-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P5Q0Mbi5LILjzCBHd3lHhk7lyxrghSml6FDbLgraYxOUA7RVZ2M3BuZ6fRk3G522 tSkl/fT55V6pB9LCFoyinA== 0001160084-03-000028.txt : 20030715 0001160084-03-000028.hdr.sgml : 20030715 20030715142840 ACCESSION NUMBER: 0001160084-03-000028 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20030715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOCATEPLUS HOLDINGS CORP CENTRAL INDEX KEY: 0001160084 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 043332304 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-105944 FILM NUMBER: 03786998 BUSINESS ADDRESS: STREET 1: 100 CUMMINGS CENTER STREET 2: SUITE 235M CITY: BEVERLY STATE: MA ZIP: 01915 BUSINESS PHONE: 978-921-2727 MAIL ADDRESS: STREET 1: 100 CUMMINGS CENTER STREET 2: SUITE 235M CITY: BEVERLY STATE: MA ZIP: 01915 SB-2/A 1 doc1.txt As filed with the Securities and Exchange Commission on July 15, 2003 Registration No. 333-105944 ------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM SB-2/A FIRST AMENDMENT TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ LocatePLUS Holdings Corporation (Exact Name of Registrant as Specified in Its Charter) Delaware 7379 04-3332304 (State or Other Jurisdiction of (Primary Standard (I.R.S. Employer Incorporation or Organization) Industrial Identification Classification Number) Code Number) 100 Cummings Center Suite 235M Beverly, Massachusetts 01915 (978) 921-2727 (Address and telephone number of principal executive offices and principal place of business) ------------------ Jon R. Latorella President and Chief Executive Officer LocatePLUS Holdings Corporation 100 Cummings Center Suite 235M Beverly, Massachusetts 01915 (978) 921-2727 (Name, Address, and Telephone Number of Agent for Service) ------------------ Copy to: Michael A. Hickey, Esq. Kirkpatrick & Lockhart LLP 75 State Street Boston, Massachusetts 02109 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ---------------------------------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF . . . AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES REGISTERED. . . . BE REGISTERED OFFERING PRICE PER SHARE (1) AGGREGATE OFFERING REGISTRATION . . . . . . . . . . . . . . (2) PRICE (1) FEE - ---------------------------- ------------- ----------------------------- -------------------- ------------- Class A Voting Common Stock, par value $0.01 per share. . 31,000,000 $ 0.185 $ 5,735,000 $ 464 - ---------------------------- ------------- ----------------------------- -------------------- -------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes of this table, we have used the average closing bid and asked prices as of May 28, 2003. (2) The maximum number of shares being registered was calculated by adding the number of shares to be registered by a current shareholder (2,500,000 shares) to the number of shares proposed to be sold at $0.185 (the average closing bid and asked prices as of May 28, 2003) which would permit the Registrant to put $5,000,000 of securities pursuant to an Investment Agreement between the Registrant and a third party. ---------------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ---------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 15, 2003 [GRAPHIC OMITED] [GRAPHIC OMITED] SUBJECT TO COMPLETION, DATED JULY 15, 2003 LOCATEPLUS HOLDINGS CORPORATION PROSPECTUS This prospectus relates to the resale of up to 31,000,000 shares of our Class A Voting Common Stock by a current stockholder, NFC Corporation, and by Dutchess Private Equities Fund, L.P., which will become a stockholder pursuant to a put right under an Investment Agreement (also referred to as an "Equity Line of Credit" arrangement) that we have entered into Dutchess. That Investment Agreement permits us to "put" up to $5.0 million in shares of Class A Voting Common Stock to Dutchess. . We are not selling any securities in this offering and therefore will not receive any proceeds from this offering. We will, however, receive proceeds from the sale of securities under the Investment AgreementAll costs associated with this registration will be borne by us. The shares of Class A Voting Common Stock are being offered for sale by the selling stockholders at prices established on the Over-the-Counter Bulletin Board during the term of this offering. Our Class A Voting Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol "LPLHA.OB." During the 45 day period ending on the date of this prospectus, the lowest reported daily average of the bid and ask prices for our Class A Voting Common Stock was $0.185 and the highest reported daily average of the bid and ask prices for our Class A Voting Common Stock was $0.385. Where indicated, certain share and per share data presented in this prospectus assumes $0.185 as the value of our Class A Voting Common Stock. Our stock prices will fluctuate, possibly significantly, based on the demand for our shares. The selling stockholders consist of: - - Dutchess, which intends to resell up to 28,500,000 shares of our Class A Voting Common Stock; and - - NFC, which intends to resell up to 2,500,000 shares of our Class A Voting Common Stock. Dutchess is an "underwriter" within the meaning of the Securities Act of 1933 in connection with the resale of Class A Voting Common Stock under the Investment Agreement. Dutchess will pay us 95% of the lowest closing bid price of the Class A Voting Common Stock during the ten consecutive trading day period immediately following the date of our notice to them of our election to put shares pursuant to the Equity Line of Credit. The shares held by NFC were issued by us in a prior private placement. With the exception of Dutchess, no other underwriter or person has been engaged to facilitate the sale of shares of Class A Voting Common Stock in this offering. This offering will terminate no later than 36 months after the registration statement of which this prospectus is a part is declared effective by the Securities and Exchange Commission. None of the proceeds from the sale of Class A Voting Common Stock by the selling stockholders will be placed in escrow, trust or any similar account. For more information on the Investment Agreement with Dutchess, refer to the section of this prospectus titled "Plan of Distribution" beginning on page 14. _____________________ INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY REVIEW THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS", WHICH BEGINS ON PAGE 4, BEFORE YOU MAKE AN INVESTMENT DECISION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES AUTHORITY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR THEIR OFFER OR SALE, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This prospectus is dated July 15, 2003. TABLE OF CONTENTS ----------------- PAGE ---- Prospectus Summary...........................................1 Risk Factors.................................................4 Forward-Looking Statements..................................12 Use of Proceeds............................................12 Determination of Offering Price...........................12 Dividend Policy.............................................12 Dilution.....................................................13 Plan of Distribution.......................................14 Capitalization...............................................17 Selected Consolidated Financial Data......................18 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................19 Business.....................................................24 Executive Officers and Directors..........................29 Organization Within the Past Five Years.................37 Certain Transactions........................................38 Principal Stockholders......................................40 Description of Capital Stock..............................43 Shares Eligible for Future Sale..........................46 Transfer Agent and Registrar..............................47 Legal Matters...............................................47 Experts......................................................47 Additional Information......................................47 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 business-to-business and business-to-government provider of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , that enables users to search certain motor vehicle records and 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 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 the last quarter of 2002, we launched another version of our LocatePLUS database that is accessible using certain wireless devices manufactured by third parties, such as personal digital assistants and e-mail capable pagers. We refer to this new product as LocatePLUS AnyWhere . Our products are primarily marketed and sold to federal, state and local government agencies (including law enforcement agencies), private investigators, human resource professionals and the legal profession. Our products are used in: - - crime and terrorism prevention and investigation; - - detection of criminal and civil fraud; - - "skip tracking" (i.e., locating debtors and individuals in violation of parole or bail restrictions); - - background checks; - - legal due diligence; and - - risk management. As of March 31, 2003, there were approximately 11,565 users of our LocatePLUS database, approximately 2,000 purchasers of our Worldwide Information CD-ROM product, and 15 users of our LocatePLUS AnyWhere service. HOW TO CONTACT US ----------------- Our executive offices are located at 100 Cummings Center, Suite 235M, Beverly, Massachusetts 01915. Our phone number is (978) 921-2727. Our website is http://www.locateplus.com. Information on our website is not intended to be incorporated into this prospectus. 1 SALES BY OUR SELLING STOCKHOLDERS --------------------------------- This prospectus relates to the resale of up to 31,000,000 shares of our Class A Voting Common Stock by a current stockholder, NFC Corporation, and by Dutchess Private Equities Fund, L.P., which will become a stockholder pursuant to a put right under an Investment Agreement that we have entered into Dutchess. The selling stockholders consist of STOCKHOLDER NUMBER OF SHARES - -------------------------------------------- ------------------ Dutchess Private Equities Fund, L.P 28,500,000 NFC Corporation 2,500,000 ----------- Total Class A Voting Common Stock being registered 31,000,000 The Investment Agreement with Dutchess, also referred to as an "Equity Line of Credit," arrangement provides that, following notice to Dutchess, we may put to Dutchess up to $5.0 million in shares of our Class A Voting Common Stock for a purchase price equal to 95% of the lowest closing bid price on the Over-the-Counter Bulletin Board of our Class A Voting Common Stock during the ten day period following that notice. The number of shares that we will be permitted to put pursuant to the Investment Agreement will be limited by our Class A Voting Common Stock's trading volume and other factors set forth in the Investment Agreement. In turn, Dutchess has indicated that it will resell those shares in the open market, resell our shares to other investors through negotiated transactions or hold our shares in its portfolio. This prospectus covers the resale of our stock by Dutchess either in the open market or to other investors through negotiated transactions. We are also registering the resale of 2,500,000 shares of issued and outstanding Class A Voting Common Stock, which were issued in a private placement to NFC prior to filing of the registration statement of which this prospectus is a part. NFC is not affiliated with us or any of our directors, officers or 5% of greater stockholders and, to the best of our knowledge, NFC is unaffiliated with Dutchess. OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE --------------------------------------------------------- The following table outlines our capital stock as of the date of this prospectus:
Shares of Class A Voting Common Stock outstanding 61,787,384 (1) Shares of Class A Voting Common Stock issuable upon exercise of the put right 28,500,000 (2) ----------- Shares of Class A Voting Common Stock issued following such exercise 90,287,384 (2) Shares of Class B Non-voting Common Stock outstanding 68,765,726 (3) Total shares of both classes of Common Stock outstanding 159,053,110 (1)(2)(3)
