(1) 4% $ 0.15 3/31/2013
Acting
Chief Financial . . 750,000(1) 6% $ 0.25 12/18/2013
(1) Class A Voting Common Stock
(2) Class B Non-Voting Common Stock
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2003, we had 76,076,691 shares of Class A Voting Common
Stock and 72,898,596 shares of Class B Non-voting Common Stock issued and
outstanding. The table on the following page sets forth certain information
known to us with respect to the beneficial ownership of our Class A Voting
Common Stock and Class B Non-voting Common Stock on December 31, 2003, by:
- - each of our directors;
- - each of our executive officers;
- - each person known to us to beneficially own more than 5% of either class
of our common stock; and
- - all of our directors and executive officers as a group.
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.
21
CLASS A VOTING CLASS B NON-VOTING
COMMON STOCK COMMON STOCK
----------------------------- -------------------------------
NUMBER OF NUMBER OF
SHARES SHARES PERCENTAGE
BENEFICIALLY PERCENTAGE BENEFICIALLY OF SHARES
BENEFICIAL OWNER OWNED OF SHARES OWNED
- ------------------------------------- -------------- ------------- --------------
Directors
JON R. LATORELLA 36,940,500(1) 43.2% 125,000(2) *
SONIA P. BEJJANI 2,750,000(3) 3.5% 125,380(4) *
THOMAS GARLOCK 1,577,838(5) 2.0% 547,560(6) *
JOHN P. HOULIHAN 530,000(7) * 2,519,750(8) 3.4%
ROBERT KITE 333,333 * 743,083(9) *
GERARD SCALLEY - * 155,610(10) *
THOMAS MURPHY 75,000 * 457,500(11) *
Officers
JAMES C. FIELDS 1,125,000(12) 1.5% - *
All directors and executive officers
as a group (8 persons) 43,331,671(13) 47.7% 4,673,883 (14) 6.3%
37
1
* Less than one percent of outstanding shares.
(1) Includes 9,440,000 shares issuable upon exercise of a fully vested stock
options, with a weighted average exercise price of $0.64 per share.
(2) Includes 100,000 shares issuable upon exercise of a fully vested stock
options, with an average exercise price of $0.20 per share.
(3) Consists of fully vested options to purchase 2,750,000 shares with a
weighted average exercise price of $0.20 per share.
(4) Includes 100,000 shares issuable upon exercise of a fully vested stock
options, with an average exercise price of $0.20 per share.
(5) Includes (i) 543,118 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.
(6) Consists of (i) 386,670 shares issuable upon exercise of immediately
exercisable warrants with an exercise price of $0.15 per share, and (ii) options
to purchase 170,000 shares with a weighted average exercise price of $0.18 per
share pursuant to a warrant granted on under our Non-employee Directors Stock
Option Policy.
(7) 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.
(8) 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 170,000 shares with a weighted average
exercise price of $0.18 per share granted under our Non-employee Directors Stock
Option Policy.
22
(9) Includes fully vested and immediately exercisable warrants to purchase
250,000 shares with an exercise price of $0.22 per share issued in December 2002
and options to purchase 135,000 shares with a weighted average exercise price of
$0.19 per share pursuant to a warrant and option granted on under our
Non-employee Directors Stock Option Policy.
(10) Includes 135,000 shares issuable upon the exercise of warrants with a
weighted average exercise price of $0.21 per share pursuant to a warrant and
option granted on under our Non-employee Directors Stock Option Policy.
(11) Includes 135,000 shares issuable upon the exercise of warrants with a
weighted average exercise price of $0.21 per share pursuant to a warrant and
option granted on under our Non-employee Directors Stock Option Policy.
(12) Includes the vested portion of stock incentive stock options to purchase up
to 1,750,000 shares with a weighted average exercise price of $0.21 per share.
(13) Includes 14,833,053 shares issuable upon the exercise of convertible
securities.
(14) Includes 708,883 shares issuable upon the exercise of warrants.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 17, 2002, the Board of Directors 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 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 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:
- - still employed by us; or
- - an independent contractor for us; or
- - 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. The Company amortized
this loan assuming its cancellation as of January 3, 2003.
23
As Mr. Latorella was employed by us on January 3, 2003, this loan has been
forgiven in accordance with its terms, and we anticipate that, in accordance
with the loan's terms, we will make a tax equalization payment to Mr. Latorella
in 2004 in the amount of approximately $147,000.
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. However, Mr.
Latorella decided to forego the increase and as such his salary was not restored
to the pre-reduced level in 2002. Mr. Latorella's salary was increased to
$150,000 per annum in October 2003.
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.
Mr. Latorella was granted fully vested incentive stock options to purchase
4,250,000 and 5,000,000 Class A Voting common and 100,000 Class B Non-Voting
common with exercise prices of $0.25, $1.00, and $0.20 per share respectively.
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 was formerly our Chief Financial Officer. Mr. Goddard ceased
his employment with the Company on March 31, 2003.
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 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:
- - still employed by us; or
- - an independent contractor for us; or
- - 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
24
as they generally become due, in which case the principal and accrued interest
will be immediately due and payable. We have amortized this loan assuming its
cancellation as of January 3, 2003.
As Mr. Goddard was employed by us on January 3, 2003, this loan has been
forgiven in accordance with its terms, and we anticipate that, in accordance
with the loan's terms, we will make a tax equalization payment in 2004 to Mr.
Goddard in the amount of approximately $67,012.
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 was fully vested, and it
expires on November 16, 2009. In connection with a severance agreement that we
entered into with Mr. Goddard, that option has been cancelled, and we issued to
him, in lieu of that option, a ten year non-qualified stock option to purchase
250,000 shares of our Class A Voting Common Stock with an exercise price of
$0.15 per share.
JAMES C. FIELDS
Mr. Fields is our Acting Chief Financial Officer.
Stock Option
On June 1, 2001, Mr. Fields was issued incentive stock options to purchase
500,000 shares of our Class A Voting Common Stock with an exercise price of
$0.20 per share, and on March 31, 2003, was issued incentive stock options to
purchase 500,000 shares of our Class A Voting Common Stock with an exercise
price of $0.15 per share, and on December 18, 2003, was issued incentive stock
options to purchase 500,000 shares of our Class A Voting Common Stock with an
exercise price of $0.25 per share.
THOMAS GARLOCK
Mr. Garlock is a member of our Board of Directors.
Equity Compensation for Services Rendered
Mr. Garlock was also issued options under our equity compensation plan to
purchase an aggregate of 1,034,720 shares of our Class A Voting Common Stock
(with an average exercise price of $0.31), of which options to purchase 836,112
were granted in November 1999, options to purchase 38,067 were granted in June
2001, and options to purchase 160,541 were granted in 2002, in consideration for
his strategic advisory and shareholder relations services.
In consideration service as a member of our Board of Directors and for
strategic advisory and shareholder relations services rendered for us, we also
issued warrants to purchase 386,670 shares of our Class B Non-voting Common
Stock to Mr. Garlock of which warrants to purchase 324,581 were granted in
December 2001, and warrants to purchase 62,089 were granted in February 2002.
These ten-year warrants have an exercise price of $0.15 per share.
