[GRAPHIC OMITED]
LOCATEPLUS HOLDINGS CORPORATION
PROSPECTUS
The information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement containing
this prospectus, which was filed with the Securities and Exchange Commission, is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
LOCATEPLUS HOLDINGS CORPORATION
1,472,808 Shares of Common Stock
This prospectus relates to the resale of up to 1,472,808 shares of our Common
Stock by Dutchess Private Equities Fund L.P. and Dutchess Private Equities Fund
L.P. II (collectively "Dutchess") which will acquire them pursuant to the terms
of convertible Debentures.
We are not selling any securities in this offering and therefore will not
receive any proceeds from this offering. All costs associated with this
registration will be borne by us.
The shares of Common Stock are being offered for sale by Dutchess at prices
established on the Over-the-Counter Bulletin Board during the term of this
offering. Our Common Stock is quoted on the Over-the-Counter Bulletin Board
under the symbol "LPHC.OB." During the 90 day period ending on February 12,
2007, the lowest reported trading price per share for our Common Stock was $0.18
and the highest reported trading price per share for our Common Stock was $0.75.
________________________________________________
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. YOU SHOULD
CAREFULLY REVIEW THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS", WHICH
BEGINS ON PAGE 3, BEFORE YOU MAKE AN INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
AUTHORITY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR THEIR OFFER OR
SALE, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is dated February 26, 2007.
TABLE OF CONTENTS
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PAGE
----
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Forward-Looking Statements. . . . . . . . . . . . . . . . . . . . . . .10
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Selling Security Holders. . . . . . . . . . . . . . . . . . . . . . . .10
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . 11
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selected Consolidated Financial Data. . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .14
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 27
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 28
Executive Compensation Plans. . . . . . . . . . . . . . . . . . . . . 30
Organization Within the Past Five Years . . . . . . . . . . . . . . . .33
Certain Relationships and Related Transactions. . . . . . . . . . . . 34
Market for Common Equity. . . . . . . . . . . . . . . . . . . . . . . 36
Principal Stockholders. . . . . . . . . . . . . . . . . . . . . . . . 37
Description of Capital Stock. . . . . . . . . . . . . . . . . . . . . 39
Limitations on Directors' Liability and Indemnity . . . . . . . . . . .41
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . .42
Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . . 42
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 43
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . F-1
* * *
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information in this prospectus regarding us and the risks associated with
purchasing our securities.
OUR COMPANY
-----------
We are a provider of public information via our proprietary data
integration solutions through our wholly-owned subsidiaries, LocatePLUS
Corporation, Worldwide Information, Inc., Certifion Corporation (d/b/a
Entersect), Dataphant, Inc., and Metrigenics, Inc. (together with LocatePLUS
Holdings Corporation, we refer to these companies collectively as the
"LocatePLUS Group").
Since 1996, we have sold a CD-ROM-based product, which we refer to as
Worldwide Information(TM), that enables users to search certain motor vehicle
records and drivers' license information in multiple states through a dynamic
search engine, using complete or partial information.
Since March 1, 2000, we have maintained a database that is accessible
through the Internet known as LocatePLUS. Our LocatePLUS(TM) database contains
searchable and cross-referenced public information about individuals throughout
the United States, including individuals' names, addresses, dates of birth,
bankruptcies, social security numbers, prior residences and probable
acquaintances (such as neighbors and other individuals sharing a residence) and,
in certain circumstances, real estate holdings, liens, judgments, drivers'
license information and motor vehicle records. Information in our LocatePLUS
database is integrated in a manner that allows users to access it rapidly and
efficiently. During December 2002, we launched another version of our
LocatePLUS(TM) database that is accessible using certain wireless devices
manufactured by third parties, such as personal digital assistants and e-mail
capable pagers. We refer to that product as LocatePLUS AnyWhere(TM).
Our wholly-owned subsidiary, Certifion Corporation (d/b/a Entersect), has
offered on-line self-certification products since September 2003. Metrigenics,
Inc., another wholly-owned subsidiary, was formed in January 2004 to develop
methods for using DNA to determine biometrics, such as height, body-type, foot
and hand size, head shape, facial features, and ethnic origin.
SUMMARY OF THE OFFERING
-----------------------
This offering relates to the offer and sale of up to 1,472,808 shares of
our Common Stock held by certain selling stockholders named in this prospectus.
Although we have agreed to pay the expenses related to the registration of the
shares being offered, we will not receive any of the proceeds from the sale of
the shares. We estimate our total registration costs to be $20,000.
The selling stockholders may, from time to time, sell, transfer or
otherwise dispose of any or all of their shares or interests in shares on any
stock exchange, market or trading facility on which the shares are traded or in
private transactions. These dispositions may be at fixed prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market
price, at varying prices determined at the time of sale, or at negotiated
prices. The selling stockholders may use any one or more of the methods
described in this prospectus when disposing of shares or interests therein.
We have advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling stockholders and their affiliates.
In addition, we will make copies of this prospectus (as it may be supplemented
or amended from time to time) available to the selling stockholders for the
purpose of satisfying the prospectus delivery requirements of the Securities Act
of 1933. We have agreed to indemnify the selling stockholders against
liabilities, including liabilities under the Securities Act of 1933 and state
securities laws, relating to the registration of the shares offered by this
prospectus.
We have agreed with the selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of (1) such time as all of the shares covered by this prospectus have
been disposed of pursuant to and in accordance with the registration statement
or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the
Securities Act of 1933.
1
IMPORTANT NOTE CONCERNING OUR FINANCIAL CONDITION
-------------------------------------------------
Our financial statements were prepared on the assumption that we will
continue as a going concern, and our independent accountants have expressed
doubt as to that assumption. Our management estimates that our projected cash
flow from operations, plus our cash reserves, will be sufficient to permit us to
continue our current level of operations for at least twelve months from the
date of this prospectus. However, we plan to increase our sales and marketing,
product development, and administrative expenses. We will not receive any of
the proceeds from the sale of the shares covered by this prospectus. For more
information on this matter, you should review our financial statements, which
begin on page F-1 of this prospectus, as well as the section of this prospectus
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
---------------------------------------------------------
The following table outlines our capital stock as of February 13, 2007:
Shares of Common Stock outstanding 7,685,067 (1)
(1) Assuming no exercise or conversion of warrants and options to purchase
3,500,201 shares of Common Stock outstanding as of February 13, 2007 or the
conversion of notes payable into up to 2,346,037 shares of Common Stock.
HOW TO CONTACT US
-----------------
Our executive offices are located at 100 Cummings Center, Suite 235M,
Beverly, Massachusetts 01915. Our phone number is (978) 921-2727. Our website
is http://www.locateplus.com. Information on our website is not intended to be
incorporated into this prospectus.
* * *
2
RISK FACTORS
Any investment in our securities involves a high degree of risk. You
should carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase any of our
securities. We have not attempted to rank the following risks in order of their
likelihood.
RISKS RELATED TO OUR BUSINESS
-----------------------------
OUR FINANCIAL STATEMENTS WERE PREPARED ON THE ASSUMPTION THAT WE WILL CONTINUE
AS A GOING CONCERN, AND OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED DOUBT AS TO
THAT ASSUMPTION.
Our financial statements were prepared on the assumption that we will
continue as a going concern, and our independent accountants have expressed
doubt as to that assumption. If sufficient capital is not available, we would
likely be required to reduce or discontinue our operations. We plan to increase
our sales and marketing, product development, and administrative expenses. We
will not receive any of the proceeds from the sale of the shares covered by this
prospectus. As a result, we may be required to raise additional capital, which
may not be available to us on favorable terms, if at all. If we are unable to
generate sufficient cash from operations and we are unable to raise additional
capital, we will be forced to discontinue some or all of our operations, reduce
the development of some or all of our products, or reduce our workforce, all of
which would materially adversely affect our business.
W
E HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND CANNOT ASSURE YOU THAT WE
WILL ACHIEVE PROFITABILITY.
We have incurred significant net losses since our inception. We incurred
net losses of approximately $7.5 million in 2004, $5.6 million in 2005 and
approximately $2.3 million for the nine months ended September 30, 2006. Our
accumulated deficit as of September 30, 2006 was approximately $38.2 million. We
anticipate that our expenses relating to our sales and marketing and product
development, as well as our general and administrative expenses, to stabilize in
the foreseeable future. To achieve profitability, we must generate more revenue
than we have in prior years. Even if we ultimately achieve profitability, we
may not be able to sustain or increase our profitability. If our revenue grows
more slowly than we anticipate, or if our operating expenses exceed our
expectations, our operating results and financial condition will be adversely
affected. For more information on our history of losses, you should review our
financial statements, which are included in this prospectus beginning on page
F-1.
OUR RIGHT TO USE CERTAIN THIRD PARTY DATA IS SUBJECT TO TERMINATION BY OUR
CURRENT DATA PROVIDERS. ANY SUCH TERMINATION COULD DISRUPT OUR BUSINESS.
We obtain our data from a variety of sources. Some of our data providers
may terminate our right to use their data in their sole discretion and without
any recourse to us. If our access to certain data sources is restricted, there
can be no assurance that we would be able to obtain and integrate replacement
data on a timely basis. In such an event, our products would likely be less
attractive to current and potential customers and our revenue would likely
decrease, which could materially adversely affect our business.
OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
ADVERSELY AFFECT THE PRICE OF OUR SECURITIES.
You should not rely on quarter-to-quarter comparisons of our historical
results as an indication of our future performance. If our quarterly operating
results do not meet the expectations of our investors, the market price of our
securities will likely decline. Our future quarterly results may fluctuate as a
result of many factors, some of which are outside our control, including:
- - legal and regulatory developments that may adversely affect our ability to
collect or disseminate data;
- - the timing, introduction and commercialization of our new products and
services (including the integration of additional datasets into our databases);
- - increased unemployment in the United States, which may result in reduced
use of our products by human resources personnel;
- - the potential costs of protecting our intellectual property rights;
3
- - the operating costs and capital expenditures related to the expansion of
our business operations and infrastructure, including the retention of key
personnel, the addition of new employees and the acquisition and integration of
new datasets;
- - the introduction of similar or substitute databases by our competitors;
and
- - the timing and establishment of our marketing and channel partnership
arrangements.
WE HAVE LIMITED PRODUCT OFFERINGS, AND IF DEMAND FOR THESE PRODUCTS DECLINES OR
FAILS TO DEVELOP AS WE EXPECT, OUR REVENUE WILL DECLINE.
We derive the majority of our current consolidated net revenue from two
products. Specifically, in the year ended December 31, 2005, and in the nine
months ended September 30, 2006, we derived substantially all of our recurring
consolidated revenue from our CD-ROM-based Worldwide Information and
Internet-based LocatePLUS data delivery products. We expect that revenue from
our Internet-based and CD-ROM-based products will continue to account for a
significant portion of our total revenue for the foreseeable future. As a
result, continued and widespread market acceptance of our existing products is
critical to our future success. We cannot assure you that our current products
will achieve market acceptance at the rates at which we expect, or that demand
for our products will continue to grow. If our products do not achieve
increasing market acceptance, our revenue would most likely decline and our
financial condition would be adversely affected.
WE OBTAIN DATA FROM A VARIETY OF SOURCES. IF WE ARE UNABLE TO OBTAIN NECESSARY
DATA, OUR PRODUCTS MAY NOT BE ATTRACTIVE TO OUR TARGET CUSTOMERS.
Sources of our data include both private and government data providers,
including federal, state and local government agencies. From time to time,
certain sources of publicly available data, such as state motor vehicle
registries, have refused to release data to us. As a result, we have, on
occasion, been forced to obtain such data through the exercise of our rights
under the Freedom of Information Act. Such efforts can be costly and time
consuming, and we cannot guarantee that we will be able to successfully acquire
such data on a consistent basis. From time to time, we may also be required to
license or purchase additional data to expand our product offerings or maintain
our databases. We cannot assure you that such third-party licenses will be
available to us on commercially reasonable terms, or at all. Our inability to
maintain or obtain any third-party license required to sell or develop our
products or product enhancements could require us to obtain substitute data,
which may be less current. In such an event, our products would likely be less
attractive to current and potential customers and our revenue would likely
decrease, which could materially adversely affect our business.
IF WE CANNOT INTEGRATE, UPDATE AND IMPROVE OUR PRODUCTS, OUR PRODUCTS MAY BE
LESS ATTRACTIVE TO OUR TARGET MARKET, WHICH WOULD ADVERSELY AFFECT OUR REVENUES
AND FINANCIAL CONDITION.
We must continuously update our databases so that we may provide datasets
to customers that are accurate and current. We must also integrate additional
datasets for our products to remain competitive. Updating our databases and
integrating additional datasets are time-consuming processes and often require
extensive resources, as we often obtain public documents in a form that is not
suitable for use in any of our products. For example, we often receive "raw
data" on electronic tape media from state motor vehicle licensing agencies that
must be modified so that it can be searched rapidly based upon partial
information. We can give no assurance that we will have adequate resources to
update our datasets or to integrate new datasets. If we are unable to update
our datasets or integrate new datasets, our products are likely to be less
desirable to our target market than those of our competitors, and our sales and
financial condition would be adversely affected.
THE MARKET FOR DATABASE PRODUCTS AND SERVICES IS HIGHLY COMPETITIVE, AND WE MAY
NOT BE ABLE TO EFFECTIVELY COMPETE IN THIS MARKET.
Our industry is intensely competitive and we expect competition to continue
to increase from both existing competitors and new market entrants. Many of the
companies that currently compete with us, as well as other companies with whom
we may compete in the future, are national or international in scope and have
greater resources than we do. Those resources could enable those companies to
initiate price cuts or take other measures in an effort to gain market share in
our target markets. We may have inadequate resources to compete against such
businesses.
4
For example, our LocatePLUS product competes with products offered by:
- - FlatRateInfo;
- - Accurint;
- - ChoicePoint; and
- - Lexis-Nexis.
Our Worldwide Information(TM) product primarily competes with the
registries of motor vehicles of various states that sell their data to screened
users. These state agencies generally provide data in "raw form" without the
search capabilities that we provide in our Worldwide Information(TM) product.
We cannot assure you that we will be able to compete successfully against these
or other current and future participants in our markets or against alternative
technologies, nor can we assure you that the competitive pressures that we face
will not adversely affect our business.
WE FACE RISKS ASSOCIATED WITH OUR STRATEGIC ALLIANCES, WHICH COULD LIMIT OUR
ABILITY TO INCREASE OUR MARKET SHARE.
From time to time, we enter into "channel partner" arrangements and similar
strategic alliances, through which we license access to our databases to third
parties in exchange for royalties. We can give no assurance that we will be
able to identify and secure appropriate channel partners or that any channel
partner arrangements will be profitable. If we are unable to enter into
appropriate channel partner arrangements, use of our database may not grow
sufficiently to meet our business objectives. Disruptions in our relations with
our channel partners may adversely effect our financial condition and the
results of our operations.
TO INCREASE OUR REVENUE, WE MUST INCREASE OUR SALES FORCE AND EXPAND OUR
DISTRIBUTION CHANNELS. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN THESE
EFFORTS.
To date, we have sold our products primarily through our direct sales and
tele-sales force. Our future revenue growth will depend in large part on
recruiting and training additional direct sales and tele-sales personnel and
expanding our distribution channels. We may experience difficulty recruiting
qualified sales and support personnel and establishing third-party distribution
relationships, such as channel partner arrangements. We may not be able to
successfully expand our tele-sales force or other distribution channels, and any
such expansion, if achieved, may not result in increased revenue or profits.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY
BE SUBJECT TO INFRINGEMENT CLAIMS THAT MAY ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION.
Our products consist of publicly available, third-party data that we
organize to permit rapid and effective computerized searches. Because our
datasets consist of publicly available data, we cannot prevent competitors from
developing equivalent databases. We anticipate that our success will depend, in
part, on our proprietary data integration and linking methodologies. We have
not obtained, and do not anticipate that we will obtain, patent protection for
these methodologies. We rely on trade secret rights, confidentiality agreements
and procedures and licensing arrangements to establish and protect our
proprietary rights with respect to our data integration methodologies. Despite
our efforts, third parties could attempt to copy or otherwise obtain and make
unauthorized use of our products or independently develop similar products.
WE FACE SIGNIFICANT SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF
CONFIDENTIAL INFORMATION. IF WE ARE UNABLE TO ADEQUATELY PROTECT CERTAIN
CONFIDENTIAL INFORMATION, OUR REPUTATION AND BUSINESS WOULD BE ADVERSELY
AFFECTED, AND WE COULD BE SUBJECT TO LIABILITY IN CERTAIN JURISDICTIONS.
We rely on commercially available encryption software and other
technologies to provide system security and to effect secure transmission of
confidential information, such as credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the security measures used
by us to protect customer transaction data. If our security systems were to be
compromised, it could have a material adverse effect on our reputation and
business and, under the laws of certain jurisdictions, we may be subject to
significant liabilities and reporting obligations. A party who is able to
circumvent our security measures could misappropriate our information, cause
interruptions in our operations, damage our reputation and customers'
willingness to use our products and subject us to possible liability under
5
applicable states' privacy laws. We may be required to expend significant
capital and other resources to protect against these security breaches or to
alleviate problems caused by these breaches.
OUR PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HAVE ADVERSE EFFECTS ON OUR
CUSTOMER RELATIONS AND FINANCIAL RESULTS.
Datasets as complex as those that we develop may contain undetected defects
or errors. For example, our products may contain unknown defects due to errors
in the data that we purchase from our data providers. Despite testing, defects
or errors may occur in our existing or new products, which could make them less
attractive to our target markets. As a result, defects and errors in our
datasets could result in loss of revenue or market share, failure to achieve
market acceptance, diversion of development resources, injury to our reputation
and an adverse effect on our business, financial condition and results of
operation.
DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT MAY NOT BE
COVERED BY OUR INSURANCE.
Our datasets may contain errors, which may give rise to claims against us.
We generally disclaim all warranties on the data we include in our products.
However, our disclaimers may not be enforceable. In such an event, or if
liabilities arise that are not contractually limited, our business could be
adversely affected. We currently do not maintain professional liability
insurance, and our general liability insurance may not cover claims of this
nature.
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH.
We intend to expand our customer base and develop new products. To manage
our anticipated growth, we must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. Any
growth of our business may place a strain on our managerial and financial
resources.