______________ (1) Assuming no exercise or conversion of: - - warrants to purchase 18,894,739 shares of Class A Voting Common Stock currently outstanding; - - options to purchase up to 13,833,300 shares of Class A Voting Common Stock pursuant to our 1999 Incentive and Non-qualified Stock Option Plan; - - options to purchase up to 25,000,000 shares of Class A Voting Common Stock pursuant to our 2003 Stock Plan; or - - debt convertible into 44,444 shares of Class A Voting Common Stock at the election of one debtholder. (2) Assuming, for presentation purposes only, the exercise of the put right to sell up to $5.0 million in shares of our Class A Voting Common Stock is exercised at a time at when the lowest closing bid price on the Over-the-Counter Bulletin Board of our Class A Voting Common Stock during the ten day period following our put notice is $0.185. (3) Assuming no exercise or conversion of: - - warrants and options to purchase up to 6,422,139 shares of Class B Non-voting Common Stock; or - - options to purchase up to 25,000,000 shares of Class B Non-Voting Common Stock pursuant to our 2003 Stock Plan. 2 IMPORTANT NOTE CONCERNING OUR FINANCIAL CONDITION AND 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. If sufficient capital is not available, we would likely be required to reduce or discontinue our operations. 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 during the remainder of 2003. We intend to use the proceeds from the Equity Line of Credit to fund these activities, although there can be no assurance the funds will be available from the Equity Line of Credit in the amounts or at the times we require. For more information on this matter, you should review our financial statements, which begin on page F-1 of this prospectus, as well as the section of this prospectus titled "Management's Discussion and Analysis of Financial Condition and Results of Operations", beginning on page 19. * * * 3 RISK FACTORS Any investment in our securities involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase any of our securities. We have not attempted to rank the following risks in order of their likelihood. RISKS RELATED TO OUR BUSINESS ----------------------------- OUR FINANCIAL STATEMENTS WERE PREPARED ON THE ASSUMPTION THAT WE WILL CONTINUE AS A GOING CONCERN, AND OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED DOUBT AS TO THAT ASSUMPTION. 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. 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 during the remainder of 2003. We intend to use the proceeds from the Equity Line of Credit to fund these activities, although there can be no assurance the funds will be available from the Equity Line of Credit in the amounts or at the times we require. 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. WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND CANNOT ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY. We have incurred significant net losses since our inception. We incurred net losses of approximately $4.4 million in 2001, $4.0 million in 2002 and $800,000 for the three months ended March 31, 2003. Our accumulated deficit as of March 31, 2003 was approximately $19.0 million. We anticipate that our expenses relating to our sales and marketing and product development, as well as our general and administrative expenses, will increase during the remainder of 2003 and for the foreseeable future. To achieve profitability, we must generate substantially more revenue than we have in prior years. Even if we ultimately achieve profitability, we may not be able to sustain or increase our profitability. If our revenue grows slower 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. GEMSTONE INVESTMENT COMPANY, INC. HAS A LIEN ON ALL OF OUR ASSETS THAT WAS GRANTED IN CONNECTION WITH A LOAN TO US BY GEMSTONE. IN THE EVENT THAT WE WERE TO DEFAULT UNDER THIS LOAN, GEMSTONE COULD FORECLOSE UPON OUR ASSETS. ANY SUCH FORECLOSURE WOULD SIGNIFICANTLY DISRUPT OUR BUSINESS AND MAY RESULT IN A LOSS OF INVESTMENT BY INVESTORS. On June 4, 2002, we received $750,000 from Gemstone Investment Company, Inc. by issuing a promissory note collateralized by all of our assets and a personal guarantee by our Chief Executive Officer (including a pledge of five million shares of Class A Voting Common Stock that he owned and a mortgage on certain of his other personal assets). Gemstone is an unaffiliated third party lender that specializes in loans to start-up and early stage businesses. There is no business relationship between Gemstone and any of our officers or directors, nor is there, to management's knowledge, any affiliation between Gemstone and any of our 5% or greater stockholders. As of October 3, 2002, $600,000 had been repaid on this note, however the terms of this loan called for its repayment in full, including accrued interest, by the earlier of October 3, 2002 or two business days after the closing of our initial public offering. As such, the terms of the note were renegotiated and all accrued interest and principal was converted to a $285,000 demand note with interest payable at 42% per annum. If we were to default under that loan arrangement, Gemstone would have the right to foreclose on our assets to satisfy our obligations under that arrangement. Any such foreclosure would materially disrupt our business and could cause investors to lose all or a portion of their investment. 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 4 can be no assurance that we would be able to obtain and integrate replacement data on a timely basis. In such an event, our products would likely be less attractive to current and potential customers and our revenue would likely decrease. A SIGNIFICANT PORTION OF OUR ASSETS CONSISTS OF AN AMOUNT DUE TO US FROM A THIRD PARTY. IF THIS AMOUNT IS NOT REPAID, OUR FINANCIAL CONDITION COULD BE HARMED. As of March 31, 2003, approximately $1.0 million was owed to us by an unaffiliated, privately held leasing company, pursuant to a demand note that bears interest at the rate of 11% per annum. We cannot guarantee the timing of this repayment or that this amount will be repaid at all. In the event that this amount is not repaid, our financial condition would be materially harmed. OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT THE PRICE OF OUR SECURITIES. You should not rely on quarter-to-quarter comparisons of our historical results as an indication of our future performance. If our quarterly operating results do not meet the expectations of our investors, the market price of our securities will likely decline. Our future quarterly results may fluctuate as a result of many factors, some of which are outside our control, including: - - 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; - - 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, 2002 as well as the three months ended March 31, 2003, we derived substantially all of our recurring revenue from our CD-ROM-based Worldwide Information and Internet-based LocatePLUS 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 5 products or product enhancements could require us to obtain substitute, possibly less current data, which would likely be less attractive to our current and prospective customers. IF WE CANNOT INTEGRATE, UPDATE AND IMPROVE OUR PRODUCTS, OUR PRODUCT MAY BE LESS ATTRACTIVE TO OUR TARGET MARKET, WHICH WOULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL CONDITION. We must continuously update our databases so that we may provide datasets to customers that are accurate and current. We must also integrate additional datasets for our products to remain competitive. 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. For example, our LocatePLUS product competes with products offered by: - - Accurint; - - ChoicePoint; - - Confi-chek.com; - - FlatRateInfo.com; and - - Lexis-Nexis. We cannot assure you that we will be able to compete successfully against these or other current and future participants in our markets or against alternative technologies, nor can we assure you that the competitive pressures that we face will not adversely affect our business. WE FACE RISKS ASSOCIATED WITH OUR STRATEGIC ALLIANCES, WHICH COULD LIMIT OUR ABILITY TO INCREASE OUR MARKET SHARE. From time to time, we anticipate that we will enter into "channel partner" arrangements and similar strategic alliances through which we will license access to our databases to third parties in exchange for royalties. We can give no assurance that we will be able to identify and secure appropriate channel partners or that any channel partner arrangements will be profitable. If we are unable to enter into appropriate channel partner arrangements, use of our database may not grow sufficiently to meet our business objectives. TO INCREASE OUR REVENUE, WE MUST INCREASE OUR SALES FORCE, AND EXPAND OUR DISTRIBUTION CHANNELS. WE CAN NOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN THESE EFFORTS. To date, we have sold our products primarily through our eleven person direct sales and tele-sales force. Our future revenue growth will depend in large part on recruiting and training additional direct sales and tele-sales personnel and expanding our distribution channels. We may experience difficulty recruiting qualified sales and support personnel and establishing third-party distribution relationships. We may not be able to successfully expand our tele-sales force or other distribution channels, and any such expansion, if achieved, may not result in increased revenue or profits. 6 WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS THAT MAY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. Our products consist of publicly available data that we organize to permit rapid and effective computerized searches. Because our datasets consist of publicly available data, we cannot prevent competitors from developing equivalent databases. We anticipate that our success will depend, in part, on our proprietary data integration and linking methodologies. We have not obtained, and do not anticipate that we will obtain, patent protection for these methodologies. We rely on trade secret rights, confidentiality agreements and procedures and licensing arrangements to establish and protect our proprietary rights with respect to our data integration methodologies. Despite our efforts, third parties could attempt to copy or otherwise obtain and make unauthorized use of our products or independently develop similar products. WE FACE SIGNIFICANT SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF CONFIDENTIAL INFORMATION. IF WE ARE UNABLE TO ADEQUATELY PROTECT CERTAIN CONFIDENTIAL INFORMATION, OUR REPUTATION AND BUSINESS WOULD BE ADVERSELY AFFECTED. We rely on commercially available encryption software and other technologies to provide system security and to effect secure transmission of confidential information, such as credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the security measures used by us to protect customer transaction data. If our security systems were to be compromised, it could have a material adverse effect on our reputation and business. A party who is able to circumvent our security measures could misappropriate our proprietary information or cause interruptions in our operations and damage to our reputation and customers' willingness to use our products. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. OUR PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HAVE ADVERSE EFFECTS ON OUR CUSTOMER RELATIONS AND FINANCIAL RESULTS. Datasets as complex as those that we develop may contain undetected defects or errors. For example, our products may contain unknown defects due to errors in the data that we purchase from our data providers. Despite testing, defects or errors may occur in our existing or new products, which could make them less attractive to our target markets. As a result, defects and errors in our datasets could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation and an adverse effect on our business, financial condition and results of operation. DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT MAY NOT BE COVERED BY OUR INSURANCE. Our datasets may contain errors that may give rise to claims against us. We generally disclaim all warranties on the data we include in our products. However, our disclaimers may not be enforced. In such an event, or if liabilities arise that are not contractually limited, our business could be adversely affected. We currently do not maintain professional liability insurance, and our general liability insurance may not cover claims of this nature. WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH. As of March 31, 2003, we had 39 employees. We intend to expand our customer base and develop new products. To manage our anticipated growth, we must continue to improve our operational and financial systems and expand, train, retain and manage our employee base. Because of the registration of our securities, we will be subject to additional reporting and disclosure obligations, and we anticipate that we will hire additional finance and administrative personnel to address these obligations. In addition, the anticipated growth of our business will place a significant strain on our existing managerial and financial resources. IF WE ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS AS PRESENTLY CONDUCTED. The recent growth in our business has resulted in an increase in the responsibilities of our personnel. Several of our personnel are presently serving in more than one capacity. In addition, we expect that we will need to hire additional employees during 2003. 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 7 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. THERE IS NO ASSURANCE THAT WE WILL PAY DIVIDENDS IN THE FUTURE. We have never declared or paid a cash dividend. At this time, we do not anticipate paying any dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future dividends and distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business. You should not purchase our securities on the expectation of future dividends. RISKS RELATED TO OUR INDUSTRY ----------------------------- EXISTING GOVERNMENT REGULATIONS AND INDUSTRY STANDARDS MAY LIMIT OUR ABILITY TO ACQUIRE OR DISSEMINATE DATA. IF OUR ABILITY TO ACQUIRE OR DISSEMINATE DATA IS LIMITED, OUR REVENUES WILL DECREASE AND OUR FINANCIAL CONDITION WILL BE ADVERSELY AFFECTED. WE MAY ALSO BE SUBJECT TO LIABILITY ARISING FROM SUCH REGULATIONS. Much of the data we provide is subject to regulation by the Federal Trade Commission under the Federal Fair Credit Reporting Act and Title V of the Financial Services Modernization Act (which is also referred to as the "Gramm-Leach-Bliley Act"), and to a lesser extent, by various other federal, state and local regulatory authorities pursuant to a variety of laws. These laws and regulations are designed to protect individuals from the misuse of their personal information. We have not engaged counsel 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. We may be in violation of laws governing the dissemination of data. In such a case, we may be subject to enforcement action by regulatory agencies and claims against us by individuals (to the extent such laws permit private rights of action). Any such claims could significantly disrupt our business and operations. We do not currently maintain liability insurance to cover such claims. FUTURE GOVERNMENT REGULATION MAY FURTHER LIMIT OUR ABILITY TO PROVIDE OUR PRODUCTS TO CUSTOMERS AND CAUSE US TO LOSE REVENUE. Future laws or regulations that further restrict the use of personal or public record information could disrupt our business and could cause us to lose revenue. For example, if laws were enacted that restricted our use of Social Security numbers, our ability to provide meaningful data to our customers would be adversely affected. If we are unable to respond to regulatory or industry standards effectively, our business, financial condition and results of operation would be adversely affected. Our future success will depend, in part, on our ability to enhance and improve the responsiveness, functionality and features of our products and services in accordance with newly-imposed regulatory or industry standards, of which we can give no assurance. WE COULD FACE LIABILITY BASED ON THE NATURE OF OUR SERVICES AND THE CONTENT OF THE MATERIALS THAT WE PROVIDE. We may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the data contained in our products. Although we carry a limited amount of general liability insurance, our insurance may not cover claims of these types and may not be adequate to indemnify us for liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, would negatively affect our reputation, business, financial condition and results of operations. 8 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 July 15, 2003, we had 61,787,384 shares of Class A Voting Common Stock issued and outstanding and 68,765,726 shares of Class B Non-voting Common Stock issued and outstanding. If all of our options, warrants and convertible securities issued as of July 15, 2003 were exercised, we would have had 90,233,139 shares of Class A Voting Common Stock issued and outstanding and 75,187,865 shares of Class B Non-voting Common Stock issued and outstanding Except to the extent the shares of common stock are held by our "affiliates," as defined under the Securities and Exchange Commission's Rule 144, we anticipate that all of those shares will be freely available for public resale, either as a result of the Securities and Exchange Commission's Rule 144(k) or as a result of our planned registrations of those issued and outstanding securities through separate resale registration statements. For more information on this matter, you should review the section of this prospectus titled "Shares Eligible for Future Sale", beginning on page 46. 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 July 15, 2003, there were 18,894,739 shares of Class A Voting Common Stock issuable upon the exercise of warrants. As of that date, there also were 44,444 shares of Class A Voting Common Stock issuable upon conversion of a certain $10,000 convertible promissory note, and we had reserved 13,833,300 shares of our Class A Voting Common Stock for issuance pursuant to our 1999 Incentive and Non-Qualified Stock Option Plan and 25,000,000 shares of our Class A Voting Common Stock reserved for issuance pursuant to our 2003 Stock Plan. As of July 14, 2003, there were 6,422,139 shares of Class B Non-voting Common Stock issuable upon the exercise of warrants, and 25,000,000 shares reserved for issuance pursuant to our 2003 Stock Plan. 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. EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS. The sale of shares pursuant to our Investment Agreement with Dutchess will have a dilutive impact on our stockholders. As a result, our net income per share could decrease in future periods, and the market price of our Class A Voting Common Stock could decline. In addition, the lower our stock price at the time we exercise our put option, the more shares we will have to issue to Dutchess to draw down on the full equity line with Dutchess. If our stock price decreases, then our existing stockholders would experience greater dilution. DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR CLASS A VOTING COMMON STOCK. The Class A Voting Common Stock to be issued under our agreement with Dutchess will be purchased at a 5% discount to the lowest closing bid price for the ten days immediately following our notice to Dutchess of our election to exercise our put right. These discounted sales could cause the price of our Class A Voting Common Stock to decline. 9 THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF CLASS A VOTING COMMON STOCK IN THE MARKET. The selling stockholders have indicated that they intend to sell in the public market the shares of common stock being registered in this offering. Such sales are likely to cause our stock price to decline. THE ANTICIPATION OF SIGNIFICANT SALES OF OUR CLASS A VOTING COMMON STOCK IN THIS OFFERING COULD RESULT IN SHORT SELLING BY THIRD PARTIES, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. The anticipation of significant sales by the selling shareholders could result in short sales by third parties. If there is not a corresponding demand for our stock, then our stock price would decline. OUR SECURITIES HAS 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. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT WITH DUTCHESS WHEN NEEDED. We are dependent on external financing to fund our planned expansion. These financing needs are expected to be provided primarily pursuant to the agreement with Dutchess. No assurances can be given that this financing will be available in sufficient amounts or at all when needed, in part. OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER CURRENTLY OWNS A SUBSTANTIAL PORTION OF OUR VOTING SECURITIES. THEREFORE, HE HAS SUBSTANTIAL CONTROL OVER APPROVING CERTAIN TRANSACTIONS AND MATTERS PRESENTED TO OUR STOCKHOLDERS. Mr. Jon R. Latorella, our President and Chief Executive Officer, currently controls a majority of our voting securities. He will continue to hold a substantial portion of our voting securities even if the Dutchess put and all of the warrants and options to purchase shares of Class A Voting Common Stock are exercised. Mr. Latorella's holdings may delay, deter or prevent transactions, such as tender offers, that would otherwise benefit investors. "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 it is anticipated 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 150,000,000 shares of Class A Voting Common Stock and 250,000,000 shares of Class B Non-voting Common Stock authorized. As a result, we have substantial amounts of authorized but unissued capital stock. Our Second Amended and Restated Certificate of Incorporation and applicable provisions of Delaware law 10 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. THE OVER-THE-COUNTER BULLETIN BOARD IS EXPECTED TO BE REPLACED WITH THE BBX, FOR WHICH WE MAY NOT QUALIFY. The NASD has announced that it will phase out the Over-the-Counter Bulletin Board. The Over-the-Counter Bulletin Board is expect to be replaced with the BBX, a market that will have a number of qualitative listing standards. We may not qualify for listing on the BBX. In the event that the Over-the-Counter Bulletin Board is phased out and we do not quality for the BBX, there would be no public market for our securities. 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. 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. 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. * * * 11 USE OF PROCEEDS This prospectus relates to shares of our Class A Voting Common Stock that may be offered and sold from time to time by certain selling stockholders. There will be no proceeds to us from the sale of shares of Class A Voting Common Stock in this offering. However, we will receive the proceeds from the sale of shares of Class A Voting Common Stock to Dutchess under the Investment Agreement. The purchase price of the shares purchased under the Investment Agreement will be equal to 95% of the lowest closing bid price of our Class A Voting Common Stock on the Over-the-Counter Bulletin Board for the ten days immediately following the date of our notice of election to exercise our put. In the case of resales by Dutchess, due to the possibility that our stock price may fluctuate during the period between our exercise of the put right under the Investment Agreement and the resale by Dutchess of shares of our Class A Voting Common Stock, the proceeds to Dutchess from its resales of our Class A Common Stock may vary significantly from the proceeds that we will realize from our exercise of our put right. The proceeds from our exercise of the put right pursuant to the Investment Agreement will be used for repayment of debt to the holders of certain notes issued prior to June 2003 (which bears interest at 10% to 12% per annum), employee compensation (including compensation for executives), infrastructure build out, sales and marketing, and general working capital. For illustrative purposes, we have set forth below our intended use of proceeds for the range of net proceeds indicated below to be received under the Investment Agreement. The table assumes estimated offering expenses of $40,000.