Non-employee Directors Stock Option and Compensation 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. On March 28, 2003, Mr. Garlock was
issued an additional 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. On November 3, 2003, Mr. Garlock was issued an option to
purchase 100,000 shares of our Class B Non-voting Common Stock for $0.20 per
share and paid was $10,000 pursuant to our Non-employee Directors Stock Option
and Compensation Policy.
25
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 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. On March 28, 2003, Mr. Houlihan
was issued an additional 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. On November 3, 2003, Mr. Houlihan was issued an
option to purchase 100,000 shares of our Class B Non-voting Common Stock for
$0.20 per share and was paid $10,000 pursuant to our Non-employee Directors
Stock Option and Compensation Policy.
GERARD SCALLEY
Mr. Scalley is a member of our Board of Directors.
Non-Employee Directors Stock Option and Compensation Policy
On August 27, 2002, Mr. Scalley was issued a warrant to purchase 35,000
shares of our Class B Non-voting Common Stock for $0.22 per share pursuant to
our Non-employee Directors Stock Option Policy. On November 3, 2003, Mr.
Scalley was issued an option to purchase 100,000 shares of our Class B
Non-voting Common Stock for $0.20 per share and paid was $10,000 pursuant to
our Non-employee Directors Stock Option and Compensation Policy.
ROBERT KITE
Mr. Kite is member of our Board of Directors. Mr. Kite was appointed to the
Board in December 2002.
Debt Financing of LocatePLUS Holdings Corporation
On March 7, 2001, we borrowed $250,000 from Mr. Kite pursuant to a
promissory note providing for an interest rate of 10% per annum payable monthly.
This loan, plus accrued interest, was repaid in January 2004. In conjunction
with the issuance of that note, we also issued to Mr. Kite a warrant to purchase
shares of our Class B Non-voting Common Stock. This warrant currently permits
Mr. Kite to purchase 250,000 shares of the Company's Class B Non-Voting Common
Stock at $0.22 per share.
Non-Employee Directors Stock Option and Compensation Policy
On March 31, 2003, Mr. Kite was issued a warrant 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. On November 3, 2003, Mr. Kite was
issued an option to purchase 100,000 shares of our Class B Non-voting
Common Stock for $0.20 per share and was $10,000 pursuant to our Non-employee
Directors Stock Option and Compensation Policy.
26
THOMAS MURPHY
Mr. Murphy is a member of our Board of Directors. Mr. Murphy joined the
Board on March 28, 2003.
Brokerage Fees paid to Oftring & Company, Inc.
Mr. Murphy was formerly the Vice President at Oftring & Company, Inc., the
underwriter of our initial public offering. In connection certain private
offerings prior to our Initial Public Offering, we issued to him a five year
warrant to purchase 300,000 shares of our Class B Non-Voting Common Stock with
an exercise price of $0.30 per share. Oftring was paid $166,000 in fees by us
during 2002 for services as a placement agent in connection with the Initial
Public Offering.
Non-Employee Directors Stock Option and Compensation Policy
On March 28, 2003, Mr. Murphy was issued a warrant 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. On November 3, 2003, Mr. Murphy
was issued an option to purchase 100,000 shares of our Class B Non-voting Common
Stock for $0.20 per share and was $10,000 pursuant to our Non-employee Directors
Stock Option and Compensation Policy.
DR. RICHARD B. YULES
Dr. Yules is a former member of our Board of Directors. Dr. Yules resigned
from our Board of Directors on March 12, 2003.
Non-Employee Directors Stock Option Policy
On August 27, 2002, Dr. Yules was issued a warrant to purchase 35,000
shares of our Class B Non-voting Common Stock for $0.22 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 product in California.
Payments for Services Rendered
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.
ITEM 13- EXHIBITS AND REPORTS ON FORM 8-K
REPORTS OF FORM 8-K
On January 13, 2003, we filed a Form 8-K announcing our audit committee
dismissed our former accountants, PricewaterhouseCoopers LLP ("PwC") as our
independent accountants for the year ending December 31, 2002 and engaged
Carlin, Charron & Rosen, LLP ("Carlin"). That filing was amended on January 24,
2003 to include PWC's response.
On March 17, 2003 we filed a Form 8-K announcing the resignation of Dr. Yules on
March 12, 2003 from our Board of Directors.
27
On April 4, 2003, we filed a Form 8-K announcing that, effective March 31, 2003,
Robert A Goddard resigned as Chief Financial Officer, Treasurer, and Secretary
of LocatePLUS Holdings Corporation, and its two subsidiaries, LocatePLUS
Corporation and Worldwide Information, Inc., to pursue other interests.
On April 23, 2003, we filed a Form 8-K announcing that on April 23, 2003, the
Company released earnings for the quarter ended March 31, 2003.
On September 19, 2003, we filed a Form 8-K announcing that the Company
released financial guidance for the third quarter ended September 30, 2003.
On November 3, 2003, we filed a Form 8-K announcing that on October 17, 2003,
LocatePLUS Holdings Corporation announced the acquisition of Voice Power
Technologies, Inc., a Texas based provider of data technology.
On December 10, 2003, we filed a Form 8-K announcing an amendment to the
Directors compensation plan and a change in CEO compensation.
EXHIBITS
3.1 Second Amended and Restated Certificate of Incorporation of LocatePLUS
Holdings Corporation, as filed with the Secretary of State of the State of
Delaware on March 19, 2002.(1)
3.2 By-Laws of LocatePLUS Holdings Corporation.(1)
4.1 Warrant and Unit Agreement by and between LocatePLUS Holdings
Corporation and Transfer Online, Inc., dated March 22, 2002.(1)
4.2 Form of Warrant Certificate.(2)
4.3 Form of Unit Certificate.(2)
4.4 Form of Class A Voting Common Stock Certificate.(2)
4.5 Form of Class B Non-voting Common Stock Certificate.(2)
4.6 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of
Class A Voting Common Stock).(1)
4.7 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of
Class B Non-voting Common Stock).(2)
4.8 Form of Convertible Subordinated Promissory Note ("Bridge Note").(1)
4.9 Form of Detachable Warrant Agreement ("Bridge Warrant").(1)
4.10 $10,000 Convertible Promissory Note, dated March 9, 2001.(1)
4.11 Amended Form of Warrant Certificate.(3)
4.12 Amended and Restated Warrant and Unit Agreement by and between
LocatePLUS Holdings Corporation and Transfer Online, Inc., dated June 20,
2002.(3)
4.13 Amendment to $10,000 Convertible Promissory Note, dated July 23,
2002.(3)
10.1 Master Lease Agreement between Cummings Properties, Inc. and Worldwide
Information, Inc., dated November 20, 1999.(1)
10.2 Database License Agreement between Worldwide Information, Inc. and
TransUnion Corporation, undated.(4)(*)
10.3 Database License Agreement between LocatePLUS.com, Inc. and Hogan
Information Services Co., dated November 27, 2001.(4)(*)
10.4 License Agreement between Worldwide Information, Inc. and First
American Real Estate Solutions, LLC, dated March 31, 1999.(4)(*)
10.5 Channel Partner Agreement between LocatePLUS Holdings Corporation and
Intellicorp LTD, dated September 1, 2001.(3)
10.6 Letter Agreement between LocatePLUS Holdings Corporation and
Intellicorp LTD, dated December 19, 2001. (1)
10.7 Secured Note, dated June 1, 2001.(1)
28
10.8 $750,000 Loan Agreement between LocatePLUS Holdings Corporation and
Gemstone Investment Company, Inc., dated June 4, 2002.(2)
10.9 Security Agreement between LocatePLUS Holdings Corporation and Gemstone
Investment Company, Inc., dated June 4, 2002.(2)
10.10 Pledge Agreement between Jon R. Latorella and Gemstone Investment
Company, Inc., dated June 4, 2002.(2)
10.11 Mortgage between Jon R. Latorella and Gemstone Investment Company,
Inc., dated June 4, 2002.(2)
10.12 Guaranty Agreement, between Jon R. Latorella and Gemstone Investment
Company, Inc., dated June 4, 2002.(2)
10.13 $175,000 Ten Year Term Promissory Note, made by Jon R. Latorella,
dated January 3, 2000.(2)
10.14 $100,000 Ten Year Term Promissory Note, made by Jon R. Latorella,
dated January 3, 2000.(2)
10.15 $125,000 Ten Year Term Promissory Note, made by Robert A. Goddard,
dated January 3, 2000.(2)
10.16 $750,000 Promissory Note, made by LocatePLUS Holdings Corporation,
dated June 4, 2002.(2)