IF WE ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, WE MAY NOT
BE ABLE TO CONTINUE OUR BUSINESS AS PRESENTLY CONDUCTED.
The recent growth in our business has resulted in an increase in the
responsibilities of our personnel. Several of our personnel are presently
serving in more than one capacity. Competition for experienced and qualified
personnel in our industry is intense. We may not be able to retain our current
key employees, or attract, integrate or retain other qualified personnel in the
future. If we do not succeed in attracting new personnel or in integrating,
retaining and motivating our current personnel, our business could be harmed.
WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS; THE LOSS OF ANY OF OUR
KEY EMPLOYEES COULD DELAY OUR PLANNED GROWTH AND LIMIT OUR ABILITY TO ACHIEVE
PROFITABILITY.
Our success depends to a significant extent on the performance and
continued service of our senior management and other key employees, and
particularly those of our President and Chief Executive Officer, Mr. Jon R.
Latorella. We have no employment agreements with any of our employees. The
loss of the services of any of our senior management or any of our other key
employees would disrupt our operations and would delay our planned growth while
we worked to replace those employees. We do not maintain "key man" life
insurance on any of our employees. As a result, if any of our key employees
were to die or become unable to provide services for us, our operations would be
disrupted and we would have no means of recovering any resulting losses.
WE DO NOT CURRENTLY PAY DIVIDENDS, NOR DO WE ANTICIPATE DOING SO IN THE
IMMEDIATE FUTURE. ACCORDINGLY, THERE IS NO ASSURANCE THAT WE WILL PAY DIVIDENDS
IN THE FUTURE.
We have never declared or paid a dividend. At this time, we do not
anticipate paying any dividends in the future. We are under no legal or
contractual obligation to declare or to pay dividends. The timing and amount of
any future dividends and distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business. You should not purchase our securities on the
expectation of future dividends.
6
RISKS RELATED TO OUR INDUSTRY
-----------------------------
EXISTING GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS MAY LIMIT OUR ABILITY TO
ACQUIRE OR DISSEMINATE DATA. IF OUR ABILITY TO ACQUIRE OR DISSEMINATE DATA IS
LIMITED, OUR REVENUES WILL DECREASE AND OUR FINANCIAL CONDITION WILL BE
ADVERSELY AFFECTED. WE MAY ALSO BE SUBJECT TO LIABILITY ARISING FROM SUCH
REGULATIONS.
Much of the data we provide is subject to regulation by the Federal Trade
Commission under the Federal Fair Credit Reporting Act and Title V of the
Financial Services Modernization Act (which is also referred to as the
"Gramm-Leach-Bliley Act"), and by various other federal, state and local
regulatory authorities pursuant to a variety of laws. These laws and
regulations are designed to protect individuals from the misuse of their
personal information.
We have not engaged counsel or any other third party to review our activity
in light of these laws and regulations, although we believe that our activities
do not violate any law specifically applicable to the dissemination of data
concerning individuals. However, our belief may be incorrect, and we may be in
violation of laws governing the dissemination of data. In such a case, we may
be subject to enforcement action by regulatory agencies and claims against us by
individuals (to the extent such laws permit private rights of action). Any such
claims could significantly disrupt our business and operations. We do not
currently maintain liability insurance to cover such claims.
FUTURE GOVERNMENT REGULATION MAY FURTHER LIMIT OUR ABILITY TO PROVIDE OUR
PRODUCTS TO CUSTOMERS AND CAUSE US TO LOSE REVENUE.
Future laws or regulations that further restrict the use of personal or
public record information could disrupt our business and could cause us to lose
revenue. For example, if laws were enacted that restricted our use of Social
Security numbers, our ability to provide meaningful data to our customers would
be adversely affected. If we are unable to respond to regulatory or industry
standards effectively, our business, financial condition and results of
operation would be adversely affected. Our future success will depend, in part,
on our ability to enhance and improve the responsiveness, functionality and
features of our products and services in accordance with newly-imposed
regulatory or industry standards, of which we can give no assurance.
WE COULD FACE LIABILITY BASED ON THE NATURE OF OUR SERVICES AND THE CONTENT OF
THE MATERIALS THAT WE PROVIDE.
We may face potential liability from individuals, government agencies or
businesses for defamation, invasion of privacy, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
data contained in our products. Although we carry a limited amount of general
liability insurance, our insurance may not cover claims of these types and may
not be adequate to indemnify us for liability that may be imposed. Any
imposition of liability, particularly liability that is not covered by insurance
or which is in excess of our insurance coverage, would negatively affect our
reputation, business, financial condition and results of operations.
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES
-----------------------------------------------------
WE HAVE A LARGE NUMBER OF SECURITIES THAT ARE AVAILABLE FOR RESALE. SALES OF
THESE SECURITIES COULD CAUSE THE PRICE OF OUR SECURITIES TO DECLINE.
Sales of a large number of shares of our securities in the public markets,
or the potential for such sales, could decrease the trading price of our
securities and could impair our ability to raise capital through future sales of
our securities. As of February 13, 2007, we had 7,685,067 shares of Common Stock
issued and outstanding. If all of our options, warrants, and convertible
securities issued as of February 13, 2007 were exercised as of that date, we
would have had 13,210,278 shares of Common Stock issued and outstanding.
The Common Stock to be acquired may be substantially more than the 2,546,000
shares of Common Stock into which the Debentures are currently convertible. See
Selling Security Holders. These shares amount to more than 27% of the
outstanding Common Stock on a fully diluted basis. As these shares become
salable on the public market they will constitute a substantial overhang on the
market for the Companys Common Stock.
7
WE HAVE ISSUED A SUBSTANTIAL NUMBER OF WARRANTS AND OTHER CONVERTIBLE
SECURITIES. OUR WARRANTS AND CONVERTIBLE SECURITIES MAY CAUSE THE TRADING PRICE
OF OUR SECURITIES TO DECLINE, AND MAY LIMIT OUR ABILITY TO RAISE CAPITAL FROM
OTHER SOURCES.
As of February 13, 2007, there were 3,500,201 shares of Common Stock
issuable upon the exercise of options and warrants and Convertible notes that
convert into up to 2,346,037 of Common Stock.
While these securities are outstanding, the holders will have the opportunity to
profit from a rise in the price of our securities with a resulting dilution
(upon exercise or conversion) in the value of the interests of our other
security holders. Our ability to obtain additional financing during the period
these convertible securities are outstanding may be adversely affected and their
existence may have a negative effect on the price of our securities. The holders
of these securities are likely to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable to us than those of the outstanding warrants and
convertible promissory notes.
OUR SECURITIES HAVE BEEN THINLY TRADED ON THE OVER-THE-COUNTER BULLETIN BOARD,
WHICH MAY NOT PROVIDE LIQUIDITY FOR OUR INVESTORS.
Our securities are quoted on the Over-the-Counter Bulletin Board. The
Over-the-Counter Bulletin Board is an inter-dealer, over-the-counter market that
provides significantly less liquidity than the NASDAQ Stock Market or national
or regional exchanges. Securities traded on the Over-the-Counter Bulletin Board
are usually thinly traded, highly volatile, have fewer market makers and are not
followed by analysts. The Securities and Exchange Commission's order handling
rules, which apply to NASDAQ-listed securities, do not apply to securities
quoted on the Over-the-Counter Bulletin Board. Quotes for stocks included on
the Over-the-Counter Bulletin Board are not listed in newspapers. Therefore,
prices for securities traded solely on the Over-the-Counter Bulletin Board may
be difficult to obtain and holders of our securities may be unable to resell
their securities at or near their original acquisition price or at any price.
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT.
Trading in our securities is subject to the Securities and Exchange
Commission's "penny stock" rules, and we anticipate that trading in our
securities will continue to be subject to the penny stock rules for the
foreseeable future. The Securities and Exchange Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
These rules require that any broker-dealer who recommends our securities to
persons other than prior customers and accredited investors must, prior to the
sale, make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to execute the transaction. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with trading in the penny stock
market. In addition, broker-dealers must disclose commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities they offer. The additional burdens imposed upon broker-dealers
by such requirements may discourage broker-dealers from recommending
transactions in our securities, which could severely limit the liquidity of our
securities and consequently adversely affect the market price for our
securities.
WE MAY SELL ADDITIONAL SHARES IN THE FUTURE, WHICH COULD CAUSE THE PRICE OF OUR
SECURITIES TO DECLINE.
We currently have 25,000,000 shares of Common Stock authorized. As a
result, we have substantial amounts of authorized but unissued capital stock.
Our Second Amended and Restated Certificate of Incorporation and applicable
provisions of Delaware law provide that we may issue authorized capital stock at
the approval of our Board of Directors, and no stockholder vote or other form of
stockholder approval is required for us to issue such capital stock.
Consequently, we could issue shares of either class of our common stock in
connection with future financings or acquisitions or in conjunction with equity
compensation arrangements. The offering prices in connection with those future
issuances could be less than the current sales prices of our securities. Any
future issuances of any of our securities could cause the trading price of our
securities to decline.
INVESTORS MUST CONTACT A BROKER-DEALER TO TRADE OVER-THE-COUNTER BULLETIN BOARD
SECURITIES. AS A RESULT, YOU MAY NOT BE ABLE TO BUY OR SELL OUR SECURITIES AT
THE TIMES THAT YOU MAY WISH.
8
Even though our securities are quoted on the Over-the-Counter Bulletin
Board, the Over-the-Counter Bulletin Board may not permit our investors to sell
securities when and in the manner that they wish. Because there are no
automated systems for negotiating trades on the Over-the-Counter Bulletin Board,
they are conducted via telephone. In times of heavy market volume, the
limitations of this process may result in a significant increase in the time it
takes to execute investor orders. Therefore, when investors place market orders
- - an order to buy or sell a specific number of shares at the current market
price - it is possible for the price of a stock to go up or down significantly
during the lapse of time between placing a market order and its execution.
COMPLIANCE WITH THE RULES ESTABLISHED BY THE SEC PURSUANT TO SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002 WILL BE COMPLEX. FAILURE TO COMPLY IN A TIMELY
MANNER COULD ADVERSELY AFFECT INVESTOR CONFIDENCE AND OUR STOCK PRICE.
Rules adopted by the Securities and Exchange Commission pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 require us to perform an annual assessment
of our internal controls over financial reporting, certify the effectiveness of
those controls and secure an attestation of our assessment by our independent
registered public accountants. Currently, this requirement will first apply to
us during the preparation and filing of our annual report for fiscal year 2007.
The standards that must be met for management to assess the internal controls
over financial reporting as now in effect are new and complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards. We may encounter problems or delays in completing activities
necessary to make an assessment of our internal controls over financial
reporting. In addition, the attestation process by our independent registered
public accountants is new and we may encounter problems or delays in completing
the implementation of any requested improvements and receiving an attestation of
the assessment by our independent registered public accountants. If we cannot
perform the assessment or certify that our internal controls over financial
reporting are effective, or our independent registered public accountants are
unable to provide an unqualified attestation on such assessment, investor
confidence and share value may be negatively impacted.
MANAGEMENT HAS CONCLUDED THAT DISCLOSURE CONTROLS AND PROCEDURES ARE NOT
EFFECTIVE AND FAILING TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL
REPORTING, THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
The assessment required pursuant to rules adopted by the SEC pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 may uncover material weaknesses
in our internal controls over financial reporting and conditions that need to be
addressed, the disclosure of which may have an adverse impact on investor
confidence and the price of our common stock. Failure to establish and maintain
appropriate internal controls over financial reporting, or any failure of those
controls once established, could adversely impact our business, financial
condition or results of operations or raise concerns for investors. Any actual
or perceived weaknesses and conditions in our internal controls over financial
reporting that need to be addressed may have an adverse impact on the price of
our common stock.
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as
this quarterly report, is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
controls are procedures which are designed with the objective of providing
reasonable assurance that (1) our transactions are properly authorized, recorded
and reported; and (2) our assets are safeguarded against unauthorized or
improper use, to permit the preparation of our condensed consolidated financial
statements in conformity with United tates generally accepted accounting
principles.
We are not an accelerated filer (as defined in the Exchange Act) and are not
required to deliver management's report on internal controls over our financial
reporting until our year ending December 31, 2007. During 2006, we identified
certain matters that would constitute material weakness (as such term is defined
under the Public Company Accounting Oversight Board Auditing Standard No. 2) in
our internal controls over financial reporting. The material weakness relates to
he financial closing process, a lack of segregation of financial
responsibilities and the need for additional qualified financial accounting
personnel. These weaknesses has lead management to conclude that disclosure
controls and procedures are not effective for the nine months ended September
30, 2006. To remediate the internal controls does not require additional
material costs.
During the nine months ended September 30, 2006, we have taken specific actions
to remediate the reportable conditions and material weakness, including the
devotion of additional resources to the quarterly closing process, the hiring of
additional qualified financial accounting personnel, and realignment of certain
financial responsibilities to
9
achieve stronger segregation of financial duties.
We intend to continue to further strengthen our controls and procedures
regarding the closing process.
There were no changes in our internal controls over financial reporting
that occurred during the quarter ending September 30, 2006, that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
USE OF PROCEEDS
This prospectus relates to the resale of shares of our Common Stock which
will be owned by certain investors upon the exercise of common stock purchase
warrants or upon the conversion of convertible term notes. We will not receive
any of the proceeds from the resale of the shares of either class of common
stock owned by the selling security holders.
DIVIDEND POLICY
We have never declared or paid a cash dividend. At this time, we do not
anticipate paying dividends in the future. We are under no legal or contractual
obligation to declare or to pay dividends, and the timing and amount of any
future cash dividends or distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business and to fund future growth. You should not purchase
any of our securities on the expectation of future dividends.
SELLING SECURITY HOLDERS
This prospectus relates to the resale from time to time of shares issued upon
conversion of certain Debentures owned by Dutchess. On December 29, 2005 we
issued a $1,500,000 Debenture to Dutchess Private Equities Fund II, LP, a
private equities fund in an individually negotiated purchase and received net
proceeds of $1,350,000. The Debenture is due on December 30, 2010 and pays
twelve per cent (12%) interest. Interest and principal are payable at such times
and under such conditions are outlined in the Debenture. The remaining balance
of $892,226 of this Debenture as amended effective October 18, 2006 is
convertible into shares of our Common Stock at the lesser of $.70 per share or
75% of the lowest closing bid price during the 20 trading days next preceding
the date of conversion. We also issued a five year warrant to purchase up to
750,000 shares of common stock at a price of $5.00 per share and 200,000 shares
common stock in conjunction with that debenture. On July 21, 2006 we issued a
$750,000 Debenture to Dutchess Private Equities Fund, LP , a related private
equities fund in an individually negotiated purchase and received proceeds of
$675,000. The Debenture is due on July 21, 2011 and pays twelve per cent (12%)
interest. Interest and principal are payable at such times and under such
conditions are outlined in the Debenture. The Debenture is convertible into
shares of our Common Stock at the lesser of $.70 per share or 75% of the lowest
closing bid price during the 20 trading days next preceding the date of
conversion. We also issued a five year warrant to purchase up to 375,000 shares
of common stock at a price of $1.00 per share and 200,000 shares common stock in
conjunction with that debenture. The holder may not convert if it would cause
the holder to own more than 4.9% of the outstanding Common Stock of the Company.
The Company is registering 1,071,429 and 401,379 shares of its Common Stock
covered by this Prospectus issuable to Dutchess Private Equities Fund, LP and
10
Dutchess Private Equities Fund, LP II respectively pursuant to these conversion
rights.
Douglas Leighton, Managing Member of Dutchess, has investment control over the
Dutchess entities. During August 2003, we issued a put to Dutchess Private
Equities Fund, LP through an equity agreement, which provided 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 Dutchess 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 Company sold 17,042,761 shares for a
total $5 million in net proceeds through December 31, 2005. There was no
remaining amount available under the put at December 31, 2005. Other than the
current and 2003 investments, we have had no other material relationship with
Dutchess.
The following table sets forth, as of February 12, 2007, the number of shares
being held of record or beneficially by the selling security holders. All of
the data presented is based upon information currently available to us.
The table below sets forth the shares that we are registering pursuant to
the Registration Statement to which this prospectus is a part:
Beneficial Ownership Beneficial Ownership
STOCKHOLDER PRIOR TO OFFERING SHARES OFFERED AFTER OFFERING %
- ----------- ----------------- -------------- -------------- -
Dutchess Private
Equities Fund, LP 1,646,429 (1) 1,071,429 575,000 6.0%
Dutchess Private
Equities Fund, LPII 2,224,571 (2) 401 379 1,823,192 16.9%
(1) This includes 1,071,429 shares to be obtained upon the conversion of the
Debentures and 375,000 issuable upon exercise of warrants.
(2) This includes 1,274,571 shares to be obtained upon the conversion of the
Debentures and 750,000 issuable upon exercise of warrants.
PLAN OF DISTRIBUTION
DUTCHESS PRIVATE EQUITIES FUND, L.P.
The Sellers are Dutchess Private Equity Fund, L.P. and Dutchess Private Equity
Fund II, L.P. On December 29, 2005 we issued a Debenture to Dutchess Private
Equities Fund II, LP, a private equities fund in an individually negotiated
purchase and received proceeds of $1,500,000. The Debenture is due on December
30, 2010 and pays twelve per cent (12%) interest. Interest and principal are
payable at such times and under such conditions are outlined in the Debenture.
The remaining balance of $892,226 of this Debenture as amended effective October
18, 2006 is convertible into shares of our Common Stock at the lesser of $.70
per share or 75% of the lowest closing bid price during the 20 trading days next
preceding the date of conversion. On July 21, 2006 we issued a Debenture to
Dutchess Private Equities Fund, LP , a related private equities fund in an
individually negotiated purchase and received proceeds of $750,000. The
Debenture is due on July 21, 2011 and pays twelve per cent (12%) interest.
Interest and principal are payable at such times and under such conditions are
outlined in the Debenture. The Debenture is convertible into shares of our
Common Stock at the lesser of $.70 per share or 75% of the lowest closing bid
price during the 20 trading days next preceding the date of conversion
(collectively, the two funds Dutchess). The holder may not convert if it would
cause the holder to own more than 4.9% of the outstanding Common Stock of the
Company. The Company is registering 1,472,808 shares of its Common Stock covered
by this Prospectus issuable to Dutchess pursuant to these conversion rights.