GROSS PROCEEDS:. . . . . . . $1,000,000 $3,000,000 $5,000,000 NET PROCEEDS:. . . . . . . . $ 960,000 $2,960,000 $4,960,000 USE OF PROCEEDS: Repayment of Debt. . . . $ 500,000 $1,640,000 $1,640,000 Employee Compensation. . $ 150,000 $ 150,000 $ 150,000 Infrastructure Build-Out $ 100,000 $ 750,000 $ 750,000 Sales and Marketing. . . $ 100,000 $ 250,000 $ 250,000 Working Capital. . . . . $ 110,000 $ 170,000 $2,170,000 ---------- ---------- ---------- TOTAL. . . . . . . . . . . . $ 960,000 $2,960,000 $4,960,000
DETERMINATION OF OFFERING PRICE The shares of Class A Voting Common Stock are being offered for sale by the selling stockholders at prices established on the Over-the-Counter Bulletin Board during the term of this offering. These prices will fluctuate based on the demand for the shares. On May 28, 2003 the average of the bid and ask prices of our Class A Voting Common Stock was $0.185 per share. Our Class A Voting Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol "LPLHA.OB." During the 45 day period ending on the date of this prospectus, the lowest reported daily average of the bid and ask prices for our Class A Voting Common Stock was $0.185 and the highest reported daily average of the bid and ask prices for our Class A Voting Common Stock was $0.385. DIVIDEND POLICY We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends and distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business and to fund future growth. You should not purchase any of our securities on the expectation of future dividends. 12 DILUTION The net tangible book value of LocatePLUS as of March 31, 2003 was $1,788,000 or $0.02 per share of common stock. Net tangible book value is determined by dividing the tangible book value of LocatePLUS (total tangible assets less total liabilities) by the number of outstanding shares of our common stock (taking Class A Voting Common Stock and Class B Non-voting Common Stock as a single class). Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to LocatePLUS, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the Class A Voting Common Stock to be issued under our Investment Agreement with Dutchess. The amount of dilution will depend on the offering price and number of shares to be issued under the Investment Agreement. Higher offering prices result in increased dilution to new investors. The following example shows the dilution to new investors at an offering price of $0.185 per share. If we issue 28,500,000 shares of Class A Voting Common Stock under the Investment Agreement at an assumed offering price of 95% of $0.185 per share (i.e., the number of shares we could issue at 95% of $0.185 per share, the lowest of the average daily bid and ask prices for our Class A Voting Common Stock during the past 45 days, to raise $5.0 million under the Investment Agreement), less the offering expenses of $40,000, our net tangible book value as of March 31, 2003 would have been $6,748,000 or $0.05 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.03 per share and an immediate dilution to new shareholders of $0.135 per share, or 73%. The following table illustrates the per share dilution:
ASSUMED PUBLIC OFFERING PRICE PER SHARE. . . . . . . . $0.185 NET TANGIBLE BOOK VALUE PER SHARE BEFORE THIS OFFERING $ 0.02 INCREASE ATTRIBUTABLE TO NEW INVESTORS . . . . . . . . $ 0.03 ------ NET TANGIBLE BOOK VALUE PER SHARE AFTER THIS OFFERING. $ 0.05 ------ DILUTION PER SHARE TO NEW SHAREHOLDERS . . . . . . . . $0.135 ======
The offering price of our common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices:
ASSUMED PER SHARE NUMBER OF OFFERING PRICE SHARES TO BE ISSUED DILUTION PER SHARE TO NEW INVESTORS - ------------------ 0.05. . . . . . . 105,263,158 $ 0.02 0.10. . . . . . . 52,631,579 $ 0.05 0.15. . . . . . . 35,087,719 $ 0.10 0.20. . . . . . . 26,315,790 $ 0.15 0.25. . . . . . . 21,052,632 $ 0.19 0.30. . . . . . . 17,543,860 $ 0.24 0.35. . . . . . . 15,037,594 $ 0.29 0.40. . . . . . . 13,157,895 $ 0.34
13 PLAN OF DISTRIBUTION This prospectus relates to the resale of up to 31,000,000 shares of our Class A Voting Common Stock by a current stockholder, NFC Corporation, and by Dutchess Private Equities Fund, L.P., which will become a stockholder pursuant to a put right under an Investment Agreement that we have entered into Dutchess. The selling stockholders consist of STOCKHOLDER NUMBER OF SHARES - -------------------------------------------- ------------------ Dutchess Private Equities Fund, L.P 28,500,000 NFC Corporation 2,500,000 ----------- Total Class A Voting Common Stock being registered 31,000,000 DUTCHESS PRIVATE EQUITIES FUND, L.P. On June 2, 2003, we entered into an Investment Agreement with Dutchess Private Equities Fund, L.P. Pursuant to the Investment Agreement, we may, at our discretion, periodically "put to" or require Dutchess to purchase shares of our Class A Voting Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares shall not exceed $5.0 million. For each share of Class A Voting Common Stock purchased under the Investment Agreement, Dutchess will pay 95% of the lowest closing bid prices on the Over-the-Counter Bulletin Board or other principal market on which our Class A Voting Common Stock is traded for the ten days immediately following the date on which we give notice to Dutchess of our intention to put such stock. Dutchess is a private limited partnership whose business operations are conducted through its general partner, Dutchess Capital Management, LLC. Our ability to put the shares under the Investment Agreement is conditioned upon us registering the shares of common stock with the Securities and Exchange Commission. The costs associated with this registration will be borne by us. Pursuant to the Investment Agreement, we may periodically put shares of Class A Voting Common Stock to Dutchess by giving notice of Dutchess of our election to exercise the put right. Pursuant to the Investment Agreement, a closing will be held thirteen trading days after such written put notice, at which time we will deliver shares of Class A Voting Common Stock and Dutchess will pay the purchase price for the shares. The purchase price for such shares will be the lowest closing price for our shares during the ten days following the put notice. During the ten day period, Dutchess may make interim payments of the purchase price and take receipt of the shares to be purchased at that time. In the event that Dutchess elects to take receipt of the shares in advance of the end of the ten day period, Dutchess will make an offsetting payment to us at the closing to the extent that the amount paid by Dutchess during such period is less than the amount otherwise owed by Dutchess to us (as determined by the lowest closing price for our shares during the full ten day period) Subject to a variety of limitations, we may put shares pursuant to the Investment Agreement once the underlying shares are registered with the Securities and Exchange Commission. Thereafter, we may continue to put shares to Dutchess until Dutchess has paid a total of $5.0 million or until 36 months after the effectiveness of the accompanying Registration Statement, whichever occurs first. If, after delivering a put notice the shares that we are to put become "restricted securities" within the meaning of the Securities Act of 1933, as amended, and if Dutchess has sold shares in anticipation of receiving unrestricted shares, we would required to cover any difference between the sales price and the amounts Dutchess may pay to purchase covering shares. Pursuant to the terms of the Investment Agreement, we cannot put shares to Dutchess if, as a result of that put, Dutchess will hold more than 4.99% of our Class A Voting Common Stock. As Dutchess has indicated that it intends to resell our Class A Voting Common Stock from time to time and since our stock price may fluctuate, it is uncertain whether this limitation will materially limit our ability to put shares of Class A Voting Common Stock to Dutchess. In addition to these restrictions, the amount of each advance is subject to a maximum advance amount and based on an average daily volume of our Class A Voting Common Stock. Unless waived by Dutchess, and subject to a $1.0 million per put cap, the maximum amount of each put exercise is equal to, at our election (I) 200% of the average daily volume of the Class A Voting Common Stock for the 20 trading days prior to the applicable put notice multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (II) $50,000. We cannot predict the actual number of shares of Class A Voting Common Stock that will be issued pursuant to 14 the investment agreement, in part, because the volume and purchase price of The shares will fluctuate based on prevailing market conditions and we have Not determined the total amount of advances we intend to draw. Nonetheless, we Can estimate the number of shares of our class a voting common stock that will Be issued using certain assumptions. Assuming we drew down the entire $5.0 Million available under the investment agreement in a single advance (which Is not permitted under the terms of the investment agreement) and the Purchase price were equal to 95% of $0.185 per share (the lowest of the Average daily bid and ask prices for our class a voting common stock during The past 45 days), then we would issue 28,500,000 shares of our common stock To dutchess. As of march 31, 2003, these shares would represent 34% of our Outstanding common stock upon issuance. You should be aware that there is an inverse relationship between our stock price and the number of shares to be issued under the Investment Agreement. That is, as our stock price declines, we would be required to issue a greater number of shares under the Investment Agreement for a given advance. This inverse relationship is demonstrated by the table on the following page, which shows the number of shares to be issued under the Investment Agreement at a price of $0.185 per share (the lowest of the average daily bid and ask prices for our Class A Voting Common Stock during the past 45 days) and 25%, 50% and 75% discounts to that price. SHARE ISSUANCE AT VARIOUS PRICES