10.17 Amendment to $750,000 Promissory Note, dated August 30, 2002.(5)
21.1 Subsidiaries of LocatePLUS Holdings Corporation.(1)
23.4 Consent of Carlin, Charron & Rosen, LLP.
(1) Filed as an Exhibit to Form SB-2, filed with the Securities and Exchange
Commission on March 28, 2002 (Registration No. 333-85154).
(2) Filed as an Exhibit to Form SB-2/A, filed with the Securities and
Exchange Commission on June 21, 2002 (Registration No. 333-85154).
(3) Filed as an Exhibit to Form SB-2/A, filed with the Securities and
Exchange Commission on July 24, 2002 (Registration No. 333-85154).
(4) Filed as an Exhibit to Form SB-2/A, filed with the Securities and
Exchange Commission on August 5, 2002 (Registration No. 333-85154).
(5) Filed as Exhibit to Form SB-2/A (post-effective amendment), filed with
the Securities and Exchange Commission on September 10, 2002 (Registration No.
333-85154).
(*) Subject to a request for confidential treatment.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
During 2003, our principal accountant, Carlin, Charron & Rosen LLP, billed
$44,400 in connection with the audit of our annual financial statements and the
review of our quarterly financial statements. In 2002, Carlin billed $22,000
for such services.
AUDIT RELATED FEES
During 2003, Carlin billed us $5,095 for assurance and services related to
the performance of their audit and review of our financial statements. During
2002, Carlin billed $7,000 for such services.
TAX FEES
During 2003, Carlin billed us $8,500 for tax related services. During
2002, Carlin billed $8,000 for such services.
ALL OTHER FEES.
During 2003 and 2002, the Company paid $10,236 in fees to Carlin relating
to the registration of securities.
29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LOCATEPLUS HOLDINGS CORPORATION
By: /s/ Jon R. Latorella
Jon R. Latorella, President and Chief Executive Officer
August 19, 2004
30
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
LocatePLUS Holdings Corporation:
Beverly, Massachusetts
We have audited the accompanying consolidated balance sheet of LocatePLUS
Holdings Corporation as of December 31, 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 2003. 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. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LocatePLUS
Holdings Corporation as of December 31, 2003, and the results of its
consolidated operations and its consolidated cash flows for each of the two
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in the financial
statements, the Company has an accumulated deficit at December 31, 2003 and has
suffered substantial net losses in each of the last two years, which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are disclosed in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
CARLIN, CHARRON & ROSEN LLP
Worcester, Massachusetts
March 18, 2004
F-1
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 1,522,922
Accounts receivable, trade - net. . . . . . . . . . . . . . . . . . . 568,811
Prepaid expenses and other current assets . . . . . . . . . . . . . . 972,256
Related party notes recievable. . . . . . . . . . . . . . . . . . . . 37,500
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 901,728
------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 4,003,217
------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 2,475,080
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735,869
------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,214,166
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,671,819
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,222,801
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 458,452
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 100,349
Current portion of capital lease obligation . . . . . . . . . . . . . 934,594
Note payable - related party. . . . . . . . . . . . . . . . . . . . . 250,000
Convertible notes payable . . . . . . . . . . . . . . . . . . . . . . 10,000
------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 4,648,015
Capital lease obligation, net of current portion. . . . . . . . . . . . 336,158
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,509
------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5,209,682
------------
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . --
Stockholders' equity:
Class A common stock, $0.01 par value; 150,000,000 shares authorized;
76,076,691 shares issued and outstanding at
December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 760,767
Class B common stock, $0.01 par value,
250,000,000 shares authorized;
72,898,596 shares issued and outstanding at
December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 728,986
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 20,967,472
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,237,448
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (22,690,187)
------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 2,004,484
------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 7,214,166
============
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
F-2
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
2003 2002
Revenues
Information sales - CD Rom . . . . $ 478,278 $ 345,003
Information sales - online . . . . 2,543,581 1,471,188
Information sales - channel. . . . 263,834 32,284
Information sales - wireless . . . 7,417 1,980
Engineering services . . . . . . . 105,667 53,333
-------------------- ------------
Total revenues . . . . . . . . . . 3,398,777 1,903,788
-------------------- ------------
Costs and expenses:
Costs of revenues
CD Rom. . . . . . . . . . . . . 91,775 90,397
Online and channel. . . . . . . 2,606,875 1,217,809
Wireless. . . . . . . . . . . . 2,749 1,100
Engineering . . . . . . . . . . 26,025 9,297
Selling and marketing. . . . . . . 1,049,381 1,001,529
General and administrative . . . . 3,804,200 3,257,546
-------------------- ------------
Total operating expenses. . . . 7,581,005 5,577,678
-------------------- ------------
Operating loss. . . . . . . . . . . . (4,182,228) (3,673,890)
Other income (expense):
Interest income. . . . . . . . . . 137,253 53,835
Interest expense . . . . . . . . . (686,315) (397,674)
Other income . . . . . . . . . . . 40,605 21,122
Write-off accrued license fees . . 283,500 -
-------------------- ------------
Net loss. . . . . . . . . . . . . . . $ (4,407,185) $ (3,996,607)
==================== ============
Basic and diluted net loss per share. $ (0.03) $ (0.04)
Shares used in computing basic and
diluted net loss per share. . . . . . 130,299,353 111,798,301
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
F-3
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------- ---------- -------------- -------------
Balance at December 31, 2001. . . . . . . . . . 53,108,580 $ 531,086 48,527,054 $ 485,270 $ 14,213,637
Issuance of common stock at
$0.15 per share, net of issuance
costs of $28,478 . . . . . . . . . . . . . . . - - 8,113,672 81,137 1,107,436
Issuance of warrants to purchase
common stock in exchange
for services . . . . . . . . . . . . . . . . . - - - - -
Payment of stock subscription
receivable. . . . . . . . . . . . . . . . . . . - - - - -
Issuance of Units at $0.30 per
unit net of $590,662 issuance
cost . . . . . . . . . . . . . . . . . . . . . - - 12,000,000 120,000 1,929,338
Exchange of convertible notes
payable plus accrued interest
at $0.22 per share . . . . . . . . . . . . . . 1,681,712 16,817 - - 386,794
Exercise of detachable warrants . . . . . . . . 60,000 600 - - 8,040
Beneficial conversion feature
on convertible debt. . . . . . . . . . . . . . - - - - 104,503
Issuance of detachable warrants
to purchase common stock in
conjunction with debt and lease
financing. . . . . . . . . . . . . . . . . . . - - - - -