Events of Default include violations of the Debenture Agreement and other
related agreements which remain uncured for over five (5) days, including
failure to make effective a registration statement covering the conversion
shares within twelve (12) moths of issuance. In case of an Event of Default, the
holder can exercise its right to increase the face amount of the Debenture by
ten percent (12%) as an initial penalty and by an additional 10% for each
additional Event of Default. In addition, the holder may elect to increase the
face amount by two and one-half percent (2.5%) per month (pro-rata for partial
periods) paid as a penalty for liquated damages. Liquated damages will be
compounded daily. In addition, the holder may by notice to us declare the
remaining principal amount of the Debenture, including accrued interest and any
liquidated damages, to be immediately due and payable. We also issued 400,000
shares of our Common Stock, 200,000 to each Dutchess entity, in connection with
the Debenture purchases. As of December 13, 2006, the lowest closing bid price
during the last 20 trading days of the Companys Common Stock was $ 0.40 ( the
closing bid price on December 6, 2006), the aggregate number of shares issuable
under the Debenture conversion would be 5,474,086 shares. However, if the lowest
closing bid price during the latest 20 days decline, the note would be
convertible into additional share. The table below demonstrates the number of
11
shares issuable at the following discounts from that lowest closing bid price:
Share PriceDiscountConversion Shares
$ 0.40 0% 5,474,086
$ 0.30 25% 7,298,782
$ 0.20 50% 10,948,173
$ 0.10 75% 21,896,346
CAPITALIZATION
Prior to December 5, 2005, the Company had outstanding two classes of
stock, Class A Voting Common Stock of which there were 150,000,000 shares
authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which
there were 250,000,000 shares authorized with 74,505,730 issued. At the annual
meeting of the shareholders held on November 12, 2005, the shareholders approved
a plan of recapitalization whereby 1) each outstanding share of our Class A
Voting Common Stock and our Class B Non-Voting Common Stock combine into a
single class of voting Common Stock with 400,000,000 authorized and 185,930,146
issued, 2) effect a one-for-fifty reverse split of this new class of Common
Stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase
the authorized from 8,000,000 to 25,000,000. The combination of the two classes
of stock was completed on December 5, 2005. The reverse split and change in
authorized shares was completed on December 12, 2005. In addition, the
completion of the recapitalization triggered the mandatory conversion of certain
notes payable in the amount of $8,965,000 into 1,793,000 shares of the new
Common Stock.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our consolidated
financial statements and the related notes beginning on page F-1 of this
prospectus.
SEPTEMBER 30,
2006
(in thousands)
DEBT:
Current portion of notes,
convertible debt and
capital lease obligations. $ 1,553
Capital lease obligations
and notes, net of current portion 11
--------
Total Debt 1,564
--------
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.01 per share: 73
Additional paid-in capital 38,931
Warrants 3,108
Impaired value of securities (825)
Accumulated deficit (38,227)
---------
TOTAL STOCKHOLDERS' EQUITY 3,060
---------
TOTAL CAPITALIZATION $4,624
=========
12
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this prospectus. The statement of operations data set
forth on the following page for the years ended December 31, 2004 and 2005 and
the balance sheet data as of December 31, 2005 have been derived from our
audited consolidated financial statements included elsewhere in this prospectus.
The statement of operations data set forth on the following page for the nine
months ended September 30, 2005 and 2006 and the balance sheet data as of
September 30, 2006 have been derived from our un-audited consolidated financial
statements included elsewhere in this prospectus. These historical results are
not necessarily indicative of results to be expected for any future period.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
STATEMENTS OF OPERATIONS DATA: (UN-AUDITED)
2006 2005 2005 2004
------------- -------------- ------------ ------------
REVENUES:
Information Sales
- -CD-Rom $ 484,154 $ 369,996 $ 480,412 $ 550,923
- -Online 4,890,029 4,671,406 6,257,679 4,107,714
- -Channel Partner 4,653,453 3,109,902 4,358,038 1,028,650
- -Wireless 5,384 9,435 11,908 13,095
Engineering services - 505,000 505,000 562,200
------------- -------------- ------------ ------------
Total revenues 10,033,020 8,665,739 11,613,037 6,262,582
------------- -------------- ------------ ------------
COSTS AND EXPENSES:
Costs of revenues:
-CD-Rom 33,886 106,582 113,612 96,683
-Online and Channel Partner 3,006,894 2,998,852 4,055,417 3,652,714
-Engineering services - - 123,750 124,175
-Wireless - 123,750 - 870
Selling and marketing 1,366,581 1,892,015 2,492,172 1,900,984
General and administrative 5,153,3583 5,240,852 7,537,444 6,467,306
Research & Development 147,796 163,655 214,287 316,941
------------- -------------- ------------ ------------
Total operating expenses 9,708,515 10,525,706 14,556,682 12,559,674
------------- -------------- ------------ ------------
OPERATING INCOME (LOSS) 324,505 (1,859,967) (2,943,645) (6,297,091)
OTHER INCOME (EXPENSE):
Interest income - 16,282 57,256 159,461
Interest expense (833,470) (2,393,840) (2,705,835) (747,279)
Interest expense - amort. of discounts 2,697 1,649 - (193,131)
Other income (1,882,650) - (7,952) 30,280
Impairment of Note Receivable - (500,000)
------------- -------------- ------------ ------------
Net loss $ (2,388,918) $ (4,235,876) $(5,600,176) $(7,547,760)
============= ============== ============ ============
BASIC AND DILUTED NET LOSS PER SHARE ($0.35) ($1.20) $ (1.56) $ (2.34)
SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS
PER SHARE 6,5755,081 3,525,718 3,582,049 3,230,121
AS OF AS OF
SEPTEMBER 30, 2006 DECEMBER 31, 2005
(UNAUDITED)
------------- -----------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 20,350 $ 610,736
Total current assets 6,220,107 5,960,203
Total assets 8,568,348 8,744,332
Total current liabilities 5,496,266 5,066,667
Total stockholders' equity 3,060,384 3,614,829
13
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(TM), that enables users to search certain motor vehicle records and
driver's license information in multiple states through a dynamic search engine,
using complete or partial information. Since March 1, 2000, we have maintained
a database that is accessible through the Internet, known as LocatePLUS. 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(TM) 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.
On January 6, 2004, LocatePLUS Holdings Corporation formed Metrigenics,
Inc, a wholly-owned subsidiary.
From time to time, we also provide engineering services in connection with the
implementation and rollout of our channel partnership arrangements.
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(TM) product utilizes proprietary
methodologies to link data from different sources associated with a given
individual to a single background report, even though the sources of data with
respect to a given individual may be incomplete or contain only partial
information with respect to that individual. 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.
During the quarter ended June 30, 2003 we launched our new patent-pending
Bull's-Eye technology, which is currently integrated into a LocatePLUS product.
Bull's-Eye is the first search tool in our industry that allows users to
correctly identify a person's current address based upon certain currently
available information. Typically,
14
when a search is performed on an individual using competing technologies, a
number of addresses are pulled from a database of public records. Bull's-Eye
enhances or improves the search process by cross-referencing current public
utility and telephone records with historical data to more accurately identify a
person's current address. We have also sought patent protection with respect to
aspects of our CareerScan and TrustmeID products.
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. 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.
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.
Capitalizing on the synergies gained through the Companies acquisitions, in
2004, Worldwide was able to utilize the technology acquired through Voicepower
Technologies, when it merged into Dataphant, to develop the industry's first
ever searchable non-published and cell phone CD-ROM. This product became
Worldwide's fastest growing CD-ROM product to date. In addition, Worldwide,
using the search capabilities built into the CD-ROM search engine, has expanded
beyond CD-ROMs. Worldwide recently entered into an exclusive partnership with
the State of New Hampshire's Department of Safety to implement its technology on
the state's Intranet. Sonia Bejjani, Company co-founder and President of
Worldwide, was profiled in "Women to Watch in 2005" by Women's Business Boston,
January 2005 issue.
Revenue from our LocatePLUS product is recognized when there is either an agreed
upon royalty fee or the 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 LocatePLUS
customer base). During 2005, our LocatePLUS online customer base exceeded
20,000 customers. Within that customer base, the subscriptions for ChoicePlan
billing plans, which are billing plans for committed revenue per customer
ranging from $25 per month to $5,000 per month, increased to 1,200 customers.
In addition, we made a significant change to our billing practice in 2004, with
the implementation of a new minimum usage fee. We expect this change will
increase annual billings by at least $1M per year.
Revenue from our Entersect product is recognized when certifications are
purchased online (and paid for via credit card) or the requested information is
downloaded, there is evidence of an arrangement, the fee is fixed or
determinable, and collectibility is reasonably assured.
Revenue from Dataphant is generated exclusively through inter-company sales 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. For the twelve months ended December 31, 2005 and
2004 we recorded $4,189,029 and $3,749,397, respectively and in the nine months
ended September 30,
15
2006 and 2005, we recorded $3,040,780 and $3,105,434 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, travel and
other miscellaneous expenses.
Interest income consists of earnings on our cash and cash equivalents,
short-term investments and notes receivable. Interest expense is primarily
attributable to various notes issued through September 30, 2006. As of September
30, 2006, we had notes payable (current and long-term) totaling $1,496,737.
NET LOSSES AND FINANCINGS
We have incurred significant net losses since our inception. We incurred
net losses of approximately $7.5 million in 2004 and $5.6 million in 2005 and
$2.3 million during the nine months ended September 30, 2006. Our accumulated
deficit as of September 30, 2006 was approximately $38.2 million. We raised
approximately $4 million 2004 and approximately $9.6 million in 2005 from the
issuance of debt and sales of our equity.
During August 2003, we issued a put to one investor through an equity agreement,
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
the Company's 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. The Company sold 17,042,761 shares for a total $5 million in net
proceeds from the investor through December 31, 2005. There was no remaining
amount available under the put at December 31, 2005.
On June 17, 2004 we entered into a Securities Purchase Agreement with
Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private
placement of a convertible term note issued by the Company in the principal
amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase
warrant (the "Warrant"). On November 30, 2004, this note was amended to
increase the principal amount to $4,000,000 and an additional warrant. In July,
2005, the company raised approximately $9 million through the issuance of
convertible debt of which $4 million was used to pay the balance on this note in
full
In connection with an offering that closed on August 15, 2005 we entered
into a Purchase Agreement with certain institutional and accredited investors
relating to the private placement of convertible term notes issued by the
Company in the principal amount of $8,965,000 and warrants to purchase up to
41,189,000 shares of our capital stock. Of the proceeds from this offering,
approximately $4.1 million was used to retire current secured convertible notes,
and the remainder will be used for general working capital. In conjunction with
this offering, we also entered into related Registration Rights and Voting
Agreements. On November 14, 2005, at the annual meeting of the shareholders,
the recapitalization was approved by a majority of the outstanding shares of
both classes of stock. On December 12, 2005, we completed a plan of
recapitalization which triggered the mandatory conversion of these notes into
1,793,000 shares of the new Common Stock.
On December 29, 2005, we entered into a Debenture Agreement with Dutchess
Private Equities Fund, II, L.P. Pursuant to that Debenture Agreement, we
received proceeds of $1,500,000 by issuing a Debenture convertible into shares
of our Common Stock , 200,000 founders shares and a Common Stock purchase
warrant for 750,000 shares with an exercise price of $5.00 per share. On July
21, 2006, we entered into a Debenture Agreement with Dutchess Private Equities
Fund, L.P. Pursuant to that Debenture Agreement, we received proceeds of
$750,000 by issuing a note payable convertible into shares of our Common Stock ,
200,000 founders shares and a Common Stock purchase warrant for 350,000 shares
with an exercise price of $1.00 per share. By amendments dated October 18, 2006
both Debenture Agreements were amended to provide that they may be converted at
any time into our Common Stock at the lesser of $.70 per share or 75% of the
lowest closing bid price during the 20 trading days next preceding the date of
conversion
16
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
Revenues. Revenues from our Worldwide InformationTM CD-ROM product
Increased to $484,154 for the nine months ended September 30, 2006 from $369,996
for the nine months ended September 30, 2005, an increase of 31%. Revenues from
our Internet-based product, LocatePLUS?, increased to $4,890,029 for the nine
months ended September 30, 2006, as compared to $4,671,406 for the nine months
ended September 30, 2005, an increase of 5%. Revenue from channel partners
increased to $4,653,453 from $3,109,902, for the nine months ended September 30,
2006 and 2005 respectively, an increase of 49%. The increase is attributable to
gaining greater acceptance by partners for streaming XML as well as the addition
of one major channel (a distribution method for our data). Revenues from our
wireless product, LocatePLUS AnyWhere, were $5,384 during the nine months ended
September 30, 2006 as compared to $9,435 during the nine months ended September
30, 2004, a decrease of 43%. Through September 30, 2006 no Engineering services
revenue was recorded. For the nine months ended September 30, 2005, Engineering
services revenue was $505,000. From time to time, we also provide engineering
services in connection with the implementation and rollout of our channel
partnership arrangements.
Costs of revenues. For the nine months ended September 30, 2006, costs of
revenues for Worldwide InformationTM were $33,886 as compared to $106,582 for
the nine months ended September 30, 2005, a decrease of 68%. For the nine months
ended September 30, 2006, our costs of revenues associated with LocatePLUS
online and channel were $3,006,894 as compared to $2,998,852 for the nine months
ended September 30, 2005, an increase of less than 1%. Costs of revenue
associated with LocatePLUS are not expected to increase significantly over the
next twelve months as we have acquired most of the data planned for that
product.
Selling and marketing expenses. Selling and marketing expenses for the nine
months ended September 30, 2006 were $1,366,581 as compared to $1,892,015 for
the nine months ended September 30, 2005, a decrease of 28%.
General and administrative expenses. General and administrative expenses
for the nine months ended September 30, 2006 were $5,153,358 as compared to
$5,240,852 for the nine months ended September 30, 2005, a decrease of 2%.
Research and Development expenses. Research and development expenses for
the nine months ended September 30, 2006 were $147,796 as compared to $163,655
for the nine months ended September 30, 2005, a decrease of 10%.
Interest income. No interest income was recorded through the nine months
ended September 30, 2006. For the nine months ended September 30, 2005, interest
income was $16,282.
Interest expense. Interest expense decreased to $833,470 for the nine
months ended September 30, 2006, from $2,393,840 for the nine months ended
September 30, 2005, a decrease of 65%.
Financing Related Expenses. During the nine months ended September 30,
2006, we recorded expenses related to registration rights in the amount of
$1,882,650. These charges will continue to accrue at a rate of approximately
$135,000 per month until either the registration is declared effective or July
8, 2007.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
REVENUES. Revenue from our Worldwide InformationTM CD-ROM product decreased
to $480,412 for the year ended December 31, 2005 from $550,923 for the year
ended December 31, 2004. This decrease is attributable to decrease in the number
of states of which we offer this product for. Revenue from our LocatePLUS and
Entersect online products, increased to $6,257,679 for the year ended December
31, 2005 as compared to $4,107,714 for the year ended December 31, 2004, an
increase of 52.3%. Approximately $701,000 of this increase, or 32.6%, was due to
the implementation of a minimum usage fee charged to LocatePLUS' online
customers effective November 2004, which had the effect of increasing usage.
Management believes that the contribution of the minimum fee to overall revenue
will decrease in the future as users increase usage in excess of the minimum.
Additionally, approximately $842,971 of the increase, or 39.2% was due to an
increase in customers using the Entersect product. The remaining $605,994
increase, or 28.2% was due to the increase in LocatePLUS' customers. Revenue
from our channel partners increased to $4,358,038 for the year ended December
31, 2005 as compared to
17
$1,028,650 for the year ended December 31, 2004 an increase of 324%. The
increase is attributed to the addition of new channel partners and additional
sales to existing channel partners. As part of deploying channel partner
agreements, we occasionally provide engineering services. In 2005 we recognized
$505,000 in engineering revenue as compared to $562,200 recognized in 2004 a
decrease of 10%. These services are not recurring and are dependent on customer
needs. We recognized wireless revenue of $11,908 in 2005 as compared to $13,095
in 2004. 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, 2005, our costs of revenue
for Worldwide InformationTM were $133,612 as compared to $96,683 for the year
ended December 31, 2004. 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, 2005, our costs of revenue associated with LocatePLUS(TM) and
channel partner sales were $4,055,417, as compared to $3,652,714 for the year
ended December 31, 2004, an increase of 11%. 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, 2005 were $2,492,172, as compared to $1,900,984 for the year
ended December 31, 2004, an increase of approximately 31%. This increase in
expenses is attributable primarily to an increase in our marketing activities
for our Entersect product, additional direct marketing performed in 2005, and an
increase in our sales force. 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, 2005 were $7,537,444 as compared to $6,467,306 for
the year ended December 31, 2004, an increase of 16.5%. Included in this is
investor relations activities accounting for $1,344,236, of which $488,558 was
non-cash stock based compensation. Investor relation expenses are not core to
the operation of the company and had we not incurred these expenses, general and
administrative expenses would have decreased to $6,189,696.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
year ended December 31, 2005 were $214,287 as compared to $316,941 for the year
ended December 31, 2004, a decrease of 32%. These expenses are a result of
investigation of new biometric data products through the creation of
Metrigenics. We anticipate these expenses will stabilize for the foreseeable
future.
INTEREST INCOME. Interest income decreased to $57,256 for the year ended
December 31, 2005, from $159,461 for the year ended December 31, 2004. This
decrease is attributable to interest earned on certain notes issued to us in
2003, of which $214,999 of principal remained outstanding as of December 31,
2005.
INTEREST EXPENSE. Interest expense increased to $2,705,835 for the year
ended December 31, 2005, from $940,410 for the year ended December 31, 2004, an
increase of 188%. This increase is attributable to the payoff of certain notes
payable issued in 2004 and the interest expense associated with additional
financing during 2005.
OTHER INCOME. Other income decreased to $(7,952) for the year ended
December 31, 2005, from $30,280 for the year ended December 31, 2004. This
decrease is attributable to the loss on a fixed asset at time of sale.
LIQUIDITY AND CAPITAL RESOURCES
From our incorporation in 1996 through December 31, 2005, we raised
approximately $40 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 September 30, 2006, our cash and cash equivalents totaled
$20,350.
During August 2003, we issued a put to one investor through an equity
agreement, 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 the Company's Class A Voting Common Stock during a ten-day pricing period.