DISCOUNT: . . . . . . . 75% 50% 25% - PURCHASE PRICE: . . . . $ 0.0462 $ 0.0925 $ 0.1388 $ 0.185 NO. OF SHARES:(1). . . 113,921,167 56,899,004 37,919,005 28,500,000 TOTAL OUTSTANDING:(2) . 168,771,460 111,749,2974 92,769,298 83,350,293 PERCENT OUTSTANDING:(3) 68% 51% 41% 34%
(1) Represents the number of shares of Class A Voting Common Stock to be issued to Dutchess at the prices set forth in the table. (2) Represents the total number of shares of Class A Voting Common Stock outstanding after the issuance of the shares to Dutchess (3) Represents the shares of Class A Voting Common Stock to be issued as a percentage of the total number shares outstanding (assuming no exercise or conversion of any options, warrants or other convertible securities). Pursuant to the terms of the Registration Rights Agreement that we have entered into with Dutchess, we would be required to register additional shares if we wished to exercise our put right in full (i.e., to sell $5.0 million in Class A Voting Common Stock to Dutchess) during a period in which the average closing price remains less than $0.185 per share. Management currently believes that the Company will not exercise the put right in any manner that would require the registration of securities in addition to those securities being registered pursuant to the registration statement of which this prospectus is a part. All proceeds used under the Investment Agreement will be used for debt repayment, employee compensation and for general working capital purposes. We cannot predict the total amount of proceeds to be raised in this transaction, in part, because we have not determined the total amount of the advances we intend to draw. However, we expect to incur expenses of approximately $40,000 consisting primarily of professional fees incurred in connection with this registration. Douglas H. Leighton, A Managing Member of Dutchess Capital Management, LLC has voting and dispositive power with respect to these securities. We engaged Oftring & Company, Inc. as our placement agent with respect to the securities to be issued under the Equity Line of Credit and for these services will be paid $5,000. Oftring & Company has no affiliation or business relationship with Dutchess, however, Oftring & Company was the underwriter in our initial public offering and an employee of Oftring & Company, Thomas Murphy, is a member of our Board of Directors. OTHER SELLING STOCKHOLDERS In addition to the shares subject to our put right under the Investment Agreement, this prospectus also relates to the resale of 2,500,000 shares of Class A Voting Common Stock issued to NFC Corporation in a private placement prior to the date that the registration statement of which this prospectus is a part was filed with the Securities and Exchange Commission. These shares were issued in exchange for investor relations consulting services rendered by NFC. No material relationship other than this agreement exists nor existed over the previous three years. Geoffrey 15 J. Eiten, President of NFC, has voting and dispositive power with respect to these securities. PLAN OF DISTRIBUTION Our selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The selling stockholders may sell the shares from time to time - - at market prices prevailing on the OTC Bulletin Board at the time of offer and sale, or - - at prices related to such prevailing market prices, or - - in negotiated transactions, or - - in a combination of such methods of sale. The selling stockholders may effect such transactions by offering and selling the shares directly to or through securities broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of the shares for whom such broker-dealers may act as agent or to whom the selling stockholders may sell as principal, or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. The selling stockholders and any broker-dealers who act in connection with the sale of their shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any discounts, concessions or commissions received by them and profit on any resale of the shares as principal may be deemed to be underwriting discounts, concessions and commissions under the Securities Act. On or prior to the effectiveness of the registration statement to which this prospectus is a part, we will advise the selling stockholders that they and any securities broker-dealers or others who may be deemed to be statutory underwriters will be governed by the prospectus delivery requirements under the Securities Act. Under applicable rules and regulations under the Securities Exchange Act, any person engaged in a distribution of any of the shares may not simultaneously engage in market activities with respect to the common stock for the applicable period under Regulation M prior to the commencement of such distribution. In addition and without limiting the foregoing, the selling security owners will be governed by the applicable provisions of the Securities and Exchange Act, and the rules and regulations thereunder, including without limitation Rules 10b-5 and Regulation M, which provisions may limit the timing of purchases and sales of any of the shares by the selling stockholders. All of the foregoing may affect the marketability of our securities. On or prior to the effectiveness of the registration statement to which this prospectus is a part, we will advise the selling stockholders that the anti-manipulation rules under the Securities Exchange Act may apply to sales of shares in the market and to the activities of the selling security owners and any of their affiliates. We have informed the selling stockholders that they may not: - - engage in any stabilization activity in connection with any of the shares; - - bid for or purchase any of the shares or any rights to acquire the shares, or attempt to induce any person to purchase any of the shares or rights to acquire the shares other than as permitted under the Securities Exchange Act; - - effect any sale or distribution of the shares until after the prospectus shall have been appropriately amended or supplemented, if required, to describe the terms of the sale or distribution. We have informed the selling stockholders that they must effect all sales of shares in broker's transactions, through broker-dealers acting as agents, in transactions directly with market makers, or in privately negotiated transactions where no broker or other third party, other than the purchaser, is involved. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. Any commissions paid or any discounts or concessions allowed to any broker-dealers, and any profits received on the resale of shares, may be deemed to be underwriting discounts and commissions under the Securities Act if the broker-dealers purchase shares as principal. 16 In the absence of the registration statement to which this prospectus is a part, certain of the selling stockholders would be able to sell their shares only pursuant to the limitations of Rule 144 promulgated under the Securities Act. CAPITALIZATION The table below sets forth our capitalization as of March 31, 2003. You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", beginning on page 19 of this prospectus and our consolidated financial statements and the related notes beginning on page F-1 of this prospectus.
MARCH 31, 2003 (in thousands) (UNAUDITED) ---------------- DEBT: Current portion of notes, convertible debt and capital lease obligations. $ 806 ================ Capital lease obligations and notes, net of current portion . . . . . . . 396 ================ STOCKHOLDERS' EQUITY: Common Stock, par value $0.01 per share: Class A Voting Common Stock, 150,000,000 shares authorized; 54,850,292 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . 549 Class B Non-voting Common Stock, 250,000,000 shares authorized; 68,640,726 shares issued and outstanding. . . . . . . . . . . . . . . . . 686 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 17,750 Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,869 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,066) ---------------- TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . . 1,788 ---------------- TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,990 ================
* * * 17 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, 2001 and 2002 and the balance sheet data as of December 31, 2002 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data set forth below for the three months ended March 31, 2002 and 2003 and the balance sheet data as of March 31, 2003 have been derived from unaudited financial statements included elsewhere in this prospectus and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations for such periods. These historical results are not necessarily indicative of results to be expected for any future period.