Net loss for the year ended
December 31, 2002. . . . . . . . . . . . . . . - - - - -
------------ ------------- ---------- -------------- -------------
Balance at December 31, 2002. . . . . . . . . . 54,850,292 $ 548,503 68,640,726 $ 686,407 $ 17,749,748
------------ ------------- ---------- -------------- -------------
Payment of stock subscription
receivable . . . . . . . . . . . . . . . . . . - - - - -
Issuance of detachable warrants to
purchase common stock in
conjunction with debt and lease
financing. . . . . . . . . . . . . . . . . . . - - - - -
Issuance of common stock in
exchange for services. . . . . . . . . . . . . 3,547,519 35,475 1,262,500 12,625 551,900
Issuance of units at $0.16 per
unit . . . . . . . . . . . . . . . . . . . . . 2,477,250 24,773 257,695 113,892 396,360
Issuance of common stock
in exchange for services . . . . . . . . . . . - - 125,000 1,250 12,500
Issuance of detachable warrants
to purchase common stock in
exchange for service . . . . . . . . . . . . . - - - - -
Issuance of options to purchase
common stock as part of
severance agreement. . . . . . . . . . . . . . - - - - 17,870
Exercise of options @ $0.20 . . . . . . . . . . 1,414,450 14,145 - - 268,746
Net Issuance options exercised. . . . . . . . . 2,170,909 21,709 - - (21,709)
Issuance of units at $0.16 per
unit . . . . . . . . . . . . . . . . . . . . . - - 370,370 3,704 55,227
Issuance of shares throughout
the year . . . . . . . . . . . . . . . . . . . 8,907,634 89,076 - - 1,189,013
Issuance of shares in
accordance with put option . . . . . . . . . . 2,708,637 27,086 - - 623,982
Issuance of common stock
for investment in subsidiary . . . . . . . . . - - 2,500,000 25,000 262,500
Net loss for the year ended
December 31, 2003. . . . . . . . . . . . . . . - - - - -
------------ ------------- ---------- -------------- -------------
Balance at December 31, 2003. . . . . . . . . . 76,076,691 $ 760,767 72,898,596 $ 728,986 $ 20,967,472
------------ ------------- ---------- -------------- -------------
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
COMMON
STOCK TOTAL
SUB- STOCKHOLDERS'
SCRIPTIONS ACCUMULATED EQUITY
WARRANTS RECEIVABLE DEFICIT (DEFICIT)
-------------- ---------- ------------- ------------
Balance at December 31, 2001. . . . . . . . . . $ 547,994 $ (4,500) (14,286,395) 1,487,092
Issuance of common stock at
$0.15 per share, net of issuance
costs of $28,478 . . . . . . . . . . . . . . . - - - 1,188,573
Issuance of warrants to purchase
common stock in exchange
for services . . . . . . . . . . . . . . . . . 236,177 - - 236,177
Payment of stock subscription
receivable. . . . . . . . . . . . . . . . . . . - 4,500 - 4,500
Issuance of Units at $0.30 per
unit net of $590,662 issuance
cost . . . . . . . . . . . . . . . . . . . . . 960,000 (174,908) - 2,834,430
Exchange of convertible notes
payable plus accrued interest
at $0.22 per share . . . . . . . . . . . . . . - - - 403,611
Exercise of detachable warrants . . . . . . . . - - - 8,640
Beneficial conversion feature
on convertible debt. . . . . . . . . . . . . . - - - 104,503
Issuance of detachable warrants
to purchase common stock in
conjunction with debt and lease
financing. . . . . . . . . . . . . . . . . . . 80,662 - - 80,662
Net loss for the year ended
December 31, 2002. . . . . . . . . . . . . . . - - (3,996,607) (3,996,607)
-------------- ---------- ------------- ------------
Balance at December 31, 2002. . . . . . . . . . $ 1,824,833 $(174,908) $(18,283,002) $ 2,351,581
-------------- ---------- ------------- ------------
Payment of stock subscription
receivable . . . . . . . . . . . . . . . . . . - 174,908 - 174,908
Issuance of detachable warrants to
purchase common stock in
conjunction with debt and lease
financing. . . . . . . . . . . . . . . . . . . 208,481 - - 208,481
Issuance of common stock in
exchange for services. . . . . . . . . . . . . 600,000
Issuance of units at $0.16 per
unit
Issuance of common stock
in exchange for services . . . . . . . . . . . - - - 13,750
Issuance of detachable warrants
to purchase common stock in
exchange for service . . . . . . . . . . . . . 49,173 - - 49,173
Issuance of options to purchase
common stock as part of
severance agreement. . . . . . . . . . . . . . - - - 17,870
Exercise of options @ $0.20 . . . . . . . . . . - - - 282,891
Net Issuance options exercised. . . . . . . . . - - - -
Issuance of units at $0.16 per
unit . . . . . . . . . . . . . . . . . . . . . 41,069 - - 100,000
Issuance of shares throughout
the year . . . . . . . . . . . . . . . . . . . - - - 1,278,089
Issuance of shares in
accordance with put option . . . . . . . . . . - - - 651,068
Issuance of common stock
for investment in subsidiary . . . . . . . . . - - - 287,500
Net loss for the year ended
December 31, 2003. . . . . . . . . . . . . . . - - (4,407,185) (4,407,185)
-------------- ---------- ------------- ------------
Balance at December 31, 2003. . . . . . . . . . $ 2,237,448 $ - $(22,690,187) $ 2,004,486
-------------- ---------- ------------- ------------
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
F-4
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . ($4,407,185) ($3,996,607)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation and amortization
of property and equipment. . . . . . . 571,527 475,542
Provision for doubtful accounts . . . . 150,603 32,180
Interest expense related
to warrants issued with debt . . . . . 327,420 4,020
Interest expense related
to beneficial conversion feature. . . . - 104,503
Interest expense recorded
on mandatorially convertible debt. . . - 40,773
Amortization of notes
receivable from related parties. . . . 9,722 133,334
Amortization of intangible assets . . . 28,512 -
Write down of accrued license fees. . . 283,500 -
Expense recorded for fair value
of stock, options, and warrants
issued for services. . . . . . . . . . 261,309 238,603
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . (449,848) (148,156)
Prepaid expenses and other assets . . . (5,006) (154,432)
Other assets. . . . . . . . . . . . . . (113,772) 50,488
Accounts payable. . . . . . . . . . . . (292,170) 115,678
Accrued expenses. . . . . . . . . . . . 24,510 101,550
Deferred revenue. . . . . . . . . . . . (24,112) (145,545)
-------------------- ------------
Net cash used in operating activities . (3,634,990) (3,148,069)
-------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayment
of purchased note receivable . . . . . 539,767 1,018,525
Purchase of note receivable . . . . . . (210,021) (1,250,000)
Purchases of property and
equipment. . . . . . . . . . . . . . . (74,568) (150,636)
Proceeds from sale of property
and equipment. . . . . . . . . . . . . 1,500 -
-------------------- ------------
Net cash provided by
investing activities . . . . . . . . . 256,678 (382,111)
-------------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . (561,790) (600,000)
Proceeds from issuance of
debt . . . . . . . . . . . . . . . . . 1,816,000 1,382,900
Payments of obligations
under capital lease. . . . . . . . . . (737,504) (169,514)
Proceeds from issuance of
common stock and collection of stock
subscriptions receivable,
net of issuance costs . . . . 2,723,315 -
Deposit for Units . . . . . . . . . . . - 3,662,143
-------------------- ------------
Net cash provided by
financing activities . . . . . . . . . 3,240,021 4,275,529
-------------------- ------------
Net (decrease) increase in
cash and cash equivalents. . . . . . . . (138,291) 745,349
Cash and cash equivalents,
beginning of period. . . . . . . . . . . 1,661,213 915,864
-------------------- ------------
Cash and cash equivalents,
end of period. . . . . . . . . . . . . . 1,522,922 1,661,213
==================== ============
Supplemental disclosures of cash
flows information:
Cash paid for interest. . . . . . . . . . $ 378,894 $ 144,215
Supplemental disclosure of non
- -cash investing and financing activities:
Acquisition of property
and equipment under capital leases . . . $ 1,658,416 $ 211,436
Exchange of convertible
debt for common stock. . . . . . . . . . - 312,000
Relative fair value of detachable
warrants issued in conjunction
with convertible debt. . . . . . . . . . 327,420 4,020
Value ascribed to beneficial
conversion features on convertible
debt . . . . . . . . . . . . . . . . . . - 104,503
Issuance of common stock for
subscription receivable. . . . . . . . . - 174,908
Fair value of warrants issued
in conjunction with services . . . . . . 261,308 241,103
F-5
See Independent Auditors' Report and Notes to Consolidated Financial Statements.
F-5
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. Also, 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. In September 2003, the Company, through its newly
formed wholly owned subsidiary Certifion Corporation, acquired all of the assets
of Project Entersect Corporation. The acquisition was accounted for as a
purchase and is recorded with the Company's operations from the date of purchase
through December 31, 2003. In October 2003, the Company merged Voice Power
Technology into its newly formed wholly owned subsidiary Dataphant, Inc. There
were no assets acquired in this acquisition and the Company issued 2,500,000
shares of its Class B Non-Voting common stock to the stock holders of Voice
Power Technology in consideration for a two year non-competition agreement with
these stock holders. All intercompany accounts and transactions have been
eliminated in consolidation.
The Company provides access to public information such as bankruptcies,
real estate transactions, 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 and in
2002 began providing information through the use of handheld wireless devices.
LIQUIDITY AND OPERATIONS
The accompanying consolidated 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 substantial losses in each of the last two years, and has incurred an
accumulated deficit of approximately $22.7 million through December 31, 2003.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. These financial statements don not include any
adjustments that might result from the outcome of this uncertainty.
The Company raised approximately $2,400,000 and $4,800,000 of equity during
2003 and 2002 respectively. The ultimate success of the Company is still
dependent upon its ability to secure additional financing to meet its working
capital and ongoing project development needs.
During August 2003, the Company issued a put to one investor through an
equity agreement, which provides that the Company, subject to certain
limitations, has the right to sell, at its discretion, up to $5 million in
shares of the Company's Class A Voting Common Stock to the investor at a
purchase price equal to 95% of the lowest closing bid price for the Company's
Class A Voting Common Stock during a ten-day pricing period. The number of
shares that the Company may sell to that investor is limited by the trading
volume of the Company's Class A Voting Common Stock and certain customary
closing conditions. The Company sold 2,708,637 shares for a total $651,068 in
net proceeds from the investor through December 31, 2003. The remaining amount
available under the put at December 31, 2003 was $4,348,932. Subsequent to year
end, the Company has issued an additional 5,206,790 shares of the Company's
Class A Voting common stock to this investor, resulting in net proceeds to the
Company of approximately $2,100,000.
F-6
Management believes the Company's current sources of liquidity, funding,
and customer demand are adequate to sustain its current level of operations
through the end of 2004. Management's plans include increasing sales, expanding
infrastructure, and hiring additional staff. To accomplish this will require
additional financing. Management plans to explore both debt and equity options,
which the board of directors is willing to pursue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all money market funds, bank certificates of deposit,
and short term investments with original maturities of three months or less at
the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist of
cash and cash equivalents, accounts receivable and notes receivable. The risk
with respect to cash and cash equivalents is minimized by the Company's policies
in which such investments are placed only with highly rated financial
institutions and in instruments with relatively short maturities. The financial
stability of these financial institutions is constantly reviewed by senior
management. The notes receivable are placed with unrelated companies that are
also reviewed by management. Consequently, the carrying value of cash and cash
equivalents, and notes 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.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method at rates sufficient to
write off the cost of the assets over their estimated useful lives.
INTANGIBLE ASSETS
Costs of acquiring businesses, such as customer lists and non-compete
agreements, are being amortized on a straight-line basis over 2-3 years, while
deferred financing costs are being amortized over the term of the related debt.
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 income 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. The majority of the Company's deferred
tax asset has been established for the expected future benefit of net operating
tax loss and credit carryforwards. A valuation reserve against net deferred tax
assets is required if, based upon available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
REVENUE RECOGNITION
The Company 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, wirelessly
to handheld wireless devices, via XML over the Internet to Channel Partners, or
through licenses of the information on compact disks.
F-7
The Company updates the information contained in compact disks (CDRoms)
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. In October 2002, the Company changed its
method of selling compact disks. Prior to October, compact disks were sold with
an upfront purchase of an annual supply of compact disks, with the purchase
price allocated equally based on the number of compact disks to which the
customer was entitled. Deferred revenue principally related to undelivered
compact disks. Subsequent to October 2002, compact disks are sold individually.
Customers may choose to have the disks automatically shipped and billed.
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.
Wireless customers using LocatePlus Anywhere are 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.
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.
Engineering services in 2003 and 2002 relate to integration services
provided to a third party database provider with whom the Company has an
arrangement whereby the Company provides the third party access to the Company's
database. Revenue is recognized over the term of the contract 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 certain software development costs for capitalization 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.
STOCK COMPENSATION PLANS
The Company applies the disclosure only provisions of the Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition Disclosure" (SFAS 148") for employee stock option
awards. Had compensation cost for the Company's stock option plan been
determined in accordance with the fair value-based method prescribed under SFAS
123, the Company's net loss and basic and diluted net loss per share would have
approximated the pro forma amounts indicated below.