The number of shares that we may sell to that investor is
18
limited by the trading volume of our Class A Voting Common Stock and certain
customary closing conditions. The Company sold 17,042,761 shares for a total $5
million in net proceeds from the investor through December 31, 2005. There was
no remaining amount available under the put at December 31, 2005.
See above under "Net Losses and Financings" for a description of financings
entered into in 2004 and 2005.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease office space and equipment under various operating lease
agreements which terminate on various dates through 2008. Future minimum
payments under our non-cancelable operating leases total $202,342.
CAPITAL LEASES
Through September 30, 2006, 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 $67,973.
LICENSE AGREEMENTS
We have entered into various data acquisition agreements under which we are
required to make minimum payments totaling $1,067,500 through 2010.
The following represents the contractual obligation and commercial commitments
as of December 31, 2005.
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 $2,736,152 $2,720,006 $ 5,568 $10,578 $ -
Capital Leases 256,692 207,156 49,536 - -
Operating Leases 600,104 523,767 76,337 - -
License Agreements - - -
---------- ---------- -------- ------- ----------
Total $3,592,948 $3,450,929 $131,441 $10,578 $ -
========== ========== ======== ======= ==========
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 persons who
were then 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
of $50,000 to five persons who were then Directors (Messrs. Kite, Houlihan and
Garlock, Gerard Scalley and Thomas Murphy).
19
In May 2004, and pursuant to our Non-employee Directors' Stock Option Policy, we
granted options to purchase an aggregate of 5,000,000 shares of Class A Voting
Common Stock, with an exercise price of $1.50 to five persons who were then
Directors (Messrs. Kite, Houlihan and Garlock, Gerard Scalley and Thomas
Murphy).
USE OF OUR ASSETS
Certain of our executives are allowed use of company owned or leased
vehicles for both business and personal purposes. The owned vehicles have been
capitalized as assets of the Company, totaling $102,954 as of December 31, 2005.
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 2004 and 2003, recognized
$0 and $9,722 of amortization expense respectively on notes receivable from
related parties. Additionally, we have accrued approximately $0 in 2004 and
$6,701 in 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. Both were
paid their tax equalization payments in 2004. As of 2004, no further
obligations exist under these notes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid
Financial Instruments ("SFAS 155"), which eliminates the exemption from applying
SFAS 133 to interests in securitized financial assets so that similar
instruments are accounted for similarly regardless of the form of the
instruments. SFAS 155 also allows the election of fair value measurement at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a remeasurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year that
begins after September 15, 2006. Early adoption is permitted. The adoption of
SFAS 155 is not expected to have a material effect on our consolidated financial
position, results of operations or cash flows.
In March 2006, the FASB issued Statement of Financial Accounting Standard 156 -
Accounting for Servicing of Financial Assets ("SFAS 156"), which requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
Adoption is required as of the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156
is not expected to have a material effect on our consolidated financial
position, results of operations or cash flows In December 2004, the FASB issued
SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No.
29." APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on
the principle that exchanges of non-monetary assets should be measured based on
the fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29,
eliminating the exception to fair value accounting for non-monetary exchanges of
similar productive assets and replaces it with a general exception to fair value
accounting for non-monetary exchanges that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
statement is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not expect this
statement to have a material impact on its financial statements.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company has no off-balance-sheet arrangements currently in effect or in
effect during the year ended December 31, 2005, 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).
20
BUSINESS
OVERVIEW
LocatePLUS Holdings Corporation, through itself and its wholly-owned
subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Certifion
Corporation, Dataphant, Inc., and Metrigenics, 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(TM), 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 30% of the cell
phone numbers in the United States. 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. Metrigenics has finished first stage testing on matching DNA to
facial characteristics and expects to have first stage products within twelve
months.
INDUSTRY BACKGROUND
We are a public information provider. Users of our 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 the detection of fraud and the prevention of crime and terrorism.
Additional users, such as large businesses, have increasingly availed themselves
of our information services in connection with their identity validation 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.
The majority of the data in the database is publicly available and it is
only through our proprietary matching and searching technology that creates
significant value to the data. 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 are integrated in a manner that allows easy and rapid access to data.
BUSINESS STRATEGY
Our business plan is to provide an entire suite of information products and
services for professionals in law enforcement agencies, law firms, insurance
underwriting, fraud investigation, private equity funds, private
21
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. We have
proprietary matching and searching capabilities that give us an advantage over
our competitors. In addition, we acquired the technology to gather virtually all
the landline phone numbers and 30% of cell phone numbers through our VPT merger
which no known competitors have. To date, our products have primarily focused on
the United States market. With the recent formation of Metrigenics, a research
and development company, we are expanding into products with worldwide
applicability. Metrigenics is working on the development of matching DNA with
facial characteristics. With the success of early trials, it is expected that
first stage products could be seen as early as twelve months.
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 tracing" (i.e., the location of debtors and individuals in
violation of parole or bail restrictions);
- background checks;
- legal due diligence; and
- Identity self certification
- Private security
- Risk-management.
Certifion offers data for self-certification purposes in connection with job
search and Internet dating services and has provided an addition channel in
which to distribute the same data developed by LocatePLUS. Our LocatePLUS(TM)
and Worldwide Information(TM) products are generally marketed and sold only to
pre-screened business and government end users. Before obtaining access to our
LocatePLUS(TM) database or our Worldwide Information(TM) product, we generally
require commercial customers to provide background information about their
business need for data and about themselves, such as business licenses, bar
admission cards or private investigator licenses. Individuals involved in law
enforcement must provide similar evidence of their authority.
To prevent the misuse of our data, we have adopted a three-tier security schema
for our LocatePLUS(TM) Group products. We believe that we lead the market in
protecting access to our data. With recent challenges in the industry relating
to data access, we have been ahead of the curve in adopting a schema that
restricts the most sensitive data. Our groups are classified in the following
manner.
LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS
- ----------- ------------------- -----------------------------------------
Names, Addresses and Phone Numbers
I General Business Past Residences, Neighbors and Affiliates
Real Property
Private Investigators Level I Data, plus:
Insurance Liens and Judgments
II Attorneys/Law Firms Drivers' Records
Government Certain Motor Vehicle Records
Corporate Security
Level I and II Data, plus:
III Law Enforcement Comprehensive Criminal Records
Restricted Motor Vehicle Records
Certain Credit Reporting Data
As we move forward, we expect to further define user groups and data available
to those groups. We expect to roll out a new version of our search engine that
allows us to do just that by year end.
22
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).
Datasets currently integrated in our LocatePLUS product include nationwide
records relating to:
- - real estate records
- - names and addresses - prior residences
- - aliases - recorded bankruptcies
- - dates of birth - liens
- - Social Security numbers - motor vehicle records
- - driver's license information - certain death records
- - residential address information - phone numbers
(including dates of residence)
- - certain criminal arrest, conviction - vesselregistrations
and incarceration records
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(TM)
product, in comparison with many products with which we compete, is the ability
of LocatePLUS(TM) to "tie" data associated with a given individual to produce a
single report. Our LocatePLUS(TM) system uses a proprietary methodology to
associate data in a manner that generally results in a matching of data entries
across diverse data sources, allowing users to obtain a single, comprehensive
data report about an individual, even when there is no single element that ties
data entries together (such as a Social Security number). This comprehensive
data report is itself linked to other data potentially relevant to a business or
government agency researching an individual, such as names and addresses of
possible acquaintances, relatives and neighbors of that individual. Another of
the advantages that LocatePLUS Group is its unlisted and cell phone listings
which we believe no other competitor has.
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(TM) 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, 2005, we
had realized only nominal revenue from this product.
WORLDWIDE INFORMATION(TM)
Since 1996, we have produced CD-ROM products that enable users to quickly
search motor vehicle records in multiple states through a dynamic search engine,
known as Worldwide Information(TM). Our Worldwide
23
Information(TM) product enables users to search certain motor vehicle records
and drivers' license information in multiple states through a dynamic search
engine. Unlike many competing products, our Worldwide Information(TM) product
enables users to rapidly identify vehicles or drivers using complete or partial
search criteria. We believe that this ability to search partial data is a
valuable tool in circumstances in which incomplete information is available, as
is often the case in criminal investigations. Unlike data provided by
Internet-based services, searches on our CD-ROM product are confidential and
unavailable to any person other than the user of our CD-ROM product. We believe
that the confidential nature of this CD-ROM product makes it particularly
attractive to law enforcement agencies, which must often conduct criminal
investigations in strict secrecy.
As of December 31, 2005, there were approximately 3,500 pre-screened purchasers
of our Worldwide Information(TM) 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.
DATAPHANT
In October 2003, Voice Power Technology merged into our newly formed
wholly-owned subsidiary, Dataphant, Inc. Through this merger, Dataphant now has
information on virtually every land-based phone number in the United States and
approximately 30% of the cell phone numbers in the United States. We believe
that we are the only company that has this information. The Dataphant data has
been integrated into both LocatePLUS and Worldwide Information products.
Currently the only distribution of this data is through the other subsidiaries.
METRIGENICS
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. Metrigenics has
finished first stage testing on matching DNA to facial characteristics and
expects to have first stage products within twelve months.
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. More recently,
congress has been addressing the access to public data such as ours. Any further
restriction on our
24
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. 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(TM) CD-ROM) and through "channel partner" arrangements, by which
third parties access our databases in consideration for a royalty. We also,
from time to time, provide certain consulting services to third party database
providers on the integration and assimilation of public data. To date, our
efforts to license data have resulted in several channel partnerships. For the
year ending December 31, 2005, we have recognized revenue of $4,358,038 on these
agreements.
COMPETITION
Current competitors for our LocatePLUS(TM) and Entersect include
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(TM) product primarily competes with the registries of
motor vehicles of various states that sell their data to screened users. These
state agencies generally provide data in "raw form" without the search
capabilities that we provide in our Worldwide Information(TM) product.
EMPLOYEES
As of February 12, 2007, the LocatePLUS Group had 73 employees. We believe
that our relations with our employees are good.
DESCRIPTION OF PROPERTY
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, 2007, and our
annual lease obligation is approximately $458,000.
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 2005 were approximately
$27,000. Annual rent payments for 2006 are expected to be $28,000.
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 1,900 square
feet pursuant to a month-to-month lease with current monthly rent of $3,139.
Metrigenics Inc., has access to University office and lab space with no lease or
rental commitment. We believe that our facilities are sufficient for our
projected needs.
INTELLECTUAL PROPERTY
Publicly available data concerning individuals is generally
non-proprietary. As a result, our intellectual property consists largely of
certain trade secrets and know-how associated with the integration of databases
and our ability to link diverse datasets. We rely on a combination of
confidentiality agreements, restrictions on access to our proprietary systems,
and contractual provisions (such as in our user agreements) to protect our
intellectual property.
25
We have registered LOCATEPLUS.COM as a trademark with the United States
Patent and Trademark Office. We maintain LOCATEPLUS, WORLDWIDE INFORMATION(TM),
ENTERSECT(TM), CareerScan(TM), and TrustmeID(TM) as unregistered trademarks
relating to our products. We may, from time to time, claim certain other rights
under trademark law, however, we currently have no other marks registered or
pending with the United States Patent and Trademark Office or the equivalent
agency of any other country.
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(TM) and TrustmeID(TM).
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On December 13, 2004, the audit committee of LocatePLUS Holdings
Corporation (the "Company") received a letter of resignation dated December 10,
2004, from the Company's independent accountants, Carlin, Charron, and Rosen,
LLP. (CCR).
Except as described in the following sentence, the reports of CCR on the
financial statements of the Company 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. The report
of CCR on the financial statements of the Company for the fiscal year ended
December 31, 2003 was modified to express substantial doubt regarding the
Company's ability to continue as a going concern.
In addition, during the Company's two most recent fiscal years and through
December 13, 2004, there was no disagreement with CCR 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
CCR, would have caused CCR to make reference to the subject of that disagreement
in its reports on the Company's financial statements for those fiscal periods.
The letter of CCR, attached as Exhibit 16.1 to the 8-K filed with the Securities
and Exchange Commission on December 17, 2004, was the initial contact from CCR
regarding the concerns addressed therein. Since that time, the Company's audit
committee of the board of directors has addressed all issues raised in the CCR
letter.
Pursuant to Item 304(a)(3) of Regulation S-K, the Company provided CCR with a
copy of this disclosure and requested that CCR as promptly as possible furnish a
letter addressed to the Commission stating whether or not CCR agrees with the
statements of the Company set forth in the December 17, 2004, 8-K.
A letter from CCR with respect to this matter was filed with the Securities and
Exchange Commission on Form 8-K on January 21, 2005.
On February 8, 2005, Livingston & Haynes, P.C. ("Livingston") was engaged as the
Company's new independent accountants. During the two most recent fiscal years
and the interim period preceding the engagement of Livingston, the Company had
not consulted with Livingston 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 the Company's financial
statements, and either a written report or oral advice was provided to the
Company by Livingston that Livingston concluded was an important factor
considered by the Company 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.
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.
* * *
26
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of Chief Financial Officer February 12, 2007.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS
- -------------------------------- --- -----------------------------------
Jon R. Latorella 42 Chairman of the Board, President
and Chief Executive Officer
Sonia P. Bejjani 37 Director; President-Worldwide
Information, Inc.
James C. Fields 39 Vice President of Finance,
Treasurer Secretary, and Acting
Chief Financial Officer
Ralph Caruso 56 Director
David Skerrett 56 Director
Chris Romeo 43 Director
Mike Ryan 47 Director
Peter Zekos 44 Director
CURRENT DIRECTORS AND OFFICERS
SONIA P. BEJJANI, 37, 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. During 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. Ms. Bejjani has been elected in 2005 to serve a three
year term.
RALPH CARUSO 56, is the founder and President of Caruso Companies, a
conglomerate involved in many facets of industrial construction that has been in
business for over 25 years. Mr. Caruso has been elected in 2005 to serve a one
year term.
DAVID SKERRETT, 56, has been Vice President of the Middlesex Corporation for 23
years. Middlesex Corporation is in the top 400 heavy civil construction
companies in the nation with $140 million in revenue. Mr. Skerrett holds a
Bachelor of Engineering from College of Technology. Mr. Skerrett has been
elected in 2005 to serve a one year term.
JON R. LATORELLA, 42, 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. Mr. Latorella has been elected in
2005 to serve a three year term.
CHRIS ROMEO, 43, is an attorney that has had a private practice since 1992 and
holds a Bachelors Degree from Wesleyan University and received a Doctorate of
Jurisprudence from the New England School of Law in 1987. Mr. Romeo will be a
new member to the Board of Directors and has been elected in 2005 to serve a two
year term.
MIKE RYAN, 47, is an attorney that has had a private practice since 1992 and
holds a Bachelors Degree from Merrimack College and received a Doctorate of
Jurisprudence from the New England School of Law in 1987. Mr. Ryan will be a
new member to the Board of Directors and has been elected in 2005 to serve a two
year term.
PETER ZEKOS, 44, is founder and President of Excel Staffing, Inc., founded in
1999, an executive search and temporary staffing company located in Worcester,
Massachusetts. Mr. Zekos holds a Bachelors of Science in Business
Administration from Clark University in Worcester, Massachusetts which he
received in 1984. Mr. Zekos joined our Board of Directors in 2005 and has been
elected in 2005 to serve a three year term.
Board of Directors on March 28, 2003. At December 31, 2005, Mr. Murphy
was the chairman of the Audit Committee of our Board of Directors
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
27
employment agreements with any of our employees.
The Board of Directors held a total of 11 meetings in 2006. A quorum of the
Directors was in attendance at regularly scheduled meetings. As we are a small
company and do not have a large Board, we have no separate Nominating Committee.
Board Members receive nomination proposals from management, stockholders and
others. The Board as a whole receives, reviews and acts upon these proposals.
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. The Committee serves
without a formal Charter. During 2006 the Committee reviewed and discussed the
2005 audited financial statements with management, discussed with the Company's
auditors the matters required to be discusses by SAS 61, received and reviewed
with the auditor the auditor's disclosures required by Independence Standards
Board Standard No. 1 and recommended that the audited financial statements be
included in the Company's annual report on Form 10K-SB.
The Audit Committee currently has one member, David Skerrett. The Board of
Directors is currently in the process of identifying and appointing a financial
expert to the Audit committee.
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
Committee serves without a formal Charter. The Compensation Committee also
administers our equity compensation plan and other employee benefits plans that
we may adopt from time to time. The Committee has the authority to review and
present to the Board for its approval compensation matters requiring Board
action. The members of the Compensation Committee are Ralph Caruso and Peter
Zekos. The Committee meets periodically with management, reviews compensations
levels and makes recommendations to the Board for implementation. The Committee
does not delegate any of its authority and does not employ outside compensation
consultants. .
SHAREHOLDER COMMUNICATIONS
Our Board of Directors does not have a formally announced policy or process
relative to shareholder communications. As a small company, we encourage our
Board members to communicate directly with shareholders and to share with other
members of the Board any communications for further action. Typically, any
written communications from shareholders addressed to Board members at Company
offices are forwarded to them for review.
CODE OF ETHICS
The Company adopted a Code of Ethics at a meeting of the Board of Directors
held on May 19, 2004.
EXECUTIVE COMPENSATION
Prior to December 5, 2005, the Company had outstanding two classes of
stock, Class A Voting Common Stock of which there were 150,000,000 shares
authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which
there were 250,000,000 shares authorized with 74,505,730 issued. At the annual
meeting of the shareholders held on November 12, 2005, the shareholders approved
a plan of recapitalization whereby 1) each outstanding share of our Class A
Voting Common Stock and our Class B Non-Voting Common Stock combine into a
single class of voting Common Stock with 400,000,000 authorized and 185,930,146
issued, 2) effect a one-for-fifty reverse split of this new class of Common
Stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase
the authorized from 8,000,000 to 25,000,000. The combination of the two classes
of stock was completed on December 5, 2005. The reverse split and change in
authorized shares was completed on December 12, 2005. In addition, the
completion of the recapitalization triggered the mandatory conversion of certain
notes payable in the amount of $8,965,000 into 1,793,000 of the new Common
Stock.
SUMMARY COMPENSATION TABLE
The following table sets forth, for 2006, 2005 and 2004, certain
compensation paid by us, including salary, bonuses and certain other
compensation, to our Chief Executive Officer and all other executive officers
whose
28
annual compensation for the years ended datelstransMonth12Day31Year2006December
31, 2006, 2005 and 2004 exceeded $100,000 (the "Named Executive Officers").