F-8
YEAR ENDED DECEMBER 31
2003 2002
------------------------ ------------
Net loss - reported . . . $ (4,383,229) $(3,996,607)
Amortization of stock
compensation expense. . . (84,246) (100,407)
Pro forma net loss. . . . $ (4,467,475) $(4,097,014)
------------------------ ------------
Pro forma net loss per
share - basic and diluted $ (0.03) $ (0.04)
======================== ============
The weighted average fair value of options granted during 2003 and 2002 was
$0.05 and $0.05 respectively. The Company recognizes forfeitures as they occur.
For purposes of this disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods.
In 2003, the fair value of stock options used to compute pro forma net loss
and net loss per share disclosures was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0%; expected volatility of 25%; average risk-free
interest rate of 3.54% and an expected option holding period of 6 years. In
2002, the fair value of options was estimated at the date of grant using the
minimum value option pricing method since all employee options were issued prior
to the Company's Initial Public Offering. The value was calculated using
expected life of 5 years, average risk free rate of 2.8%, volatility of 0%, and
dividend yield of 0%.
ADVERTISING
The Company charges advertising costs to operations when incurred.
Advertising expense was $9,225 in 2003 and $2,363 in 2002.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during each period. 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. Diluted per share
computations are not presented since the effect would be antidilutive.
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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECENT PRONOUNCEMENTS
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based
Compensation and Disclosure - an amendment of FASB Statement No.123" (SAS 148).
This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to
provide alternative transition methods for a voluntary change to fair value
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.The Company has not adopted the fair value recognition
principles of SFAS 123; therefore this Statement has had no effect upon the
Company's consolidated financial condition or results of operations. The
Company has provided the additional disclosure required by SFAS 148.
3. ACCOUNTS RECEIVABLE, TRADE
Trade accounts receivable are presented net of an allowance for doubtful
collections of $110,458 at December 31, 2003. In determining this allowance,
objective evidence that a single receivable
F-9
is uncollectible as well as a historical pattern of collections of accounts
receivable that indicate that the entire face amount of a portfolio of accounts
receivable may not be collectible is considered at each balance sheet date.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Included in prepaid expenses and other current asses is a balance of
$250,000 paid to NFC Corporation, in the form of 2,500,000 shares of the
Company's Class A Voting common stock, for investor relation services. These
shares were valued at $0.18 per share, the market price on the date of issue, or
$450,000. To date, $200,000 of that amount has been expensed for services
provided to the Company by NFC. Also included in prepaid expense and other
current assets is a $53,300 balance on employee expenses per verbal agreement
with an employee that allowed the employee to exercise 800,000 options with an
exercise price of $0.20 at no cost to the employee. The Company is expensing
this balance over the remaining four months of a one year period. The employee
is expected to pay the Company for any unamortized balance if employment is
terminated before the one year period expires.
5. NOTES RECEIVABLE
RELATED PARTIES
During 2000, the Company issued cash loans of $400,000 in exchange for
promissory notes from certain officers. Although the notes were due January 3,
2010, in the event that, as of January 3, 2003, the officers were (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 would 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 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 notes. As such, the Company has been expensing the
principal of the notes on a monthly basis and in 2003 and 2002 recognized $9,722
and $133,000 of amortization expense, respectively, on notes receivable from
related parties. At December 31, 2003, the net amount of these notes is $0.
Additionally, the Company has accrued approximately $6,701 in 2003 and $71,480
in 2002 ($215,929 cumulative through December 31, 2003 included in accrued
expenses in the balance sheet) relating to an estimate of the officers' tax
liability expected to be reimbursed by the Company.
At December 31, 2003, there were non-interest bearing demand notes receivable in
the amount of $37,500 due from company officers and employees. These notes are
expected to be repaid in 2004.
UNRELATED PARTIES
Demand promissory note receivable from an unrelated leasing company, with
interest at 11% . One million dollars was advanced to the leasing company near
the end of 2002 as proceeds from the Company's initial public offering were
collected. There is no business relationship between the Company and this
leasing company or any officers or directors of either company. Interest income
on the note receivable was approximately $100,000 in 2003 and $23,000 in 2002
and $181,800 is unpaid at December 31, 2003 and is included in prepaid expenses
and other current assets. The remaining principal balance at December 31, 2003
was $838,508. Subsequent to year end, the Company received $235,000 of
principal repayment.
Unsecured note receivable with an unrelated entity. There is an oral agreement
to advance up to $250,000 on this note. There is no business relationship
between the Company and this entity or any officers or directors of either
company, except that the Company is currently performing some administrative and
bookkeeping services for the unrelated entity in exchange for approximately
$1,000 per month. In 2002, the Company advanced a total of $250,000 to this
unrelated entity in the form of cash and services. The remaining balance at
December 31, 2003 was $63,220. There is no stated interest rate on these
advances but the Company believes it is
F-10
entitled to warrants that would allow it to buy stock in the unrelated entity;
however, the terms and conditions of the warrants have yet to be agreed on.
6. INVESTMENT
During 2000, the Company entered into certain agreements, as amended, with
an unrelated party ("IntelliCorp") under which the Company invested cash of
$500,000 in exchange for contingently convertible promissory notes. 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 unrelated party resulting from this Channel Partner Agreement in
favor of the Company. One third of proceeds remitted to the Company under this
arrangement will be treated as repayment of the $500,000 plus accrued interest
and the balance will be recorded as revenue. On full repayment of the $500,000
plus accrued interest, the revenue sharing arrangement will change to a 50:50
basis. Interest on the note ceased to accrue on January 21, 2002 in accordance
with the arrangement. As of that date, interest receivable of $76,280 was due
but not recorded as income. In 2003 and 2002, the Company recognized $10,106
and $16,000, respectively, as partial repayment towards the $500,000, recorded
as other income.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003, consists of the following:
Equipment . . . . . . . . . . . . $3,136,525
Vehicles. . . . . . . . . . . . . 89,635
Software. . . . . . . . . . . . . 157,559
Furniture and fixtures. . . . . . 388,493
Leasehold improvements. . . . . . 539,563
----------
4,311,775
Less accumulated depreciation and
amortization. . . . . . . . . . 1,836,695
----------
Property and equipment, net . . . $2,475,080
==========
The carrying value of assets under capital leases was $1,903,160, net of
amortization of $639,008 as of December 31, 2003.
Depreciation and amortization expense was $576,081 and $475,542 for the
years ended December 31, 2003 and 2002, respectively, which includes
amortization expense on the equipment under capital lease of $277,828 and
$163,532 for the years ended December 31, 2003 and 2002, respectively.