- - - - - NON-EQUITY NON- ALL
NAME AND - - - STOCK OPTIONS INCENTIVE QUALIFIED OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS AWARDS PLAN DEFERRED COMP TOTALS
- - - ($) ($) ($) (SHARES) COMP ($) COMP ($) ($) ($)
- ------------------------ ---- -------- -------- ------- --------- ----------- ---------- --------- --------
JON R. LATORELLA 2006 231,468 325,000 - - - - 15,000(2) 571,468
---- -------- -------- ------- --------- ----------- ---------- --------- --------
President and 2005 232,727 - - - - - 15,000(2) 247,727
Chief Executive Officer 2004 193,955 100,000 - 70,000(1) - - 15,000(2) 378,955
JAMES C. FIELDS(3) 2006 142,690 - - - - - 13,200(5) 155,890
Acting Chief Financial 2005 142,893 - - - - - 13,200(5) 156,093
Officer, Treasurer and 2004 134,967 - - 20,000(4) - - 10,000(5) 164,967
Secretary
(1) On May 19, 2004 Mr. Latorella was granted incentive stock options to
purchase 70,000 Class A Voting Common Stock with an average exercise price of
$70.05 per share on a post recapitalization basis.
(2) Mr. Latorella and his family are allowed use of company vehicles, the
value of which is approximately $1,100 per month to Mr. Latorella.
(3) Mr. Fields commenced his employment with us in 2001. Mr. Fields became
an executive officer with the Company on March 31, 2003.
(4) On May 19, 2004, Mr. Fields was granted incentive stock options to
purchase 20,000 shares of Class A Voting Common Stock with an exercise of $19.50
per share on a post recapitalization basis.
(5) Beginning in April 2004, Mr. Fields was allowed the use of a
company-leased vehicle, the value of which is approximately $1,100 per month.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
-------------------------------------------------------------------- -----------------------------------------
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market
Awards: or
Market Number Payout
Equity Number Value of Value
Incentive of of Unearned of
Plan Shares Shares Shares, Unearned
Awards: or or Units Shares,
Number Units Units or Units
Number of Number of of of of Other or
Securities Securities Securities Stock Stock Rights Other
Underlying Underlying Underlying That That That Rights
Unexercised Unexercised Unexercised Option Have Have Have That Have
Options Options Unearned Exercise Option Not Not Not Not
(#) (#) Options Price Expiration Vested Vested Vested Vested
Name Exercisable Unexercisable (#) ($) Date (#) ($) (#) (#)
- ------------------- ------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
JON R. LATORELLA(1)
President and
Chief Executive
Officer 35,000 - - $ 12.50 12/18/08 - - - -
50,000 - - $ 12.50 12/18/08 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
100,000 - - $ 50.00 12/18/08 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
20,000 - - $ 75.00 05/19/09 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
50,000 - - $ 19.50 05/19/09 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
2,000 - - $ 10.00 11/03/08 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
240,000 - - $ 0.50 12/29/09 - - - -
------------- -------------- ------------ ---------- ---------- ------- ------- ---------- ----------
JAMES C. FIELDS(2)
Acting Chief
Financial Officer 10,000 10.00 06/01/11 - - - -
------------- ---------- ---------- ------- ------- ---------- ----------
10,000 7.50 03/28/13 - - - -
------------- ---------- ---------- ------- ------- ---------- ----------
15,000 12.50 12/18/13 - - - -
------------- ---------- ---------- ------- ------- ---------- ----------
20,000 19.50 05/19/14 - - - -
------------- ---------- ---------- ------- ------- ---------- ----------
20,000 0.50 12/29/14 - - - -
------------- ---------- ---------- ------- ------- ---------- ----------
(1) All options issued to Mr. Latorella expire five years from issue date.
As such, the issue date is five years prior to expiration and all options were
immediately vested upon issue.
29
(2) All options issued to Mr. Fields expire ten years from issue date. As
such, the issue date is ten years prior to expiration. With the exception of the
10,000 share grant issued 6/1/2001 which vested 25% per year on its anniversary,
all options were immediately vested upon issue.
DIRECTOR COMPENSATION
Non-
Fees Non-Equity Qualified
Earned Incentive Deferred All
or Paid Stock Option Plan Compensation Other
in Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
RALPH CARUSO - - - - - - -
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
DAVID SKERRETT - - - - - - -
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
PETER ZEKOS - - - - - - -
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
CHRIS ROMEO - - - - - - -
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
MIKE RYAN - - - - - - -
- -------------- --------- --------- --------- -------------- -------------- -------------- --------
Independent members of the Board will be compensated for their service in 2007
$25,000 per member.
EQUITY COMPENSATION PLANS
1999 STOCK OPTION PLAN
On November 16, 1999, our Shareholders ratified and adopted an Incentive and
Non-Qualified Stock Option Plan, which we refer to as the "1999 Stock Option
Plan". The 1999 Stock Option Plan set aside 300,000 shares of our Common Stock
adjusting for the December 2005 1 for 50 reverse split for issuance pursuant to
the exercise of incentive and non-qualified stock options to be awarded to our
employees, officers and directors at the recommendation of the equity
compensation plan's administrator and subject to the approval of our Board of
Directors. We strongly believe in the concept of each employee having some form
of equity participation as an incentive toward excellence in individual
performance and our further success.
In June 2000, our 1999 Stock Option Plan was amended and restated to provide
greater flexibility to the equity compensation plan's administrator in the
granting of various forms of equity compensation. Adjusting for the effects of
the reverse split, as of July 15, 2006, 189,126 stock options were outstanding
under the equity compensation plan. The weighted average exercise price of all
options granted under the equity compensation plan was $7.75 per. The 1999
Stock Option Plan is administered by the Compensation Committee of the Board of
Directors.
2003 STOCK OPTION PLAN
On May 29, 2003, our Shareholders ratified and adopted an Incentive and
Non-Qualified Stock Option Plan, which we refer to as the "2003 Stock Option
Plan." The 2003 Stock Option Plan set aside 25,000,000 shares of our Class A
Voting Common Stock and 25,000,000 shares of our Class B Non-Voting Common Stock
for issuance pursuant to the exercise of incentive and non-qualified stock
options to be awarded to our employees, officers and directors at the
recommendation of the equity compensation plan's administrator and subject to
the approval of our Board of Directors. Adjusting for the December 2005
combination and reverse split, the plan may issue up to 1,000,000 of Common
Stock. We strongly believe in the concept of each employee having some form of
equity participation as an incentive toward excellence in individual performance
and our further success.
As of July 15, 2006, 514,000 stock options were outstanding under the equity
compensation plan. The weighted average exercise price of all options granted
under the equity compensation plan was $23.60 per share. The 2003 Stock Option
Plan is administered by the Compensation Committee of the Board of Directors.
PLANS NOT APPROVED BY SECURITY HOLDERS
30
From time to time, we have issued options or warrants to employees and
non-employees (such as directors, consultants, advisors, vendors, customers,
suppliers and lenders) in exchange for services or other consideration provided
to us. These issuances have not been made pursuant to a formal policy or plan,
but instead are issued with such terms and conditions as may be determined by
our Board of Directors from time to time. Generally, our stockholders have not
approved or disapproved these issuances.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table reflects equity compensation granted or issued by us as of
the September 30, 2006, 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
NUMBER OF WEIGHTED SECURITIES
SECURITIES TO AVERAGE REMAINING
BE ISSUED UPON EXERCISE AVAILABLE
EXERCISE OF PRICE OF FOR FUTURE
OUTSTANDING OUTSTANDING ISSUANCE
OPTIONS, OPTIONS, UNDER EQUITY
WARRANTS WARRANTS COMPENSATION
PLAN CATEGORY AND RIGHTS AND RIGHTS PLANS(1)
-------------- ----------- ------------
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS:
Common Stock 700,126 $19.45 491,071
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS:
Common Stock 2,800,075 $ 7.34 N/A
TOTAL:
-------------- ----------- ------------
Common Stock 3,500,201 $11.98 N/A
(1) Excludes securities reflected in column titled "Number of securities to
be issued upon exercise of outstanding options, warrants and rights."
401(K) PLAN
We sponsor a defined contribution plan under the provisions of Section 401(k) of
the Internal Revenue Code, which covers substantially all of our employees. We
may make discretionary matching contributions up to 1% of annual employee
contributions. Employees are eligible to participate in the 401(k) Plan after
one year of service. Our matching contributions vest ratably over a five-year
period. We pay the administrative expenses of this plan.
NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY
On February 1, 2002 we adopted a Non-employee Director Stock Option Policy.
Under the Non-employee Director Stock Option Policy, we will make annual grants
(beginning on the date of adoption of the policy or the first day that a
director is elected to our Board of Directors, if later) to our non-employee
directors of warrants to purchase 35,000 shares of our Class B Non-Voting Common
Stock as compensation for service on our Board of Directors (and any
committees). These grants are made in lieu of any other compensation to our
non-employee directors. Each of these warrants will be immediately exercisable
and will have an exercise price that is equal to the fair market value of our
Class B Non-Voting Common Stock as of the date of grant. No separate
compensation is provided to directors for service on either of our two
committees.
We reimburse our directors for out-of-pocket costs associated with their
activities on the Board of Directors.
Directors who are also employees of LocatePLUS Holdings Corporation or any of
its subsidiaries (currently, Mr. Latorella and Ms. Bejjani) are not paid any
compensation for their service as directors.
Pursuant to the Non-employee Directors Stock Option Policy:
- - On March 28, 2003, Messrs. Garlock, Houlihan, and Kite were each issued a
warrant to purchase 35,000 shares of our Class B Non-Voting Common Stock for
$0.15 per share.
- - In 2004, Messrs. Garlock, Houlihan, Kite, Murphy, and Scalley were each
issued an option to purchase 1,000,000 shares of our Class A Voting Common Stock
for $1.50 per share pursuant to our Non-employee Directors Stock Option and
Compensation Policy.
31
ADVISORY BOARD
On December 2, 1999, our Board of Directors authorized the formation of an
Advisory Board, consisting of up to eight members, to provide ongoing advice and
consultation to the Board of Directors to enhance the development and operation
of our LocatePLUS product. The Advisory Board members (none of whom are
employees or directors) are selected by the Board of Directors based on each
candidate's experience, accomplishments and national recognition in the fields
encompassed by our target markets. Compensation for members of our advisory
board consists of expense reimbursement and a one-time grant of fully vested
non-qualified stock options or immediately exercisable warrants to purchase
thirty five thousand shares of Class B Non-Voting Common Stock. The Advisory
Board meets informally from time to time with management.
The current members of the Advisory Board are:
DALE C. JENKINS, JR.
On December 2, 1999, we appointed Dale C. Jenkins, Jr., as the first member
of our Advisory Board. In 1999 Mr. Jenkins was appointed to the position of
Special Assistant for Law Enforcement and Public Safety to the Chancellor of
Higher Education of the Commonwealth of Massachusetts. Mr. Jenkins was also
appointed to the Advisory Board of the U.S. Commission on Civil Rights and the
Massachusetts Governor's Crime Watch Committee and was a consultant to the U.S.
Department of Justice. In addition, Mr. Jenkins directed the Lead Advanced
Security Team for Presidents Ronald Reagan and George H. W. Bush and acted as
Deputy Director of Inaugural Security for then President-Elect George H. W.
Bush. On November 17, 1999, our Board of Directors granted a ten-year option to
Mr. Jenkins to purchase 25,000 shares of our Class A Voting Common Stock with an
exercise price of $0.20 per share as compensation for his services on the
Advisory Board.
JAMES A. CORRY
On July 20, 2000 our Board of Directors appointed James A. Corry as the
second member of our Advisory Board. Since July 2001, Mr. Corry has been the
Chief Operating Officer of Abel Telecom, Inc., based in Scottsdale, Arizona.
Prior to that, Mr. Corry was a criminal investigation and security expert for
the United States Secret Service. During his more than twenty years with that
agency, Mr. Corry worked on security issues globally, conducting criminal and
fraud investigations and managing the security of political personnel, including
President George H. W. Bush. On June 1, 2001, the Board of Directors issued to
Mr. Corry a ten-year option to purchase 25,000 shares of our Class A Voting
Common Stock with an exercise price of $0.20 per share as compensation for his
services on the Advisory Board.
WILLIAM H. SHAHEEN
On October 1, 2001 our Board of Directors appointed William H. Shaheen to
our Advisory Board. Mr. Shaheen is currently the Managing Partner of the law
firm of Shaheen and Cohen, with offices in Concord and Dover, New Hampshire.
Mr. Shaheen served as U.S. Attorney for the District of New Hampshire from 1976
to 1981. In 1981, he was appointed a New Hampshire District Court Judge in
Durham, New Hampshire. Mr. Shaheen resigned his judgeship in 1997 upon the
election of his wife as Governor of the State of New Hampshire. On October 12,
2001 in consideration for his services on the Advisory Board, Mr. Shaheen
received a ten-year warrant to purchase 25,000 shares of our Class B Non-Voting
Common Stock, with an exercise price of $0.20 per share.
DAVID G. DUCHESNEAU
On October 1, 2001 our Board of Directors also appointed David G.
Duchesneau to our Advisory Board. From 1991 to the present, Mr. Duchesneau has
been General Manager of Standa, Inc., a full service private investigative
agency and consulting firm. From 1971 to 1991, Mr. Duchesneau was the Commander
and Senior Officer of the Organized Crime Unit and Fugitive Apprehensive Unit of
the New Hampshire State Police. On October 12, 2001 Mr. Duchesneau was issued a
ten-year warrant to purchase 25,000 shares of our Class B Non-Voting Common
Stock, with an exercise price of $0.20 per share in consideration for his
services on the Advisory Board.
CHARLES LYONS
On November 20, 2001 our Board of Director appointed Charles Lyons to the
Advisory Board. Mr. Lyons is the Superintendent Director of the Shawsheen
Valley Technical School District located in Billerica, Massachusetts.
32
He is also the Chairman of the Arlington, Massachusetts Board of Selectmen. On
that date, our Board of Directors granted a ten-year warrant to Mr. Lyons to
purchase 12,500 shares of our Class B Non-Voting Common Stock with an exercise
price of $0.20 per share as compensation for his services on the Advisory Board.
ORGANIZATION WITHIN THE PAST FIVE YEARS
We were incorporated in Massachusetts in 1996 as Worldwide Information,
Inc. In July 1999, we reincorporated in Delaware to take advantage of certain
favorable corporate excise tax rates relative to Massachusetts as well as
Delaware's well-established corporate law. As part of that re-incorporation, we
changed our name to LocatePLUS.com, Inc.
On August 1, 2001, we changed our name from LocatePLUS.com, Inc. to
LocatePLUS Holdings Corporation as part of a corporate restructuring. In
conjunction with that corporate restructuring, we created two wholly-owned
subsidiaries, LocatePLUS Corporation, a Delaware corporation, and Worldwide
Information, Inc., a Delaware corporation. We capitalized LocatePLUS Corporation
with all of our Internet-based LocatePLUS business, in consideration for all of
its outstanding equity. We capitalized Worldwide Information, Inc. with all of
our CD-ROM-based Worldwide Information(TM) business, in consideration for all of
its outstanding equity. We created these subsidiaries for two primary reasons:
- - We wished to isolate any potential liabilities in one of our products in a
manner that would reduce the impact of any such liabilities on our other product
line. There are no claims pending relating to errors or omissions in either of
our two product lines, nor does management currently anticipate any such claims.
However, as disclosed above, claims associated with defects in our databases may
arise from time to time.
- - We wished to administratively separate the operations associated with our
LocatePLUS product from our Worldwide Information(TM) product. Operations
associated with our Worldwide Information(TM) product have historically been
conducted through our Byfield, Massachusetts office. Operations associated with
our LocatePLUS product have been conducted through our Beverly, Massachusetts
office. Although each of these products is marketed to similar users, the
acquisition and integration of data for and the operation of these two products
differs significantly.
Subsequently, we acquired all of the securities of Entersect Corporation
and Dataphant, Inc. and formed Metrigenics, Inc. We presently hold all of the
equity of each of these five subsidiaries, and we account for each subsidiary on
a consolidated basis.
LocatePLUS Holdings Corporation provides certain administrative and
executive functions on behalf of each of its subsidiaries, such as management of
payroll and other accounts payable.
No options, warrants or similar rights to acquire equity in any subsidiary
currently exists, nor do we anticipate any such rights being created in the
future. We have no present intention of selling or otherwise disposing of any
subsidiary.
* * *
33
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 STOCK OPTION
In 2004, Mr. Latorella was granted fully vested incentive stock options to
purchase 1,000,000 and 2,500,000 Class A Voting common with exercise prices of
$1.50 and $0.39 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 $1,500 per month.
JAMES C. FIELDS
Mr. Fields is our Acting Chief Financial Officer.
STOCK OPTION
On December 18, 2003, was issued incentive stock options to purchase 10,000
shares of our Class A Voting Common Stock with an exercise price of $12.50 per
share on a post recapitalization basis. In 2004, Mr. Fields was issued
incentive stock options to purchase 20,000 shares of our Class A Voting Common
Stock with an exercise price of $19.50 per share on a post recapitalization
basis.
USE OF COMPANY CARS.
Mr. Fields is allowed use of a company car, the value of which is approximately
$1,100 per month.
THOMAS GARLOCK
Mr. Garlock is a former member of our Board of Directors.
NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY
In 2004, Mr. Garlock was issued an option to purchase 20,000 shares of our Class
A Voting Common Stock for $75.00 per share pursuant to our Non-employee
Directors Stock Option and Compensation Policy.
GERARD SCALLEY
Mr. Scalley is a former member of our Board of Directors.
NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY
In 2004 Mr. Scalley was issued an option to purchase 20,000 shares of our
Class A Voting Common Stock for $75.00 per share on a post recapitalization
basis pursuant to our Non-employee Directors Stock Option and Compensation
Policy.
ROBERT KITE
Mr. Kite is former member of our Board of Directors. Mr. Kite was appointed to
the Board in December 2002.
34
NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY
In 2004 Mr. Kite was issued an option to purchase 20,000 shares of our
Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee
Directors Stock Option and Compensation Policy.