8. OTHER ASSETS
Other assets consist of the following at December 31, 2003:
Customer lists and
non-compete agreement. . $ 328,486
Accumulated amortization (28,512)
Deferred financing costs 459,000
Accumulated amortization (193,639)
Security deposits. . . . 95,534
Deposit on Subsidiary
formed after year end. . 75,000
---------
Total. . . . . . . . . . $ 735,869
=========
F-11
9. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2003:
Payroll and related taxes $314,605
Sales tax . . . . . . . . 26,385
Accounting, legal and
professional fees . . . . 96,667
Other . . . . . . . . . . 20,795
--------
Total . . . . . . . . . . $458,452
========
10. NOTES PAYABLE
On October 12, 2002 the Company completed its initial public offering and
as a result certain convertible notes with detachable warrants were converted at
$0.24 into 1,681,712 Class A Common Shares and the Company recorded $100,903 of
interest expense as a result of the beneficial conversion. In addition, all
detachable warrants were exercised either through purchase or cashless
conversion into 60,000 shares of Class A Common Stock.
Convertible promissory note, due on demand, that bears interest at the rate
of 12% per annum. The note is convertible into 44,444 shares of Class A Voting
Common Stock at the note holder's option. The note requires quarterly payment
of interest until the principal is repaid or converted.
During 2003, the Company received $2.3 million, by issuing subordinated
promissory notes bearing simple interest ranging from 10% and 12% per annum.
The balance of this debt at December 31, 2003, is $2,022,227. The remaining
debt is due in 2004, except for $230,000 due in 2005. In conjunction with the
issuance of these notes, warrants to purchase 2,500,000 shares of Class B
Non-Voting Common stock with a weighted average exercise price of $0.14 were
also issued.
The Company allocated the investment proceeds between the notes and warrants
based on their relative fair values. The relative fair value of the warrants
was determined to be $218,482, which was recorded as debt discount, a reduction
of the carrying amount of the notes. This amount is being amortized to interest
expense over the term of the debt. The unamortized balance of this debt
discount is $124,899 at December 31, 2003 ($4,491 long-term). The fair value of
the warrants was based on the Black-Scholes model. The Black-Scholes
calculation incorporated the following assumptions: 0% dividend yield, 29%
volatility, 3.6% average risk-free interest rate, a ten-year life and an
underlying Class B Non-Voting Common Stock value of $0.14 per share.
11. NOTE PAYABLE - RELATED PARTY
In December 2002, the Company issued a note with detachable warrants
payable to one of its current board members in exchange for $250,000 in cash.
The note has a twelve-month term with interest at a rate of 10% per annum
payable monthly. The detachable warrants were for the purchase of 250,000
shares of the Company's Class B Non-Voting Common Stock at $0.22 per share. The
warrants had a term of ten years and became exercisable upon issue. Subsequent
to year end this note was repaid in full.
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 $41,599, which was recorded as debt discount, a reduction
of the carrying amount of the debt. This amount is being amortized to interest
expense over the term of the debt. 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, 4.1% average
risk-free interest rate, a ten-year life and an underlying Class B Non-Voting
Common Stock value of $0.22 per share.
F-12
12. RELATED PARTY TRANSACTIONS
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 expense of $161,026
associated with the warrants.
In 2002, the Company granted options to purchase 160,541shares of Class A
Voting Common Stock with an average exercise price of $.90 per share and
warrants to purchase 27,089 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 expense of $40,238 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 expense of $9,569 associated with the
warrants.
The fair value of the options granted in 2002 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 $0.90 per share.
The fair value of the warrants granted in 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.
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under various non-cancelable
operating lease agreements which terminate on various dates through 2005. Rent
expense amounted to $579,419 and $494,466 for 2003 and 2002, respectively.
Future minimum payments under non-cancelable operating leases are as
follows:
YEAR ENDING DECEMBER 31,
2004 . . . . . . . . . . $522,027
2005 . . . . . . . . . . 87,005
--------
Total. . . . . . . . . . $609,032
========
CAPITAL LEASES
The Company acquired equipment under long-term capital leases. The
economic substance of the leases is that the Company is financing the
acquisition of the assets through the leases.
F-13
The following is a schedule by years of future minimum lease payments under
the capital leases, together with the net present value of the minimum lease
payments at December 31, 2003.
YEAR ENDING DECEMBER 31,
2004 . . . . . . . . . . . . . $1,023,457
2005 . . . . . . . . . . . . . 353,733
2006 . . . . . . . . . . . . . 3,044
2007 . . . . . . . . . . . . . 1,268
----------
1,381,502
Less: amounts representing
interest and executory costs . 110,750
----------
Present value of future
minimum lease payments . . . . 1,270,752
Less: current portion of
obligation under capital lease 934,594
----------
Long-term obligation under
capital lease . . . . . . . . $ 336,158
==========
LICENSE AGREEMENTS
The Company obtains its data from multiple sources and has entered into
various license agreements with the related data providers. In 2003 and 2002,
the Company recorded $1,738,849 and $665,366 respectively in costs related to
these agreements. 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. The Company is required to make minimum payments under these agreements
as follows:
YEAR ENDING DECEMBER 31,
2004. . . . . . . . . . . $2,051,427
2005. . . . . . . . . . . 679,565
2006. . . . . . . . . . . 20,000
----------
2,750,992
==========
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 could acquire replacement data from other sources; however, such
termination might have an adverse effect on the Company's operations.
LEGAL PROCEEDINGS
The Company is from time to time subject to legal proceedings and claims
which arise in the normal course of its business. Management believes the
outcome of any pending or known matters will not have a materially adverse
effect on the Company's financial position or results of operations.
F-14
14. INCOME TAXES
Deferred tax assets consist of the following at December 31:
2003
Net operating loss carry forwards. . $ 7,421,500
Depreciation and amortization. . . . 481,400
Bad debt reserve . . . . . . . . . . 44,750
Investment loss. . . . . . . . . . . 202,500
Capitalized research and development 810,000
Other. . . . . . . . . . . . . . . . 87,450
----------
Gross deferred tax assets. . . . . . 9,047,600
Valuation allowance. . . . . . . . . (9,047,600)
----------
$ -
==========
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, 2003, the Company had net operating loss carryforwards for
federal and state income tax reporting purposes of approximately $18,300,000.
The federal and state net operating loss carryforwards expire through 2023.
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.
15. COMMON STOCK
DESCRIPTION OF COMMON STOCK
On March 23, 2001, the Company amended its articles of incorporation
wherein it renamed all of 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, 2003, no
dividends have been declared or paid.
On August 12, 2002, the Company commenced its initial public offering of
securities (Registration No. 333-85154, effective August 12, 2002), pursuant to
which the Company offered up 12,000,000 units for $0.30 per unit. Each unit
consisted of one share of Class B Non-voting Common Stock and a three year
redeemable warrant to purchase one share of Class A Voting Common Stock with an
exercise price of $0.50 per share.
As of December 31, 2003, a total of 16,082,239 shares of Class A Voting
Common Stock were reserved for issuance upon exercise of outstanding stock
option and warrant agreements. As of
F-15
December 31, 2003, 10,283,249 shares of Class B Non-voting Common Stock were
reserved for issuance upon exercise of outstanding warrant agreements.
STOCK OPTIONS AND WARRANTS
During 2002, the Company issued options to purchase 261,739 shares of Class
A Voting Common Stock at an average exercise price of $0.90 per share and
warrants to purchase 1,304,158 shares of Class B Non-Voting Common Stock at an
average exercise price of $0.15 per share to third parties in exchange for
services. The Company recorded expense of $59,573 and $190,586, respectively,
associated with these options and warrants.