* * *
35
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Prior to December 5, 2005, the Company had outstanding two classes of
stock, Class A Voting Common Stock of which there were 150,000,000 shares
authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which
there were 250,000,000 shares authorized with 74,505,730 issued. At the annual
meeting of the shareholders held on November 12, 2005, the shareholders approved
a plan of recapitalization whereby 1) each outstanding share of our Class A
Voting Common Stock and our Class B Non-Voting Common Stock combine into a
single class of voting common stock with 400,000,000 authorized and 185,930,146
issued, 2) effect a one-for-fifty reverse split of this new class of common
stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase
the authorized from 8,000,000 to 25,000,000. The combination of the two classes
of stock was completed on December 5, 2005. The reverse split and change in
authorized shares was completed on December 12, 2005. In addition, the
completion of the recapitalization triggered the mandatory conversion of certain
notes payable in the amount of $8,965,000 into 1,793,000 of the new Common
Stock.
We had 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".
Post the plan of recapitalization, on December 12, 2005, we had two
securities trading on the Over-the-Counter Bulletin Board as follows:
- - shares of our Common Stock, quoted under the symbol "LPHC"; and
- - our public warrants (redeemable with 50 warrants to purchase one share of
our Common Stock at an exercise price of $25.00 per share) are quoted under the
symbol "LPHCW".
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 for each quarter during fiscal years
2003, 2004, 2005, and 2006, as reported by the Over-the-Counter Bulletin Board.
2003 2004
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------------------------- ----------------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
LPLHA.OB 0.40 0.14 0.42 0.12 0.38 0.28 0.34 0.24 0.63 0.29 0.58 0.37 0.39 0.25 0.37 0.25
- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
LPLHB.OB 0.29 0.10 0.29 0.10 0.35 0.20 0.25 0.13 0.41 0.20 0.44 0.32 0.38 0.22 0.32 0.21
- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
LPLHW.OB 0.10 0.00 0.12 0.00 0.13 0.03 0.09 0.05 0.26 0.07 0.19 0.09 0.13 0.04 0.12 0.05
- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2005 2006
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------------------------------- ------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEPT 30
------------ ------------ ------------ ---------- ---------- ----------- ----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
LPLHA.OB 0.315 0.172 0.217 0.125 0.15 0.072 N/A N/A N/A N/A N/A N/A N/A N/A
- -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
LPLHB.OB 0.265 0.172 0.21 0.12 0.155 0.081 N/A N/A N/A N/A N/A N/A N/A N/A
- -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
LPLHW.OB 0.08 0.04 0.055 0.03 0.055 0.007 N/A N/A N/A N/A N/A N/A N/A N/A
- -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
LPHC N/A N/A N/A N/A N/A N/A 9.47 2.75 3.50 1.43 2.89 .47 1.70 .76
- -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
LPHCW N/A N/A N/A N/A N/A N/A .058 .01 .023 .012 .020 .006 .065 .003
- ------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ----
36
HOLDERS
As of December 31, 2005 there were:
- - approximately 480 holders of record of our Common Stock,
- - approximately 150 holders of record of our public warrants.
DIVIDENDS
We have never declared or paid a cash dividend. At this time, we do not
anticipate paying dividends in the future. We are under no legal or contractual
obligation to declare or to pay dividends, and the timing and amount of any
future cash dividends or distributions is at the discretion of our Board of
Directors and will depend, among other things, on our future after-tax earnings,
operations, capital requirements, borrowing capacity, financial condition and
general business conditions. We plan to retain any earnings for use in the
operation of our business and to fund future growth.
PRINCIPAL STOCKHOLDERS
As of the close of business on December 13, 2006, there were 7,685,067
shares of Common Stock issued and outstanding. There were also unexercised
options and warrants issued to purchase shares of Common Stock (including both
vested and unvested options) outstanding on that date. Of these, 2,136,207
issued shares and 4,613,712 options, warrants, and convertible shares were owned
by officers, directors and over 5% stockholders
The following table sets forth certain information known to us with respect
to the beneficial ownership of our Common Stock as of the close of business on
December 13, 2006, 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 of December
13, 2006 are deemed outstanding, while such shares are not deemed outstanding
for computing percentage ownership of any other person. 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 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.
COMMON STOCK
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- -------------------------- ------------------ -----------
Directors
JON R. LATORELLA 983,735(1) 12.02%
SONIA P. BEJJANI 92,508(2) 1.19%
RALPH CARUSO 22,944 *
DAVID SKERRETT 1,995(3) *
PETER ZEKOS 20,700(5) *
CHRIS ROMEO - -
MIKE RYAN - -
Officers
JAMES C. FIELDS 65,000(7) *
5% or More Shareholders
SPECIAL SITUATION FUNDS 1,410,000(8) 17.44%
DUTCHESS 3,871,037(9) 34.70%
All directors and
executive officers
as a group 6,467,919(10) 65.35%
* Less than one percent of outstanding shares.
37
(1) Includes 499,475 shares issuable upon exercise of a fully vested stock
options, with a weighted average exercise price of $17.45 per share.
(2) Includes 90,000 shares issuable upon exercise of a fully vested stock
options, with an average exercise price of $26.16 per share.
(3) Consists of 225 held in IRA and 1,770 in trusts for which he is the
custodian.
(4) Includes 1,500 shares held by the Houlihan Trust, over which Mr.
Houlihan has voting and dispositional authority. Also includes 24,900 shares of
issuable upon exercise of certain immediately exercisable warrants with an
exercise price of $62.07 per share.
(5) Includes 700 shares issuable upon exercise of a fully vested stock
options, with an average exercise price of $15.00 per share.
(6) Includes 21,950 shares of issuable upon exercise of certain immediately
exercisable warrants with an exercise price of $69.63 per share
(7) Includes the vested portion of stock incentive stock options to purchase
up to 65,000 shares with a weighted average exercise price of $11.65 per share.
(8) Includes 505,000 shares and 200,000 shares issuable upon the exercise of
warrants with an exercise price of $7.50 per share held by Special Situations
Fund III, L.P. and 505,000 shares 200,000 shares issuable upon the exercise of
warrants with an exercise price of $7.50 per share held by Special Situations
Private Equity Fund, L.P.
(9) Includes 400,000 shares and 2,346,037shares issuable upon the conversion
of certain notes payable using a conversion price of $0.70 per share, 750,000
shares issuable upon the exercise of five year warrant issued December 29, 2005
with an exercise price of $5.00 per share and 375,000 shares issuable upon the
exercise of five year warrant issued July 21, 2006 with an exercise price of
$1.00 per share.
(10) Includes 4,613,712 shares issuable upon the exercise of warrants and
conversion of certain notes payable
* * *
38
DESCRIPTION OF CAPITAL STOCK
The authorized capital of LocatePLUS Holdings Corporation consists of:
- - 25,000,000 shares of Common Stock.
The following description of our capital stock does not purport to be complete
and is governed by and qualified by our Amended and Restated Certificate of
Incorporation (which we refer to as our "Charter"), included as an exhibit to
the Corporation's Registration Statement on Form SB-2, filed with the Securities
and Exchange Commission on March 28, 2002 (Registration No. 333-85154), and
By-laws, which are included as an exhibit to the Corporation's Registration
Statement on Form SB-2, filed with the Securities and Exchange Commission on
March 28, 2002 (Registration No. 333-85154).
COMMON STOCK
Prior to December 5, 2005, the Company had outstanding two classes of stock,
Class A Voting Common Stock of which there were 150,000,000 shares authorized
with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were
250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of
the shareholders held on November 12, 2005, the shareholders approved a plan of
recapitalization whereby 1) each outstanding share of our Class A Voting Common
Stock and our Class B Non-Voting Common Stock combine into a single class of
voting common stock with 400,000,000 authorized and 185,930,146 issued, 2)
effect a one-for-fifty reverse split of this new class of common stock resulting
in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized
from 8,000,000 to 25,000,000. The combination of the two classes of stock was
completed on December 5, 2005. The reverse split and change in authorized
shares was completed on December 12, 2005. In addition, the completion of the
recapitalization triggered the mandatory conversion of certain notes payable in
the amount of $8,965,000 into 1,793,000 of the new common stock.
As of February 13, 2007, there were 7,685,067 shares of Common Stock issued
and outstanding.
The holders of our common stock are entitled to receive ratably dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available for that purpose. In the event of our liquidation,
dissolution or winding up, the holders of our common stock are entitled to share
ratably in all assets remaining after payment of liabilities. Our common stock
does not have any preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to our common
stock.
Shares of Common Stock are entitled to one vote per share held of record on
all matters submitted to a vote of stockholders. Holders of Common Stock do not
have cumulative voting rights.
COMMON STOCK REDEEMABLE WARRANTS
GENERAL
Each Common Stock Redeemable Warrant, or "public warrant," entitles the
holder of 50 public warrants to purchase one share of our Common Stock for
$25.00 per share. The exercise price is subject to adjustment upon the
occurrence of certain events as provided in the Common Stock Redeemable Warrant
certificate and as summarized below. Subject to certain limitations which are
described below, our Common Stock Redeemable Warrants with an original
expiration of October 12, 2005 may now be exercised at any time until April 12,
2007, which is their expiration date. Those of our Common Stock Redeemable
Warrants which have not previously been exercised will expire on April 12, 2007,
at the close of business (5:00 p.m. Boston time). A Common Stock Redeemable
Warrant holder will not be deemed to be a holder of the underlying shares of our
Common Stock for any purpose until the Common Stock Redeemable Warrant has been
properly exercised.
EXERCISE
A Common Stock Redeemable Warrant holder may exercise our Common Stock
Redeemable Warrants only if an appropriate registration statement is then in
effect with the Securities and Exchange Commission and if the shares of Common
Stock underlying our Common Stock Redeemable Warrants are qualified or
registered for sale under the securities laws of the state in which the holder
resides (or an exemption from registration is available). We will use
commercially reasonable efforts to maintain the registration of the Common Stock
underlying the warrants until
39
April 12, 2007, and to qualify for sale the shares of Common Stock in each U.S.
jurisdiction in which our Common Stock Redeemable Warrant holders reside,
although we can give no guarantee that such registration will be permitted under
applicable law.
Our Common Stock Redeemable Warrants may be exercised by delivering to our
Transfer Agent the applicable Public Warrant certificate on or prior to the
expiration date, with the form on the reverse side of the certificate executed
as indicated, accompanied by payment of the full exercise price for the number
of Common Stock Redeemable Warrants being exercised plus payment of any taxes
required by the holder's jurisdiction. Fractional shares of Common Stock will
not be issued upon exercise of our Common Stock Redeemable Warrants.
ADJUSTMENTS OF EXERCISE PRICE
If we effect any stock split or stock combination with respect to our
Common Stock, the exercise price in effect immediately prior to such stock split
or combination will be proportionately reduced or increased, as the case may be.
Any adjustment of the exercise price will also result in an adjustment of the
number of shares purchasable upon exercise of a Common Stock Redeemable Warrant.
REDEMPTION
We may repurchase the Common Stock Redeemable Warrants for $0.001 per
warrant upon 30 days' notice to the holders of the Common Stock Redeemable
Warrants in the event that the closing bid on the Over-the-Counter Bulletin
Board for our Common Stock is at or above $62.50 per share for five consecutive
days.
RESTRICTED WARRANTS
As of January 4, 2007, we had issued warrants to purchase an aggregate of
2,800,075 shares of our Common Stock, for which the weighted average exercise
price of these warrants is $7.34 per share. These warrants carry no rights of
registration for public sale and resale in the public markets is therefore
subject to restriction. These restricted warrants include "net issuance"
provisions, permitting a holder to exchange a portion of the warrants for shares
of the underlying security in lieu of payment of a cash exercise price.
CONVERTIBLE NOTE
In consideration for a $10,000 loan made to us on March 9, 2001, we issued
a convertible promissory note. This convertible promissory note bears interest
at the rate of 12% per annum. This note is convertible into 889 shares of our
Common Stock at the election of the holder. The note originally matured on
September 9, 2001. On July 22, 2002, the holder of the note agreed with us to
convert the note into a demand note providing for quarterly payments of interest
on the note until the principal of the note is repaid or converted. The current
outstanding balance of this Note is $10,000.
On July 8, 2005 we entered into a Securities Purchase Agreement with certain
institutional and accredited investors and, in a private placement exempt from
the registration requirements of the Securities Act of 1933, we issued a series
of convertible term notes with an aggregate principal amount of $8,000,000 due
November 5, 2005, if not converted prior to such date. As part of that
offering, we also issued warrants to purchase up to 32,000,000 shares of our
capital stock. As part of the same offering, on August 15, 2005 we issued
additional notes with an aggregate principal amount of $965,000 and terms
identical to the notes issued on July 8, 2005, as well as warrants to purchase
up to 3,860,000 shares of our capital stock. All of the notes are convertible,
and the warrants are exercisable, first into as many shares of our Class A
Voting Common Stock, par value $0.01 per share, as are available for issuance at
the time of conversion or exercise, and then into shares of our Class B
Non-Voting Common Stock, par value $0.01 per share. As part of our agreement
with these investors, we have agreed to seek the approval from our stockholders
of the recapitalization of each outstanding share of our Class A Voting Common
Stock and our Class B Non-Voting Common Stock into a single class of voting
common stock, as well as a one-for-fifty reverse split of this new class of
common stock. If our stockholders approve these measures, the notes will
automatically convert into shares of the new class of common stock, and any
unexercised warrants will be exercisable for shares of that class of stock as
well. As there are currently no unissued shares of our Class A Voting Common
Stock that are not otherwise reserved for issuance, we anticipate that these
notes and warrants will be exercisable for shares of either our Class B
Non-Voting Common Stock or the newly created class of common stock, if approved.
Without taking into consideration interest payable on the notes, the notes are
convertible into 89,650,000 shares of our common stock (regardless of class) at
a current conversion rate of $0.10 per share and the warrants are exercisable
for ten years
40
from the date they were issued for up to 41,189,000 shares of our common stock
(regardless of class) at a current exercise price of $0.15 per share. The
conversion price of the notes and the exercise price of the warrants are each
subject adjustment for a variety of events, including, for example, payment of
dividends, certain mergers or asset sales, and certain securities issuances.
The completion of the recapitalization triggered the mandatory conversion of
these notes into 1,793,000 of Common Stock.
We also entered into a Registration Rights Agreement whereby, among other
things, we agreed to file a registration statement with the SEC, to register the
resale of the shares of our capital stock that we will issue upon exercise, if
any, of the warrants and conversion of the notes. We have agreed to keep the
registration statement effective until all of the shares registered by this
prospectus are sold or can be sold without registration and without restriction
as to the number of shares that may be sold.
On December 29, 2005 we issued a Debenture to Dutchess Private Equities Fund II,
LP, a private equities fund and received proceeds of $1,500,000. The Debenture
is due on December 30, 2010 and pays twelve per cent (12%) interest. Interest
and principal are payable at such times and under such conditions are outlined
in the Debenture. The remaining balance of $892,226 of this Debenture as amended
effective October 18, 2006 is convertible into shares of our Common Stock at the
lesser of $.70 per share or 75% of the lowest closing bid price during the 20
trading days next preceding the date of conversion. On July 21, 2006 we issued a
Debenture to Dutchess Private Equities Fund, LP, a related private equities fund
and received proceeds of $750,000. The Debenture is due on July 21, 2011 and
pays twelve per cent (12%) interest. Interest and principal are payable at such
times and under such conditions are outlined in the Debenture. The Debenture is
convertible into shares of our Common Stock at . at the lesser of $.70 per share
or 75% of the lowest closing bid price during the 20 trading days next preceding
the date of conversion (collectively, the two funds Dutchess). The holder may
not convert if it would cause the holder to own more than 4.9% of the
outstanding Common Stock of the Company. The Company is registering 1,472,808
shares of its Common Stock covered by this Prospectus issuable to Dutchess
pursuant to these conversion rights. Events of Default include violations of the
Debenture Agreement and other related agreements which remain uncured for over
five (5) days including failure to make effective a registration statement
covering the conversion shares within twelve (12) moths of issuance. I. In case
of an Event of Default, the holder can exercise its right to increase the face
amount of the Debenture by ten percent (10%) as an initial penalty and by an
additional 10% for each additional Event of Default. In addition, the holder may
elect to increase the face amount by two and one-half percent (2.5%) per month
(pro-rata for partial periods) paid as a penalty for liquated damages. Liquated
damages will be compounded daily. In addition, the holder may by notice to us
declare the remaining principal amount of the Debenture, including accrued
interest and any liquidated damages, to be immediately due and payable.
On October 18, 2006, we amended the debenture agreements to change the
conversion formula and cancelled a related Investment Agreement dated December
29, 2005. We also issued 400,000 shares of our Common Stock, 200,000 to each
Dutchess entity, in connection with the Debenture purchases. We also issued
400,000 shares of our Common Stock, 200,000 to each Dutchess entity, in
connection with the Debenture purchases.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Our Charter provides that members of our Board of Directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director except for liability:
- - for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- - for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- - under Section 174 of the General Corporation Law of the State of Delaware
(relating to distributions by insolvent corporations); or
- - for any transaction from which the director derived an improper personal
benefit.
Our Charter also provides that if the General Corporation Law of the State
of Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of members of
our Board of Directors will be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Our Charter and By-laws also provide that we may indemnify our directors
and officers to the fullest extent permitted by Delaware law. A right of
indemnification shall continue as to a person who has ceased to be a director or
officer and will inure to the benefit of the heirs and personal representatives
of such a person. The indemnification provided by our Charter and By-laws will
not be deemed exclusive of any other rights that may be provided now or in the
future under any provision currently in effect or hereafter adopted by our
Charter, By-laws, by any agreement, by vote of our stockholders, by resolution
of our directors, by provision of law or otherwise.
41
We have also secured directors' and officers' liability insurance on behalf of
our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons in
accordance with the provisions contained in our Charter and By-laws, Delaware
law or otherwise, we have been advised that, in the opinion of the Securities
and Exchange Commission, this indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act of 1933 and we will
follow the court's determination.
SHARES ELIGIBLE FOR FUTURE SALE
The following outlines our capital stock as of February 13, 2007:
Shares Common Stock outstanding 7,685,067 (1)
(1) Assuming no exercise or conversion of warrants and options to purchase
3,500,201 shares of Common Stock outstanding as of February 13, 2007 or the
conversion of notes payable into up to 2,346,037 shares of Common Stock.
As of February 13, 2007, our affiliates held 1,736,207 shares of our Common
Stock. In general, under Rule 144, as currently in effect after the date of
this prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned shares of our common stock for at least one year, including
any person who is deemed to be our affiliate, will be entitled to sell, within
any three-month period, a number of shares that does not exceed:
- - 1% of the number of shares of such class of common stock then outstanding,
which will equal approximately 68,833 shares.
Sales under Rule 144 are also governed by other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us. Under Rule 144(k), however, a person who is not, and for the three
months prior to the sale of such shares has not been, an affiliate of the
Company will be free to sell "restricted securities" (e.g., shares issued in a
private placement) which have been held for at least two years without regard to
the limitations described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our securities is Transfer Online,
Inc. Transfer Online's address is 227 SW Pine Street, Suite 300, Portland,
Oregon 97204.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Geoffrey T. Chalmers, Esq.
EXPERTS
The financial statements for the year ended December 31, 2005 included in
this prospectus have been so included in reliance on the report (which contains
an explanatory paragraph relating to our ability to continue as a going concern
as described in Note 1 to the financial statements) of Livingston and Haynes,
LP., independent accountants, given on the authority of said firm as experts in
auditing and accounting.
42
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act of 1933 for the shares of Common
Stock in the offering, of which this prospectus is a part. This prospectus does
not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and our securities, we refer you to the
registration statement and the exhibits and schedule that were filed with the
registration statement.
Statements contained in this prospectus about the contents of any contract
or any other document that is filed as an exhibit to the registration statement
are not necessarily complete, and we refer you to the full text of the contract
or other document filed as an exhibit to the registration statement. A copy of
the registration statement and the exhibits and schedules that were filed with
the registration statement may be inspected without charge at the Public
Reference Room maintained by the Securities and Exchange Commission at 100 F
Street NE, Washington, D.C. 20549, and copies of all or any part of the
registration statement may be obtained from the Securities and Exchange
Commission upon payment of the prescribed fee. Information regarding the
operation of the Public Reference Room may be obtained by calling the Securities
and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the SEC. The address of the site is
www.sec.gov.
* * *
43
LOCATEPLUS HOLDINGS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
December 31, 2005 and September 30,
2006 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Operations for
the years ended December 31, 2005 and 2004,
and for the nine months ended September 30, 2006
and 2005 (unaudited) . . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31,
2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2005 and 2004,
and for the nine months ended September 30, 2006
and 2005 (unaudited) . . . . . . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . F-7
F-1
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, 2005, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2005 and 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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
audit provides 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 and its subsidiaries as of December 31, 2005, and the
results of its consolidated operations and its consolidated cash flows for the
years ended December 31, 2005 and 2004, 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, 2005 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.
/s/LIVINGSTON & HAYNES, P.C.
Livingston & Haynes, P.C.
Wellesley, Massachusetts
March 22, 2006
The accompanying financial statements as of September 30, 2006 for the nine
months ended September 30, 2006 and 2005, have not been audited as
disclosed in Note 1.
January 4, 2007
F-2
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
2006 DECEMBER 31,
(UN-AUDITED) 2005
ASSETS
Current assets:
Cash and cash equivalents $ 20,350 $ 610,736
Accounts receivable, less allowance for
doubtful accounts of 127,396 and
172,263 at September 30, 2006 and
December 31, 2005 respectively 5,452,995 4,432,854
Prepaid expenses and other current assets 569,162 739,013
Notes receivable 177,600 177,600
------------ -------------
Total current assets 6,220,107 5,960,203
Property and equipment, net 1,986,990 2,603,483
Other assets 361,251 180,646
------------ -------------
Total assets $ 8,568,348 $ 8,744,332
============ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable 1,882,186 1,858,486
Accrued expenses 2,029,096 222,633
Deferred revenue 31,972 78,387
Current portion of capital lease obligation 67,973 187,155
Current Notes Payable 145,475 2,720,006
Current Convertible notes payable 1,339,564 -
------------ -------------
Total current liabilities 5,496,266 5,066,667
Capital lease obligation, net of current portion - 46,691
Notes payable 11,698 16,145
Convertible notes payable - -
------------ -------------
Total liabilities 5,507,964 5,129,503
------------ -------------
Commitments and contingencies --
Common Stock, $0.01 par value;
25,000,000 shares authorized;
7,363,857 and 5,693,789 shares
issued and outstanding at September 30,
2006 and December 31, 2005
respectively 73,639 56,938
Additional paid-in capital 38,930,684 37,421,622
Warrants 3,107,702 2,805,892
Common stock subscription receivable - -
Impaired value of securities (824,600) (831,500)
Accumulated deficit (38,227,041) (35,838,123)
------------ -------------
Total stockholders' equity 3,060,384 3,614,829
------------ -------------
Total liabilities and stockholders' equity $ 8,568,348 $ 8,744,332
============ =============
See independent auditors' report and notes to consolidated financial statements.
F-3
LOCATEPLUS HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
2006 2005 2005 2004
UNADITED UNADITED
Revenues
Information sales - CD-Rom $ 484,154 $ 369,996 $ 480,412 $ 550,923
Information sales - online 4,890,029 4,671,406 6,257,679 4,107,714
Information sales - channel 4,653,453 3,109,902 4,358,038 1,028,650
Information sales - wireless 5,384 9,435 11,908 13,095
Engineering services - 505,000 505,000 562,200
------------ ------------- ------------- ------------
Total revenues 10,033,020 8,665,739 11,613,037 6,262,582
------------ ------------- ------------- ------------
Costs and expenses:
Costs of revenues
CD-Rom 33,886 106,582 133,612 96,683
Online and channel 3,006,894 2,998,852 4,055,417 3,652,714
Wireless - - - 870
Engineering - 123,750 123,750 124,175
Selling and marketing 1,366,581 1,892,015 2,492,172 1,900,984
General and administrative 5,153,358 5,240,852 7,537,444 6,467,306
Research and Development 147,796 163,655 214,287 316,941
------------ ------------- ------------- ------------
Total operating expenses 9,708,515 10,525,706 14,556,682 12,559,673
------------ ------------- ------------- ------------
Operating income (loss) 324,505 (1,859,967) (2,943,645) ( 6,297,091)
Other income (expense):
Interest income - 16,282 57,256 159,461
Interest expense (833,470) (2,393,840) (2,705,835) (747,279)
Interest expense - amortization
of discounts 2,697 1,649 - (193,131)
Other income - - (7,952) 30,280
Finance Related Expenses (1,882,650) - - -
Impairment of Note Receivable - (500,000)
------------ ------------- ------------- ------------
Net loss $ (2,388,918) $ (4,235,876) $ ( 5,600,176) $( 7,547,760)
============ ============= ============= =============
============
Basic and diluted net loss per share ($0.35) ($1.20) $ (1.56) $ (2.34)
Shares used in computing basic
and diluted net loss per share 6,755,081 3,525,718 3,582,049 3,230,121
See independent auditors' report and notes to consolidated financial statements.
F-4
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- - CLASS A CLASS B ADDITIONAL WARRANTS
- - COMMON STOCK COMMON STOCK COMMON STOCK PAID-IN
- - SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
Balance at December 31,
2003 76,076,691 $ 760,767 72,898,596 $ 728,986 $20,967,471 $2,237,448
--------- ------- ------------- ------------ ------------ ---------- ------------ ----------
Issuance of shares 2,791,532 27,915 502,460
Issuance of shares 8,600,841 86,008 3,228,850
Exercise of options @ $0.15 250,000 2,500 35,000
Exercise of options 3,604,350 36,044 107,327
Net Issuance options /
warrants exercised 964,821 9,648 260,582 2,606 (12,254)
Warrants exercised 1,000 10 10,000 100 2,589
Issuance of common stock
in exchange for services 4,601,743 46,017 560,065 173,339
Net loss for the year ended
December 31, 2004
--------- ------- ------------- ------------ ------------ ---------- ------------ ----------
Balance at December 31,
2004 96,890,978 968,909 73,169,178 731,692 25,391,508 2,410,787
Issuance of shares 16,121,047 161,211 1,336,552 13,366 1,641,979
Combine Class B common
into Class A 74,505,730 745,058 (74,505,730) (745,058)
Effect 1 for 50 reverse split 3,900,789 $39,008 (187,517,755) (1,875,178) - 1,836,170
Conversion of Notes
Payable 1,793,000 17,930 8,551,965 395,105
Services performed for
Stock
Impairment on Assets
Net loss for the year ended
December 31, 2005
--------- ------- ------------- ------------ ------------ ---------- ------------ ----------
Balance at December 31,
2005 5,693,789 56,938 - - - - 37,421,622 2,805,892
========= ======= ============= ============ ============ ========== ============ ==========
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- - STOCK - - TOTAL
- - SUBSCRIPTION IMPAIRMENT ACCUM STOCKHOLDERS'
- - RECEIVABLE ON ASSETS DEFICIT EQUITY (DEFICIT)
Balance at December 31,
2003 $ $(22,690,187) $ 2,004,485
Issuance of shares 530,375
Issuance of shares 3,314,858
Exercise of options @ $0.15 37,500
Exercise of options 143,371
Net Issuance options /
warrants exercised -
Warrants exercised 2,699
Issuance of common stock
in exchange for services (488,558) 290,863
Net loss for the year ended
December 31, 2004 (7,547,760) (7,547,760)
-------------- ----------- ------------- -----------------
Balance at December 31,
2004 (488,558) (30,237,947) (1,223,609)
Issuance of shares 1,816,556
Combine Class B common
into Class A
Effect 1 for 50 reverse split
Conversion of Notes
Payable 8,965,000
Services performed for
Stock 488,558 488,558
Impairment on Assets (831,500) (831,500)
Net loss for the year ended
December 31, 2005 (5,600,176) (5,600,176)
-------------- ----------- ------------- -----------------
Balance at December 31,
2005 (831,500) (35,838,123) 3,614,829
============== =========== ============= =================
See independent auditors' report and notes to consolidated financial statements
F-5
LOCATEPLUS HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
2006 2005 2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES: UNADITED UNADITED
Net loss $ (2,388,918) $ (4,235,876) ($5,600,176) ($7,547,760)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Depreciation and amortization of
property and equipment 806,361 765,244 1,026,805 943,473
Provision for doubtful accounts (44,867) 95,895 (7,768) 69,573
Interest expense related to warrants
issued with debt 309,447 199,369 199,375 193,131
Amortization of intangible assets 9,108 118,059 133,454 158,551
Impairment of Note Receivable - - - 500,000
Expense recorded for fair value of
stock, options, and warrants
issued for services 214,650 705,448 958,643 290,864
Stock Based Compensation 75,817 - - -
Changes in assets and liabilities:
Accounts receivable (975,274) (2,828,824) (3,468,376) ( 457,472)
Prepaid expenses and other assets 169,852 (643,052) (430,949) 345,099
Other Assets (182,813) 147,728 149,777 ( 476,909)
Accounts payable 23,699 (1,099,764) (174,071) 809,756
Accrued expenses 1,806,463 (21,641) (9,536) (206,283)
Deferred revenue (46,415) 9,929 20,143 ( 42,105)
------------- -------------- ------------- -------------
Net cash used in operating activities (222,890) (6,787,485) (7,202,677) ( 5,420,082)
------------- -------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayment of purchased
note receivable - 333,333 453,070 422,500
Advance on note receivable - (75,211) (175,211) ( 119,638)
Purchases of property and equipment (189,868) (530,272) (629,636) ( 647,517)
Proceeds from sale of property
and equipment - -
------------- -------------- ------------- -------------
Net cash provided by investing activities (189,868) (272,150) (351,777) (344,655)
------------- -------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (1,261,755) (4,331,363) (4,331,363) (1,013,911)
Proceeds from issuance of debt 1,250,000 - 10,640,653 4,250,000
Financing fees on issuance of debt - - - (312,000)
Payments of obligations under capital lease (165,873) (526,687) (595,446) (1,246,893)
Proceeds from issuance of common
stock and collection of stock subscriptions
receivable, net of issuance costs - 1,230,664 1,264,407 3,751,558
------------- -------------- ------------- -------------
Net cash provided by financing activities (177,628) 6,113,267 6,978,251 5,428,754
------------- -------------- ------------- -------------
Net (decrease) increase in cash
and cash equivalents (590,386) (946,368) ( 576,203) (335,983)
Cash and cash equivalents,
beginning of period 610,736 1,186,939 1,186,939 1,522,922
------------- -------------- ------------- -------------
Cash and cash equivalents, end of period $ 20,350 $ 240,571 610,736 1,186,939
============= ============== ============= =============
Supplemental disclosures of
cash flows information:
Cash paid for interest $ 2,284,726 $ 691,429
Supplemental disclosure of non-cash
investing and financing activities:
Acquisition of property and
equipment under capital leases - $ 805,431
Relative fair value of detachable warrants
issued in conjunction with convertible debt $ 395,105 268,866
Issuance of common stock for
subscription receivable 488,558
Fair value of warrants issued in conjunction
with services 261,308
See independent auditors' report and notes to consolidated financial statements.
F-6
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
LocatePLUS Holdings Corporation (the "Company") was initially incorporated
in Massachusetts in 1996 as Worldwide Information, Inc. In July 1999, the
Company reincorporated in Delaware and changed its name to LocatePLUS.com, Inc.
On August 1, 2001, the Company changed its name from LocatePLUS.com, Inc. to
LocatePLUS Holdings Corporation as part of a corporate restructuring. 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.
UN-AUDITED INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated condensed financial statements are
un-audited and have been prepared in accordance with accounting principles
generally accepted in the United States of America. These statements include the
accounts of LocatePlus Holdings Corporation and its subsidiaries. Certain
information and footnote disclosures normally included in LocatePlus Holdings
Corporation's annual consolidated financial statements have been condensed or
omitted in accordance with Securities and Exchange Commission ("SEC") rules for
interim financial statements. The interim consolidated financial statements, in
the opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary to fairly present the financial position as of
September 30, 2006 and the results of operations and cash flows for the nine
months then ended. There were no material unusual charges or credits to
operations during the recently completed fiscal quarter.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the entire fiscal
year. These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2005, contained herein.
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 significant net losses in each of the last two years as well as during
the nine months ended September 30, 2006. In addition, the Company has
incurred an accumulated
F-7
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
deficit of approximately $38.2 million through September 30, 2006. 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 $8 million, $4 million, and $2.4 million
of equity during 2005, 2004, and 2003 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 Common Stock to the investor at a purchase price equal
to 95% of the lowest closing bid price for the Company's 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 Common Stock and
certain customary closing conditions. The Company sold 369,535 shares, after
adjusting for a 1 for 50 reverse split on December 12, 2205, for a total $5.0
Million in net proceeds from the investor through December 31, 2005.
During December 2005, 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 $10 million in
shares of the Company's Common Stock to the investor at a purchase price equal
to 93% of the lowest closing bid price for the Company's 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 Common Stock and
certain customary closing conditions. No shares have been sold under this
agreement and on October 18, 2006, this agreement was terminated.
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 Companys 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. In the nine months ended September 30, 2006,
and 2005, one customer accounted for 27% and 32% respectively and accounted for
77% of accounts receivable at September 30, 2006. 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.
F-8
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
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.
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 2004 and 2003 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.
In 2005, the Company began aggregating its own phone data instead of acquiring
from third parties. As a result, this data is available for sale in bulk form
for resale. Typically the contracts for this bulk data call for an initial
delivery of all the records in database and then monthly updates. Sixty five
percent of the contract value is recognized when the initial information is
delivered to the customer, and thirty five percent is recognized over the
remaining term of the contract when updated. It is recognized 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.
ADVERTISING
The Company charges advertising costs to operations when incurred.
Advertising expense was $576,715 in 2005 and $308,500 in 2004.
F-9
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
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 anti-dilutive.
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 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting for
Non-monetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. SFAS No. 153
amends APB Opinion No. 29, eliminating the exception to fair value accounting
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception to fair value accounting for nonmonetary exchanges that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. The statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect this statement to have a material impact on its financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
SFAS No. 123R requires employee stock options and rights to purchase shares
under stock participation plans to be accounted for under the fair value method,
and eliminates the ability to account for these instruments under the intrinsic
value method prescribed by APB Opinion No. 25, and allowed under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing
model for estimating fair value, which is amortized to expense over the service
periods. The requirements of SFAS No. 123R are effective for fiscal periods
beginning after December 15, 2005. If the company had applied the provisions of
SFAS No. 123R to the financial statements for the period ending December 31,
2005, net income would have been reduced by approximately $1.3 million. SFAS No.
123R allows for either prospective recognition of compensation expense or
retrospective recognition, which may be back to the original issuance of SFAS
No. 123 or only to interim periods in the year of adoption. The Company is
currently evaluating these transition methods.
In October 2004, the FASB ratified the EITF consensus on Issue 04-1,
Accounting for Preexisting Relationships between the Parties to a Business
Combination. This consensus describes the accounting for the settlement of
preexisting relationships and the re-acquisition of certain rights in a business
combination. This consensus was effective for the fourth quarter of 2004 and was
adopted by the Company in that quarter. This adoption did not have a material
effect on the Company's results of operations, cash flows or financial position,
but may impact future transactions.
3. STOCK COMPENSATION PLANS
Prior to January 1, 2006, the Company accounted for its stock-based
compensation plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and related interpretations, as permitted by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company applied 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 for the twelve months ended December 31, 2005
and 2004. 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-10
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
YEAR ENDED DECEMBER 31
----------------------
2005 2004
---- ----
Net loss - reported $ ( 5,600,176) $(7,547,760)
Amortization of stock compensation expense (1,289,122) (1,367,513)
------------- ------------
Pro forma net loss $ (6,889,298) $(8,915,273)
============= ============
Pro forma net loss per share - basic and diluted $(1.92) $(2.76)
The weighted average fair value of options granted during 2004 and $1.50
adjusting for the recapitalization. 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 2004, 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 34%; average risk-free
interest rate of 4.03%; and an expected option holding period of 6 years.
In 2005, 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 30%; average risk-free
interest rate of 4.37%; and an expected option holding period of 6 years.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R), "Share
Based Payment" ("SFAS No. 123(R)") using the modified prospective transition
method. No stock-based compensation expense was recognized in the income
statement for the six-month period ended June 30, 2005, as all options granted
under the Company's stock-based employee compensation plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. As permitted by SFAS No. 123, stock-based compensation was included as a
pro forma disclosure in the notes to the Company's financial statements for the
six month period ended June 30, 2005.
Under that transition method, compensation cost recognized in the nine months
ended September 30, 2006 includes: (a) compensation cost for all stock-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions
of SFAS No. 123, and (b) compensation cost for all stock-based payments granted
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123(R). Results for prior periods
have not been restated, as provided for under the modified-prospective method.