During 2002, the Company issued warrants to purchase 307,184 shares of
Class B Non-Voting Common Stock at an average exercise price of $0.23 per share
to third parties as part of financing arrangements. The Company will record
interest expense of $51,549 over the life of the financing agreements associated
with these warrants.
During 2002, the Company issued warrants to purchase 250,000 shares of
Class B Non-Voting Common Stock at an exercise price of $0.22 per share to third
parties in exchange for legal services. The Company will record legal expense
of $29,113 over the life of the contract associated with these warrants.
During 2002, the Company issued 36,000 shares of Class A Common Stock for
the exercise of warrants associated with manditorily convertible debt.
During 2002, the Company issued 24,000 shares of Class A Common Stock for
the cashless exercise of 120,000 warrants associated with manditorily
convertible debt.
During 2002, 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 average value of $0.90 per share.
During 2002, 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, 4.4% average risk-free interest rate, a ten-year life and an
underlying Class B Voting Common Stock average value of $0.18 per share.
During 2003, the Company issued notes payable with detachable warrants for
the purchase of 2,880,000 shares of Class B Non-voting Common Stock with an
average exercise price of $0.17 per share that are exercisable for a period of
ten years from the date of issuance.
During 2003, the Company issued units consisting of one share of Class B
Non-Voting Common Stock and a warrant that is convertible into three shares of
Class B Non-Voting Common Stock with an exercise price at $0.27 per share. A
price adjustment mechanism included in the warrants provides that, if the stock
price decreases, the warrants will nevertheless permit the holder to receive,
upon a cashless exercise of the warrants, at least one share of Class A Voting
Common Stock per unit without any cash payment. Warrants convertible into
1,111,110 shares were issued under this agreement.
During 2003, the Company issued units consisting of one share of Class A
Voting Common Stock and a warrant that is convertible into three shares of Class
A Voting Common Stock with an exercise price at $0.16 per share. A price
adjustment mechanism included in the warrants provides that, if the stock price
decreases, the warrants will nevertheless permit the holder to receive, upon a
cashless exercise of the warrants, at least one share of Class A Voting Common
F-16
Stock per unit without any cash payment. Warrants convertible into 7,431,750
shares were issued under this agreement. As of December 31, 2003, 4,218,750
warrants had been exercised resulting in a net issuance of 2,107,909 shares of
Class A Common Stock.
During 2003, the Company issued warrants to purchase 1,775,000 shares of
Class B Non-Voting Common Stock at an average exercise price of $0.22 per share
to third parties in exchange for services. The Company recorded expense of
$49,173 associated with these warrants.
During 2003, 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 average value of $0.90 per share.
During 2003, 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, 4.4% average risk-free interest rate, a ten-year life and an
underlying Class B Voting Common Stock average value of $0.18 per share.
As of December 31, 2003, not including the Company's publicly traded
warrant for the purchase of 12,000,000 shares of Class A Voting Common Stock,
there were a total of 4,082,239 and 10,283,249 options and warrants outside the
Stock Plans for Class A Voting and Class B Non-Voting Stock, respectively.
16. STOCK OPTION PLANS
On November 16, 1999, the Board of Directors approved the Incentive and
Non-Qualified Stock Option Plan as amended (the "1999 Plan"). Under the terms
of the 1999 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 1999 Plan of which 1,304,784 are available for
grant at December 31, 2003. The options are not transferable except by will or
domestic relations order.
On March 28, 2003, the Board of Directors approved the Incentive and
Non-Qualified Stock Option Plan (the "2003 Plan") which was approved by the
stockholders at the May 29, 2003 annual meeting. Under the terms of the 2003
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
2003 Plan. A maximum of 25,000,000 shares of Class A Voting Common Stock and
25,000,000 shares of Class B Non-Voting Common Stock has been approved for
issuance under the 2003 Plan of which 17,500,000 and 19,300,000 Class A and
Class B, respectively, are available for grant at December 31, 2003. The
options are not transferable except by will or domestic relations order.
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. The options are generally fully exercisable when
issued to directors and consultants and exercisable 25% per year and continuing
over four years for employees (based on continual employment). 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
F-17
table presents activity under the Plans for the years ended December 31, 2003
and 2002:
CLASS A CLASS B
- - WEIGHTED WEIGHTED
- - AVERAGE AVERAGE
- - EXERCISE EXERCISE
- - SHARES PRICE SHARES PRICE
Outstanding at
December 31, 2001 10,602,716 0.20 - -
Issued. . . . . . 300,000 0.25 - -
Canceled. . . . . (170,000) 0.20 - -
Outstanding at
December 31, 2002 10,732,716 0.20 - -
Issued. . . . . . 11,480,000 0.57 5,700,000 0.20
Exercised . . . . (1,414,450) 0.20 - -
Canceled. . . . . (1,022,500) 0.20 - -
Outstanding at
December 31, 2003 19,775,766 0.42 5,700,000 0.20
The following table summarizes information relating to options outstanding
at December 31, 2003:
CLASS A
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
0.15 . . . . 250,000 9.25 $ 0.15 250,000 $ 0.15
0.20 - $0.25 14,445,766 7.51 $ 0.22 12,880,766 $ 0.22
0.30 . . . . 80,000 7.01 $ 0.30 80,000 $ 0.30
1.00 . . . . 5,000,000 4.97 $ 1.00 5,000,000 $ 1.00
---------- ------------ ----------- ------------------ ---------
19,775,766 6.45 $ 0.42 18,210,766 $ 0.43
========== ============ =========== ================= =========
CLASS B
- - OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - - WEIGHTED - - -
- - - AVERAGE WEIGHTED - WEIGHTED
RANGE OF - REMAINING AVERAGE - AVERAGE
EXERCISE - CONTRACTUAL EXERCISE - EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
..20 . . . 5,700,000 9.69 $ 0.20 5,700,000 $ 0.20
---------------- ---------- ---------- ---------------- ---------
5,700,000 9.69 $ 0.20 5,700,000 $ 0.20
================ ========== ========== ================ =========
F-7
17. DEFINED CONTRIBUTION RETIREMENT PLAN
The Company sponsors a defined contribution retirement 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. Company matching contributions amounted to
$5,925 and $2,806 in 2003 and 2002, respectively.
F-18
18. 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
DECEMBER 31,
2003 2002
Information sales:
CD Rom. . . . . . . . . . . . $ 478,278 $ 345,003
Online and Channel. . . . . . 2,807,415 1,503,472
Wireless. . . . . . . . . . . 7,417 1,980
------------- ----------
Total information sales. . . . . 3,293,110 1,850,455
============= ===========
Costs of Information sales:
CD Rom. . . . . . . . . . . . 91,775 90,397
Online and Channel. . . . . . 2,606,875 1,217,809
Wireless. . . . . . . . . . . 2,749 1,100
------------- ----------
Total costs of Information sales 2,701,399 1,309,306
============= ===========
19. SUBSEQUENT EVENTS
On January 6, 2004, the Company formed a new wholly-owned subsidiary,
Metrigenics, Inc., with operations located in New York state. Metrigenics was
formed to develop new ways to integrate biometrics with data.
See Independent Auditors Report
F-19