Total stock-based compensation expense recognized in the income statement for
the nine months ended September 30, 2006 was $73,064.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits
of deductions resulting from the exercise of stock options as operating cash
flows in the consolidated statements of cash flows. SFAS No. 123(R) requires the
tax benefits resulting from tax deductions in excess of the compensation cost
recognized for those options ("excess tax benefits") to be classified and
reported as both an operating cash outflow and a financing cash inflow on a
prospective basis upon adoption.
For the Nine Months
Ended September 30, 2005
Net loss as reported $(4,235,876)
Add: Total stock-based compensation
included in net income as reported -
Add: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (969,485)
-------------
Pro forma net loss $ (5,205,361)
=============
Pro forma net loss per share: Basic and Diluted $ (0.03)
Disclosures for the period ended September 30, 2006 are not presented because
the amounts are recognized in the
F-11
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
financial statements in connection with the adoption of SFAS 123R.
SFAS No. 123R requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the
Black-Scholes-Merton ("BSM") option valuation model, which incorporates various
assumptions including volatility, expected life, and interest rates. The
assumptions used for the nine-month periods ended September 30, 2006 and
September 30, 2005 and the resulting estimates of weighted-average fair value
per share of options granted during those periods are as follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
2006 2005
-------- --------
Expected life 6 years 6 years
Volatility 31% 34%
Risk free interest rate 4.86% 4.03%
Dividend yields - -
Weighted-average fair value of
options granted during the period - 15.00
The expected life of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. For 2006, expected stock price volatility is based on
a combination of historical volatility of the Company's stock and the one-year
implied volatility of its traded options, for the related vesting periods. Prior
to the adoption of SFAS 123R, expected stock price volatility was estimated
using only historical volatility of the Company's stock. The risk-free interest
rate is based on the implied yield available on U.S. Treasury zero-coupon issues
with an equivalent remaining term. The Company has not paid dividends in the
past and does not plan to pay any dividends in the near future.
4. ACCOUNTS RECEIVABLE, TRADE
Trade accounts receivable are presented net of an allowance for doubtful
collections of $172,263 at December 31, 2005. In determining this allowance,
objective evidence that a single receivable 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.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets primarily consist of
approximately $303,934 in prepaid insurance and data, $115,000 in fees for
financing that are being amortized over the length of the term, and $46,000 in
interest receivable on notes receivable.
6. NOTES RECEIVABLE
The Company holds a 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.
The remaining principal balance at March 31, 2006 was $358,508. At December 31,
2004, substantial doubt existed on collectability of these balances. An
allowance of $500,000 was recorded against the outstanding balance and accrued
interest. Net of that allowance, the carrying value of that note is
approximately $177,000.
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. The Company has advanced as much as $250,000 to this
unrelated entity in the form of cash and services. At December 31, 2005 there
was no outstanding balance on this account.
F-12
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005, consists of the
following:
Equipment $ 4,518,977
Vehicles 102,954
Software 751,649
Furniture and fixtures 389,783
Leasehold improvements 618,093
-----------
6,381,456
Less accumulated depreciation and
amortization 3,777,973
-----------
Property and equipment, net $ 2,603,483
===========
The carrying value of assets under capital leases was $952,661, net of
amortization of $1,017,338, as of December 31, 2005.
Depreciation and amortization expense was $1,160,259 and $943,473 for the
years ended December 31, 2005 and 2004, respectively, which includes
amortization expense on the equipment under capital lease of $ 398,043 and
$353,835 for the years ended December 31, 2005 and 2004, respectively.
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at
December 31, 2005:
Accrued interest receivable $ 45,961
Prepaid expenses 427,735
Deferred financing costs 115,000
Other 150,317
---------
Total $ 739,013
=========
9. OTHER ASSETS
Other assets consist of the following at September 30, 2006:
Restricted trading securities $ 50,400
Customer lists and non-compete
agreement net of amortization 35,074
Security deposits 92,964
License Fees 182,813
---------
Total $ 361,251
=========
Restricted trading securities consist of 200,000 restricted shares of common
stock in Data Evolution Holdings, Inc. (DEH), which trades over the counter
under the symbol DTEV. These shares were acquired as part of an agreement to
provide service and data to DEH. The service and data was valued at $875,000.
At the time the service and data was valued, November 22, 2004, the trailing 10
day average closing price of DTEV was $5.96 per share, or $1,192,000. Due to
the fact that these shares were restricted, a mutually agreed upon 25% liquidity
discount was applied to the value, or $875,000, as such 200,000 shares were
exchanged for the service. At September 30, 2006, the 10-day trailing
average closing price was $0.33 per share, or the value of the shares was
$67,200. An impairment to the current value has been recorded to adjust
the security carrying value to the original 25% discount. The company recorded
an impairment of $824,600 and the adjusted carrying value is now $50,400.
F-13
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
10. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2005:
Payroll and related taxes $ 86,635
Accounting, legal and professional
fees 82,500
Other 53,498
---------
Total $ 222,633
=========
11. NOTES PAYABLE
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, 2005, is $1,714,000. The remaining
debt is due in 2006. In conjunction with the issuance of these notes, the
Company issued warrants to purchase 2,500,000 shares of Class B Non-Voting
Common stock with a weighted average exercise price of $0.14.
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.
On June 17, 2004 the Company entered into a Securities Purchase Agreement with
Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private
placement of a convertible term note issued by the Company in the principal
amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase
warrant (the "Warrant"). On November 30, 2004, this note was amended to
increase the principal amount to $4,000,000 and add an additional warrant. The
terms, as amended, allow for this note to covert into 6,666,667 shares of our
Class A Voting Common Stock at a fixed conversion rate of $0.30 per share and
5,000,000 shares of our Class A Voting Common Stock at a fixed conversion rate
of $0.40 per share. One Warrant provides for the purchase of up to 1,320,000
shares of Class A Common Stock at a price of $0.45 each, subject to customary
adjustments, until June 17, 2009, and the additional Warrant provides for the
purchase of up to 650,000 shares of Class A Common Stock at a price of $0.35
each, subject to customary adjustments, until November 30, 2009. On March 31,
2005, the Company amended its convertible term note issued by the Company to
Laurus Master Fund, Ltd., a Cayman Islands company. The terms, as amended,
allow for this note to convert into 6,250,000 shares of our Class A Voting
Common Stock at a fixed conversion rate of $0.16 per share, 3,333,333 shares of
our Class A Voting Common Stock at a fixed conversion rate of $0.30 per share
and 5,000,000 shares of our Class A Voting Common Stock at a fixed conversion
rate of $0.40 per share. In July, 2005, the company raised $9 million through
the issuance of convertible debt. The net proceeds were used to pay down
existing debt of $4 million and the remaining balance will be used to fund
operations. As of July 8, 2005, the balance on this note was paid in full.
In connection with an offering that closed on August 15, 2005 we entered into a
Purchase Agreement with certain institutional and accredited investors relating
to the private placement of convertible term notes issued by the Company in the
principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares
of our capital stock. Of the proceeds from this offering, approximately $4.1
million was used to retire current secured convertible notes, and the remainder
will be used for general working capital.
All of the notes are convertible, and the warrants are exercisable, first into
as many shares of our Class A Voting Common Stock, par value $0.01 per share, as
are available for issuance at the time of conversion or exercise, and then into
shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As
F-14
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
part of our agreement with these investors, we have agreed to seek the approval
from our stockholders of the recapitalization of each outstanding share of our
Class A Voting Common Stock and our Class B Non-Voting Common Stock into a
single class of voting common stock, as well as a one-for-fifty reverse split of
this new class of common stock. If our stockholders approve these measures, the
notes will automatically convert into shares of the new class of common stock,
and any unexercised warrants will be exercisable for shares of that class of
stock as well. As there are currently no un-issued shares of our Class A Voting
Common Stock that are not otherwise reserved for issuance, we anticipate that
these notes and warrants will be exercisable for shares of either our Class B
Non-Voting Common Stock or the newly created class of common stock, if approved.
Without taking into consideration interest payable on the notes, the notes are
convertible into 89,650,000 shares of our common stock (regardless of class) at
a current conversion rate of $0.10 per share and the warrants are exercisable
for ten years from the date they were issued for up to 41,189,000 shares of our
common stock (regardless of class) at a current exercise price of $0.15 per
share. The conversion price of the notes and the exercise price of the warrants
are each subject adjustment for a variety of events, including, for example,
payment of dividends, certain mergers or asset sales, and certain securities
issuances. In conjunction with this offering, we also entered into related
Registration Rights and Voting Agreements. On November 14, 2005, at the annual
meeting of the shareholders, the recapitalization was approved by a majority of
the outstanding shares of both classes of stock. Effective December 2005 that
debt was converted to common stock.
On December 29, 2005, the Company entered into a Debenture Agreement with
Dutchess Private Equities Fund II, L.P. Pursuant to that Debenture Agreement, we
received proceeds of $1,500,000 by issuing a twelve-month note payable
convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000
founders shares and Common Stock purchase warrant for 750,000 shares with an
exercise price of $5.00 per share. A discount to this note has been recorded for
the warrants and founders shares in the amount of $367,292 and will be amortized
over the life of the note and be recorded as interest expense. As of September
30, 2006, $312,660 has been amortized. The Debenture is due on December 30, 2010
and pays twelve per cent (12%) interest. Interest and principal are payable at
such times and under such conditions are outlined in the Debenture. The
remaining balance of $892,226 of this Debenture as amended effective October 18,
2006 is convertible into shares of our Common Stock at the lesser of $.70 per
share or 75% of the lowest closing bid price during the 20 trading days next
preceding the date of conversion.
12. 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 2007. Rent
expense amounted to $563,180 and $476,292 during 2005 and 2004, respectively.
Future minimum payments under non-cancelable operating leases are as follows:
YEAR ENDING DECEMBER 31,
2006 $ 542,684
2007 92,255
2008 6,306
----------
Total $ 641,245
==========
F-15
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
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.
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, 2005.
YEAR ENDING DECEMBER 31,
2006 $ 207,156
2007 49,536
----------
256,692
Less: amounts representing
interest and executory costs 22,571
----------
Present value of future minimum
lease payments 234,121
Less: current portion of obligation
under capital lease 207,156
----------
Long-term obligation under capital
lease $ 26,965
==========
LICENSE AGREEMENTS
The Company obtains its data from multiple sources and has entered into
various license agreements with the related data providers. In 2005 and 2004,
the Company recorded $2,906,465 and $2,617,681 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,
2006 $ 145,000
----------
$ 145,000
==========
The Company's operations depend upon information that includes public
records. If material changes were to occur in federal or state laws regulating
or prohibiting the distribution of public records, particularly credit header
records, the Company's financial condition and results of operations could be
materially affected. In the event that such a termination occurred, management
believes it 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.
DATA EVOLUTION HOLDINGS, INC.
The Company has entered into a services agreement with Data Evolution
Holdings, Inc. (DEH), which trades over the counter under the symbol DTEV. The
agreement calls for the Company to purchase services from DEH that will expand
our ability to distribute our product through DEH PowerSys products. The
agreement calls for the Company to purchase access to PowerSys products, a
feasibility study, a two-year support plan, and become a strategic alliance
partner. The value of these services has not yet been determined by DEH,
however, the payment of these services will be made in Company Class A Common
Voting Stock that will have a four year lock up period.
F-16
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
14. INCOME TAXES
Deferred tax assets consist of the following at December 31:
2005
====
Net operating loss carry forwards 12,000,000
Depreciation and amortization 350,000
Bad debt reserve 85,000
Investment loss 400,000
Capitalized research and development 1,000,000
----------
Gross deferred tax assets 13,835,000
Valuation allowance (13,835,000)
----------
$ -
==========
The Company has provided a valuation allowance for the full amount of the
deferred tax assets since realization of these future benefits is not
sufficiently assured. As the Company achieves profitability, these deferred tax
assets may be available to offset future income tax liabilities and expenses.
At December 31, 2004, the Company had net operating loss carryforwards for
federal and state income tax reporting purposes of approximately $ 30,000,000.
The federal and state net operating loss carryforwards expire through 2025.
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, 2004, 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.
On December 5, 2005, the Company amended its articles of incorporation
wherein it combined each outstanding share of our Class A Voting Common Stock
and our Class B Non-Voting Common Stock into a single class of voting common
stock with 400,000,000 authorized.
On December 12, 2005, the Company amended its articles of incorporation to
effect a one-for-fifty reverse split of the common stock and to increase the
authorized from the resulting split of 8,000,000 to 25,000,000.
F-17
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
As of December 31, 2005, a total of 3,103,203 shares of Common Stock were
reserved for issuance upon exercise of outstanding stock option and warrant
agreements.
STOCK OPTIONS AND WARRANTS
During 2004, the Company issued warrants to purchase 51,400 shares of Class
A Voting Common Stock at an average exercise price of $20.00 per share,
adjusting for the effects of the reverse split, to third parties in exchange for
services. The Company recorded a discount to Note payable or expense of
$173,339 associated with these warrants.
During 2005, the Company issued warrants to purchase 1,574,780 shares of
Common Stock at an average exercise price of $6.31 per share to third parties in
exchange for services. The Company recorded a discount to Note payable or
expense of $413,321 associated with these warrants.
During 2004, 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, 18% volatility, 3.9% average risk-free interest rate, a ten-year life and
an underlying Class A Voting Common Stock average value of $20.00 per share
adjusting for the effects of the reverse split.
During 2005, 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, 20% volatility, 3.9% average risk-free interest rate, a ten-year life and
an underlying Class A Voting Common Stock average value of $5.00 per share.
As of December 31, 2005, there were a total of 2,400,077 options and
warrants outside the Stock Plans.
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, or 300,000 after adjusting for the
reverse split, of Class A Voting Common Stock has been approved for issuance
under the 1999 Plan of which 5,070 post split shares are available for grant at
December 31, 2005. 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, or 500,000 after adjusting for the
reverse split, of Class A Voting Common Stock and 25,000,000 shares, or 500,000
after adjusting for the reverse split, of Class B Non-Voting Common Stock, or a
combined total of 1,000,000 post split shares have been approved for issuance
under the 2003 Plan of which 486,000 are available for grant at December 31,
2005. 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
table presents activity under the Plans adjusting for the reverse split for the
years ended December 31, 2005 and 2004:
F-18
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Outstanding at December 31, 2003 509,515 18.54
Issued 320,920 40.00
Exercised (83,250) 3.00
Canceled (53,895) 10.50
-------- ------
Outstanding at December 31, 2004 693,290 30.96
Issued 10,200 17.00
Exercised - -
Canceled (3,364) 11.00
-------- ------
Outstanding at December 31, 2005 700,126 30.86
The following summarizes information relating to options outstanding at
December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------- -------- ------------ --------- -------- ----------
0.00 - 10.00 234,351 6.20 $ 9.66 177,876 $ 9.62
10.00 - 15.00 109,775 7.85 $ 12.51 109,275 $ 12.51
15.00-75.00 356,000 8.26 $ 49.88 344,000 $ 50.95
-------- ----- ------- ------- -------
700,126 7.51 $ 30.56 631,151 $ 32.65
======== ===== ======= ======= =======
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
$7,133 and $6,022 in 2005 and 2004, respectively.
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.
F-19
LOCATEPLUS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30 DECEMBER 31,
2006 2005 2005 2004
(UNAUDITED) (UNAUDITED)
Information sales:
CD Rom $ 484,154 $ 369,996 $ 469,493 $ 550,923
Online and Channel 9,543,482 7,781,308 10,615,717 5,136,364
------------- -------------- ----------- -----------
Total information sales $ 10,027,636 $ 8,151,304 11,085,210 5,687,287
------------- -------------- ----------- -----------
Costs of Information sales:
CD Rom 33,886 106,582 133,612 96,683
Online and Channel 3,006,894 2,998,852 4,055,417 3,652,714
------------- -------------- ----------- -----------
Total costs of Information sales $ 3,040,780 $ 3,105,434 4,189,029 3,749,397
------------- -------------- ----------- -----------
19. SUBSEQUENT EVENTS
On July 21, 2006, the Company entered into an Debenture Agreement with Dutchess
Private Equities Fund, L.P. Pursuant to that Debenture Agreement, we received
proceeds of $750,000 by issuing a note payable convertible into 750,000 shares
of Common Stock at $1.00 per share and 200,000 founders shares and Common Stock
purchase warrant for 350,000 shares with an exercise price of $1.00 per share.
On October 18, 2006, both of the Dutchess Debentures were amended to be
convertible at the lower of $0.70 per share or seventy-five percent (75%) of the
lowest closing bid price of the common stock during the past twenty (20) trading
days prior to a Conversion.
During December 2005, 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 $10 million in shares of the
Company's Common Stock to the investor at a purchase price equal to 93% of the
lowest closing bid price for the Company's 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 Common Stock and certain
customary closing conditions. No shares have been sold under this agreement and
on October 18, 2006, this agreement was terminated.
See Independent Auditors Report
F-20
TABLE OF CONTENTS
PAGE
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Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Forward-Looking Statements. . . . . . . . . . . . . . . . . . . . . . .10
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Selling Security Holders. . . . . . . . . . . . . . . . . . . . . . . .10
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . . 11
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selected Consolidated Financial Data. . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .14
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Executive Officers and Directors. . . . . . . . . . . . . . . . . . . 27
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 28
Executive Compensation Plans. . . . . . . . . . . . . . . . . . . . . 30
Organization Within the Past Five Years . . . . . . . . . . . . . . . .33
Certain Relationships and Related Transactions. . . . . . . . . . . . 34
Market for Common Equity. . . . . . . . . . . . . . . . . . . . . . . 36
Principal Stockholders. . . . . . . . . . . . . . . . . . . . . . . . 37
Description of Capital Stock. . . . . . . . . . . . . . . . . . . . . 40
Limitations on Directors' Liability and Indemnity . . . . . . . . . . .41
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . .42
Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . . . . 42
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 43
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . F-1
* * *
[GRAPHIC OMITED]
Please read this prospectus carefully. It describes our business, products and
services, and financial condition and results of operations.
We have prepared this prospectus so that you will have the information
necessary to make an informed investment decision. You should rely only on the
information contained in this prospectus. The information contained in this
prospectus is accurate only as of its date, regardless of the time this
prospectus is delivered or that our securities are sold.