THREE MONTHS ENDED YEAR ENDED STATEMENTS OF OPERATIONS DATA: MARCH31, DECEMBER 31, 2003 2002 2002 2001 -------------- ------------- ------------- -------------- (unaudited) REVENUES: Information Sales - CD Rom . . . . . . . . . . . . $ 130,159 $ 66,494 $ 348,003 $ 268,701 - Online . . . . . . . . . . . . 571,249 277,547 1,471,188 752,109 - Channel Partner. . . . . . . . 44,053 4,114 32,284 - - Wireless . . . . . . . . . . . 1,485 - 1,980 - Engineering services . . . . . . . 10,667 - 53,333 388,187 Total revenues. . . . . . . . . 757,613 348,155 1,903,788 1,408,997 COSTS AND EXPENSES: Costs of revenues: CD Rom. . . . . . . . . . . . . 14,742 26,173 90,397 96,561 Online and Channel Partner. . . 514,977 190,983 1,217,809 986,240 Engineering services. . . . . . 687 - 9,297 49,347 Wireless. . . . . . . . . . . . 3,115 - 1,100 - Selling and marketing. . . . . . . 245,599 274,980 1,001,529 799,486 General and administrative . . . . 730,567 903,581 3,257,546 3,317,128 Total operating expenses. . . . 1,509,687 1,395,717 5,577,678 5,248,762 OPERATING LOSS. . . . . . . . . . . . (752,074) (1,047,562) (6,373,890) (3,839,765) OTHER INCOME (EXPENSE): Interest income. . . . . . . . . . 34,413 16,426 53,832 67,768 Interest expense . . . . . . . . . (77,063) (34,744) (397,674) (590,970) Other income, net. . . . . . . . . 12,061 4,548 21,122 6,712 Net loss. . . . . . . . . . . . $ (782,663) $ (1,061,332) $ (3,996,607) $ (4,356,255) BASIC AND DILUTED NET LOSS PER SHARE. $ (0.006) $ (0.010) $ (0.036) $ (0.044) SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE. . . . . . 123,491,018 108,397,027 111,798,301 99,613,673
18
AS OF AS OF BALANCE SHEET DATA: MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------- (unaudited) Cash and equivalents. . . . $1,593,416 $ 1,661,213 Total current assets. . . . 3,685,237 3,538,219 Total assets. . . . . . . . 4,970,985 4,947,157 Total current liabilities . 2,786,836 2,393,354 Total stockholders' equity. $1,787,872 $ 2,351,581
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our consolidated financial condition and results of operations together with "Selected Financial Data" and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements because of certain factors, including, but not limited to, those presented below. OVERVIEW We are a business-to-business and business-to-government provider of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , 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. We anticipate that the majority of our future revenues will be derived from our LocatePLUS product. We distribute our content both directly (through the Internet in the case of our LocatePLUS product and through the mail in the case of our Worldwide Information CD-ROM) and through "channel partner" arrangements, by which third-party database providers obtain access to our databases in consideration for a royalty. In 2001, we entered into an arrangement with a third party database provider pursuant to which we provided certain engineering services relating to the integration and assimilation of public data. This agreement was terminated in 2001. We also provide engineering services in connection with the implementation and rollout of certain of our channel partnership arrangements. Although our products consist primarily of publicly available - and therefore non-proprietary - information, we integrate data in our products in a proprietary manner that allows users to access data rapidly and efficiently. In addition, our LocatePLUS product utilizes proprietary methodologies to link data from different sources associated with a given individual to a single background report, even though the sources of data with respect to a given individual may be incomplete or contain only partial information with respect to that individual. Revenue associated with our Worldwide Information product is recognized upon delivery to the customer of a CD-ROM, provided that no significant obligations remain, evidence of the arrangement exists, the fee is fixed or determinable and collectibility is reasonably assured. Information in our Worldwide Information product is updated and released either quarterly or twice a year. In the case of our LocatePLUS product, we charge a fee to customers, which varies based upon the type and quantity of information requested. Revenue from our LocatePLUS product is recognized when requested information is downloaded, there is evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. We charge our fees to customers' credit cards (approximately 60% of our current LocatePLUS customer base) or invoice customers for such fees on a monthly basis (approximately 40% of our current customer base). Revenue from our LocatePLUS AnyWhere is recognized monthly based on a fixed fee for usage. Our costs of revenue consist primarily of our costs to obtain data and software maintenance expenses, which consist primarily of payroll and related expenses for information technology personnel, Internet access and hosting charges, and expenses relating to Web content and design. We obtain our data from multiple sources and we have entered into various license agreements with the related data providers. In 2001 and 2002, we recorded $648,500 and $665,366, respectively, and in the quarters ended March 31, 2002 and 2003, we recorded $80,000 and $348,753, 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. Costs of engineering services are 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. 19 Our selling and marketing expenses consist of salaries and commissions paid to sales representatives for the products that we offer, as well as direct mail advertising campaigns and magazine and Internet-banner advertisements. General and administrative expenses consist of payroll and related expenses for non-sales, non-research and development and executive and administrative personnel, facilities expenses, insurance, professional services expenses, travel and other miscellaneous expenses. Interest income consists of earnings on our cash, cash equivalents and short term investments. Interest expense is primarily attributable to various notes issued in the year ended December 31, 2002 and to various notes issued through March 31, 2003. As of March 31, 2003, we had notes payable (current and long-term) totaling $905,711. We have incurred significant net losses since our inception. We incurred net losses of approximately $800,000 in the three months ended March 31, 2003 and $3.9 million in the year ended December 31, 2002. Our accumulated deficit through March 31, 2003 was approximately $19.1 million. We raised approximately $4.8 million from sales of our equity during 2002. Our ultimate success is still dependent upon our ability to secure additional financing to meet our working capital and ongoing project development needs. We believe our current sources of liquidity, funding, and customer demand are adequate to sustain our current level of operations for the remainder of 2003. However, we anticipate that we will increase our sales and marketing, product development and general and administrative expenses during 2003. As a result, to achieve our business objectives, we must raise additional capital, which may consist of future debt or equity offerings. There can be no assurance that additional capital will be available to us, however, or, if it is available, that it will be available on favorable terms. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 Revenues. Revenue from our Worldwide InformationTM CD-ROM product increased to $130,159 for the three months ended March 31, 2003 from $66,494 for the three months ended March 31, 2002, an increase of 96%. This increase was the result of timing differences for CD-ROM releases between 2002 and 2003. Because revenue is recognized on our CD-ROM products when shipped, the timing of our shipments can cause quarterly fluctuations of revenue. Revenue from our Internet-based product, LocatePLUS, increased to $571,249 for the three months ended March 31, 2003 as compared to $277,547 for the three months ended March 31, 2003, an increase of 106%. This increase is attributable to an increase in the number of customers as well as an increase in customer usage. The number of users of our Internet-based product increased to 11,565 at March 31, 2003 from 6,669 at March 31, 2002, an increase of 73%. Revenue from channel partners increased to $44,053 from $4,114, an increase of 971%. The increase is attributable to increased acceptance by partners for streaming XML (a distribution method for our data). The number of our channel partners has increased from one at March 31, 2002 to four at March 31, 2003. Revenue from our wireless product, LocatePLUS AnyWhere , was $1,485 during the three months ended March 31, 2003. LocatePLUS AnyWhere was launched in late 2002, and, as a result, no wireless revenue was recognized in the three months ended March 31, 2002. Costs of revenues. For the three months ended March 31, 2003, our costs of revenue for Worldwide InformationTM were $14,742 as compared to $26,173 for the three months ended March 31, 2002, a decrease of 44%. This decrease is attributable to both a reduction in data costs and a reduction in the costs associated with printing CD-ROMs. For the three months ended March 31, 2003, our costs of revenue associated with LocatePLUS were $514,977, as compared to $190,983 for the three months ended March 31, 2002, an increase of 170%. The increase in cost is attributable to the cost of acquisition of additional data sets. Costs of revenue associated with LocatePLUS are not expected to increase dramatically over the next twelve months as we have acquired most of the data planned for that product. Costs of revenue for LocatePLUSAnyWhere were $687 for the three months ended March 31, 2003. We expect this cost to decrease as a percentage of revenues in the future as we sell this product through our Earthlink partnership. 20 We expect costs of revenues to increase over the next twelve months, but at a rate less than our increase in sales as most of the costs associated with our products are relatively fixed. Selling and marketing expenses. Selling and marketing expenses for the three months ended March 31, 2003 were $245,599, as compared to $274,980 for the three months ended March 31, 2002, a decrease of approximately 11%. This decrease is attributable primarily to a temporary reduction in the size of our sales force. We expect selling and marketing expense to increase in the future as we increase the size of our sales staff. General and administrative expenses. General and administrative expenses for the three months ended March 31, 2003 were $730,567, as compared to $903,581 for the three months ended March 31, 2002, a decrease of 19%. This decrease is attributable to a reduction in non-cash compensation recorded for consulting and advisory services, as well as the non-recurrence of one time expenses associated with the reconciliation and consolidation of various stockholder records in 2002. Interest income. Interest income increased to $34,413 for the three months ended March 31, 2003, from $16,426 for the three months ended March 31, 2003. This increase is attributable to interest earned on notes receivable in 2003, for which there was no equivalent interest income in 2002. Interest expense. Interest expense increased to $77,063 for the three months ended March 31, 2003, from $34,744 for the three months ended March 31, 2002. This increase is primarily attributable to interest on a short-term demand loan for which there was no equivalent interest income in 2002. Other Income. Other income increased to $12,061 for the three months ended March 31, 2003, from $4,548 for the three months ended March 31, 2002. This increase is attributable to income recorded for the repayment of previously written off debt. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Revenues. Revenue from our Worldwide InformationTM CD-ROM product increased to $345,003 for the year ended December 31, 2002 from $268,701 for the year ended December 31, 2001, an increase of 28%. During 2002, we shipped CD-ROM products including data from new states for which we had no shipments in 2001. Revenue from our Internet-based product, LocatePLUS, increased to $1,471,188 for the year ended December 31, 2002 as compared to $752,109 for the year ended December 31, 2001, an increase of 96%. This increase is attributable to an increase in customers and usage. The number of users of our Internet-based product increased to 10,966 at December 31, 2002 from 5,159 at December 31, 2001, an increase of 113%. In 2002, we started delivering our online product through channel partnerships. In 2002, we recognized $32,284 in revenue from the first of these channel partner arrangements, for which we had no revenue in 2001. As part of deploying channel partner agreements, we occasionally provide engineering services. In 2002, we realized $53,333 in engineering revenue to deploy one channel partner site, as compared to $388,187 in 2001. In 2002, we formally launched our wireless product and realized $1,980 in revenue from sales of that product. No revenue was realized from sales of this product in 2001. Costs of revenues. For the year ended December 31, 2002, our costs of revenue for Worldwide InformationTM were $90,397 as compared to $96,561 for the year ended December 31, 2001, a decrease of 6%. This decrease is primarily attributable to a decrease in costs associated with the acquisition of data from certain states. For the year ended December 31, 2002, our costs of revenue associated with LocatePLUS were $1,217,809, as compared to $986,240 for the year ended December 31, 2001, an increase of 23%. This increase is primarily attributable to costs associated with the acquisition of two data sets. Selling and marketing expenses. Selling and marketing expenses for the year ended December 31, 2002 were $1,001,529, as compared to $799,486 for the year ended December 31, 2001, an increase of approximately 25%. This increase in expenses is attributable primarily to an increase in our sales force and commissions associated with increased sales volume. General and administrative expenses. General and administrative expenses for the year ended December 31, 2002 were $3,257,546 as compared to $3,317,128 for the year ended December 31, 2001, a decrease of 2%. This decrease is primarily attributable to a reduction in professional services from outside consultants. 21 Interest income. Interest income decreased to $53,835 for the year ended December 31, 2002, from $67,768 for the year ended December 31, 2001. This decrease is attributable to interest earned on a certain $1,000,000 note issued to us in 2001, of which $95,000 of principal remained outstanding as of December 31, 2002. Interest expense. Interest expense decreased to $397,674 for the year ended December 31, 2002, from $590,970 for the year ended December 31, 2001, a decrease of 33%. This decrease is attributable to non-cash interest expense incurred in 2001 in connection with debt issued with detachable warrants in 2001. Other Income. Other income increased to $21,122 for the year ended December 31, 2002, from $6,712 for the year ended December 31, 2001. This increase is attributable to the sale of certain assets and to income recorded for the repayment of previously written off debt. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in 1996 through December 31, 2002, we raised approximately $19.9 million through a series of private and public placements of equity and convertible debt to fund marketing and sales efforts and develop our products and services. During 2002, our financing activities provided approximately $4.8 million of cash, principally through the sale of Units in our initial public offering and a private placement of Class B Non-voting Common Stock. As of March 31, 2003, our cash and investments totaled $1,593,416. During 2002 and the three months ended March 31, 2003, we used approximately $3.1 million and $600,000 of cash, respectively, in operating activities principally to fund our net losses. During 2001 and 2002, we loaned an aggregate of $2.0 million to Andover Secure Resources, Inc., an unaffiliated third party leasing company, due to the favorable terms of those loans. These loans (including interest) are payable upon our demand to Andover and bear interest at interest rates ranging from 10% to 11% per annum. As of March 31, 2003, approximately $1 million on these loans remain outstanding. Between May and August 2002, we received $314,000 in cash by issuing subordinated promissory notes bearing simple interest at 10% per annum. The terms of the notes called for their repayment one year from the date of their issuance. These notes were repaid in October 2002. On June 4, 2002, we received $750,000 from Gemstone Investment Company, Inc. by issuing a promissory note collateralized by all of our assets and a personal guaranty by our Chief Executive Officer (including a pledge of five million shares of the Chief Executive Officer's LocatePlus Holdings Corporation Class A Voting Common Stock and a mortgage on certain of his other personal assets). Gemstone Investment Company, Inc. is an unaffiliated third party lender that specializes in loans to start-up and early stage businesses. As of October 2002, $600,000 had been repaid on this note, however the terms of this loan called for its repayment in full, including accrued interest, by the earlier of October 3, 2002 or two business days after the closing of our initial public offering. As a result, effective October 3, 2002, the terms of this note were renegotiated, and all accrued interest and principal on the note were converted to a $285,000 demand note with an interest payable at 42% per annum. All interest has been paid on this note and as of March 31, 2003, the principal balance remained outstanding. In December 2002, we issued a one-year term note for $250,000 with detachable ten year, fully vested detachable warrants to an individual who, as a condition of his investment, required that he be appointed to the Board of Directors of the Company. The note bears interest at the rate of 10% per annum and is payable in one lump sum at maturity. The detachable warrants provide for the purchase of 250,000 shares of our Class B Non-Voting Common Stock with an exercise price of $0.22 per share. We raised approximately $4.8 million of equity during 2002. However, we anticipate that we will increase our sales and marketing, product development and general and administrative expenses during 2003 and for the foreseeable future. To achieve our business objectives, we must raise additional capital, which may consist of future debt or equity offerings. There can be no assurance, however, that additional capital will be available to us or, if it is available, that it will be on favorable terms. Through March 31, 2003, we received $440,000, net of issuance costs, by sales of subordinated promissory notes bearing simple interest at 10% per annum. The terms on $75,000 of the notes require their repayment 12 months from the date of issuance and the terms of the remaining notes require their repayment 18 months from the date of issuance. 22 COMMITMENTS AND CONTINGENCIES OPERATING LEASES We lease office space and equipment under various operating lease agreements which terminate on various dates through 2005. Future minimum payments under our non-cancelable operating leases total $1,002,650. CAPITAL LEASES Through March 31, 2003, we entered into certain long-term equipment lease agreements. These agreements are classified as capital leases and expire in 2005. Future minimum lease payments under our non-cancelable capital leases total $399,268. LICENSE AGREEMENTS We have entered into various data acquisition agreements under which we are required to make minimum payments totaling $2,127,875 through 2005. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements included in the Company's Annual Report for December 31, 2002. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 will be applied prospectively and is effective for exit or disposal activities initiated after December 31, 2002. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based Compensation and Disclosure - an amendment of FASB Statement No.123" (FAS 148). This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative transition methods for a voluntary change to fair value accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management is currently evaluating the effects of this pronouncement. Had we implemented the above accounting pronouncements, our financial position and results of operations would not have been materially affected. 23 BUSINESS OVERVIEW We are a business-to-business and business-to-government provider of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , that 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. INDUSTRY BACKGROUND We are a background information provider. Users of background information have historically included law enforcement, other government agencies, law firms, investigation companies, private investigators and insurance companies. Information is used by those entities for various activities ranging from legal discovery to employment screening to the detection of fraud and the prevention of crime and terrorism. Additional users, such as large businesses, have increasingly availed themselves of background information services in connection with their hiring practices and other business decisions. A considerable amount of background information about individuals in the United States is publicly available. Examples of such public data include: - - names and addresses - property ownership - - aliases - bankruptcies - - 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, businesses and government agencies that wish to use public information are faced with the time-consuming, costly and difficult task of gathering data from numerous locations and sources, verifying the information acquired and organizing it into a useful format. While services and technologies have developed to enable remote access to information sources, there 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, human resources, law firms, insurance underwriting, fraud investigation, private equity funds, private investigation and financial institutions. We believe that we will be able to compete with comparable services based upon the pricing of our services and based upon certain technical advantages incorporated in our systems (such as our data integration methodologies and our hyper-linked and wireless LocatePLUS reports). 24 OUR TARGET MARKET AND SCREENING OF USERS Our products are marketed and sold to federal, state and local government agencies (including law enforcement agencies), private investigators, human resource professionals and the legal profession. Our products have been used in: - - crime and terrorism investigation (e.g., in conjunction with federal and state investigations in the aftermath of the September 11th terrorist attacks and the subsequent anthrax incidents); - - detection of fraud; - - "skip tracking" (i.e., the location of debtors and individuals in violation of parole or bail restrictions); - - background checks; - - legal due diligence; and - - risk management. Our products are generally marketed and sold only to pre-screened business and government end users. We do not sell products or services to the general public due to the liability that may arise from the release of personal information to the public. Before obtaining access to our LocatePLUS database or our Worldwide Information product, we generally require commercial customers to provide background information about their business need for data and about themselves, such as business licenses, bar admission cards or private investigator licenses. Individuals involved in law enforcement must provide similar evidence of their authority. In an attempt to prevent the misuse of our date, we have adopted a three-tier security schema.
LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS I General Business Names, Addresses and Phone Numbers Past Residences, Neighbors and Affiliates Real Property II Private Investigators Level I Data, plus: Insurance Liens and Judgments Attorneys/Law Firms Drivers' Records Government Certain Motor Vehicle Records Corporate Security III Law Enforcement Level I and II Data, plus: Comprehensive Criminal Records Restricted Motor Vehicle Records Certain Credit Reporting Data
LOCATEPLUS We launched our LocatePLUS Internet site in March 2000. Our LocatePLUS database contains searchable and cross-referenced public information on individuals throughout the United States. Information is presented in a dynamic, hyper-linked fashion, permitting users to rapidly identify and obtain personal information relating to individuals and their associated residences, possible acquaintances, and a variety of other types of data. Our LocatePLUS database consists of approximately five billion individual data entries. According to our estimates, we have data entries relating to approximately 205 million adult individuals in the United States (or approximately 98% of the adult population of the United States, based on the 2000 United States Census). As of March 31, 2003, there were approximately 11,565 pre-screened users of our LocatePLUS database. 25 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 (including dates of residence) - phone numbers - - certain criminal arrest, conviction and incarceration records - vessel registrations We intend to continue integration of datasets into our LocatePLUS product, including: - - certain hunting and fishing licenses - certain professional licenses - - certain facial image files - certain fingerprint files - - certain gun licenses - Federal Aviation Administration records We can currently give no assurance as to the timing of integration of such datasets, however, or whether these new datasets will be integrated with our LocatePLUS product at all. We believe that one of the significant advantages of our LocatePLUS product, in comparison with many products with which we compete, is the ability of LocatePLUS to "tie" data associated with a given individual to produce a single report. Our LocatePLUS system uses a proprietary methodology to associate data in a manner that generally results in a matching of data entries across diverse data sources, allowing users to obtain a single, comprehensive data report about an individual, even when there is no single element that ties data entries together (such as a Social Security number). This comprehensive data report is itself linked to other data potentially relevant to a business or government agency researching an individual, such as names and addresses of possible acquaintances, relatives and neighbors of that individual. LOCATEPLUS ANYWHERE We recently developed a version of our LocatePLUS product that is accessible through wireless personal digital assistants and e-mail capable pagers, which we refer to as LocatePLUS AnyWhere. LocatePLUS AnyWhere was commercially launched in mid-December 2002. This product is being marketed primarily to law enforcement. The product is sold on a subscription fee basis, permitting unlimited access to our LocatePLUS database for a flat monthly fee provided that that the user agrees to a fixed term commitment. As of March 31, 2003, we had realized only nominal revenue from this product. WORLDWIDE INFORMATION Since 1996, we have produced CD-ROM products that enable users to quickly search motor vehicle records in multiple states through a dynamic search function, known as Worldwide Information . Unlike many competing products, our Worldwide Information product enables users to rapidly identify vehicles or drivers using complete or partial search criteria. We believe that this ability to search partial data is a valuable tool in circumstances in which incomplete information is available, as is often the case in criminal investigations. Unlike data provided by Internet-based services, searches on our CD-ROM product are confidential and unavailable to any person other than the user of our CD-ROM product. We believe that the confidential nature of this CD-ROM product makes it particularly attractive to law enforcement agencies, which must often conduct criminal investigations in strict secrecy. As of March 31, 2003, there were approximately 2,100 pre-screened purchasers of our Worldwide Information CD-ROM product. 26 We currently expect to expand our Worldwide Information product to include data from additional states, and to develop a DVD-ROM-based version of this product, although we can give no assurance as to the timing of such product launches or whether such products will be developed at all. We expect that a DVD-ROM-based version of this product, if developed, would permit multi-state Worldwide Information databases to reside on a single medium. SOURCES OF OUR DATA Our operations depend upon information derived from a wide variety of automated and manual sources. External sources of data include public records information companies, governmental authorities and on-line search systems. We license or otherwise obtain our data from 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 in compliance with the Gramm-Leach-Bliley Act or any law specifically applicable to the dissemination of data concerning individuals. Any further restriction on our use of personal information, however, could limit the usefulness of our products and have a material adverse effect 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 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 four channel partnerships. For the year ending December 31, 2002, we recognized revenue on only one of these agreements. The other three agreements were implemented in 2003 and, for the three months ended March 31, 2003, these channel agreements resulted in $44,053 in revenue. COMPETITION Current competitors for our LocatePLUS product include Accurint, ChoicePoint, Confi-chek.com, FlatRateInfo.com, and Lexis-Nexis. Many of the companies that currently compete with this product, as well as other companies with whom we may compete in the future, are national or international in scope and have greater resources than we do. Those resources could enable those companies to initiate price cuts or take other measures in an effort to gain market share in our target markets. Our Worldwide Information product primarily competes with the registries of motor vehicles of various 27 states that sell their data to screened users. These state agencies generally provide data in "raw form" without the search capabilities that we provide in our Worldwide Information product. FACILITIES LocatePLUS Holdings Corporation and our wholly owned subsidiary, LocatePLUS Corporation, are presently headquartered in Beverly, Massachusetts, where we lease approximately 32,000 square feet. The lease on that facility expires on February 28, 2005, and our annual lease obligation is approximately $480,000. Our wholly-owned subsidiary, Worldwide Information, Inc., is presently located in Byfield, Massachusetts, where it leases approximately 2,700 square feet. The lease on the Byfield facility expired on March 1, 2003, and we are currently a tenant-at-will in this facility. Our annual lease payments on this facility in 2002 were approximately $25,000. We are currently negotiating to extend this lease to February 2005. We also lease a storage facility in Georgetown, Massachusetts pursuant to a month-to-month lease, with current monthly rent of $500. We believe that our facilities are sufficient for our projected needs. INTELLECTUAL PROPERTY Publicly available data concerning individuals is generally non-proprietary. As a result, our intellectual property consists largely of certain trade secrets and know-how associated with the integration of databases and our ability to link diverse datasets. We rely on a combination of confidentiality agreements, restrictions on access to our proprietary systems, and contractual provisions (such as in our user agreements) to protect our intellectual property. We have registered LOCATEPLUS.COM as a trademark with the United States Patent and Trademark Office. We maintain LOCATEPLUS and WORLDWIDE INFORMATION as unregistered trademarks relating to our products. We may, from time to time, claim certain other rights under trademark law, however, we currently have no other marks registered or pending with the United States Patent and Trademark Office or the equivalent agency of any other country. Patent protection is generally not available for compilations of data (such as our products), and therefore we have no patents on any of our products, and we currently do not anticipate any patents issuing with respect to any of our products. Similarly, rights under United States copyright law do not extend to mere compilations of data, although we may have certain rights under United States copyright law with respect to the organization, integration and presentation of our data. EMPLOYEES As of March 31, 2003, we had 39 employees. We believe that our relations with our employees are good. LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings, although claims may arise from time to time in the conduct of our operations. There can be no assurance at this time that any claims that may arise in connection with the conduct of our business will not materially adversely affect our business or operations, or divert our critical resources. 28 EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth specific information regarding our executive officers and directors as of March 31, 2003.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS - --------------------------------- --- ---------------------------------------------------------------------------------- Jon R. Latorella. . . . . . . . . 39 Chairman of the Board, President and Chief Executive Officer Sonia P. Bejjani. . . . . . . . . 34 Director; President-Worldwide Information, Inc. James C. Fields . . . . . . . . . 35 Vice President of Finance, Treasurer and Secretary, Acting Chief Financial Officer Steven W. Silva . . . . . . . . . 41 Vice President of Business Development Thomas Garlock(1) . . . . . . . . 46 Director John P. Houlihan (1). . . . . . . 57 Director Robert H. Kite(1) . . . . . . . . 48 Director Thomas E. Murphy(2) . . . . . . . 44 Director Gerard Scalley(2) . . . . . . . . 47 Director
(1) Member of our Compensation Committee. (2) Member of our Audit Committee. JON R. LATORELLA co-founded our business in 1991 and has been our Chief Executive Officer since we commenced our activities. Mr. Latorella is also the Chairman of our Board of Directors. Before founding our business, Mr. Latorella served as a consultant to various local and state law enforcement agencies. Mr. Latorella holds a Bachelor of Science/Bachelor of Arts from the University of Massachusetts, which he received in 1994. SONIA P. BEJJANI co-founded our business in 1991 and has been a member of our Board of Directors and employed by us in various capacities since we commenced our activities. For the five years ending August 1, 2001, Ms. Bejjani was our Vice President - Sales and Customer Service. Since August 1, 2001, Ms. Bejjani has been the President of Worldwide Information, Inc., our wholly-owned subsidiary. JAMES C. FIELDS was appointed our Vice President of Finance, Treasurer, Secretary and Acting Chief Financial Officer on March 31, 2003. Prior to that, Mr. Fields served as our Director of Finance since February 2001. Prior to joining us, Mr. Fields was the Controller and Vice President of operations at CO Space, a carrier neutral collocation company. Mr. Fields is a certified public accountant and holds a Bachelor of Arts in Accounting from the College of St. Scholastica, which he received in 1992, and a Masters of Business Administration from Babson College, which he received in 1999. STEVEN W. SILVA has been our Vice President of Business Development since January 2002. Mr. Silva was employed with SuperWings Inc., a developer of mobile field service management applications, as its Vice President of Business Development and Marketing from 2000 to 2002. During 2000, Mr. Silva was the Vice President of Strategic Marketing at ZipLink Inc., a provider of wholesale Internet connectivity solutions, where he was responsible for marketing, product management, business development and strategic alliances. From 1997 to 2000, Mr. Silva worked for eZenia! Inc., a provider of real time collaboration solutions, where he held worked as its Director of Technical Business Development. From 1990 to 1997, Mr. Silva also held channel sales and marketing positions with PictureTel Corporation, a provider of visual collaboration systems. Mr. Silva holds a Bachelor of Science in Business Administration/Economics from Salem State College, which he received in 1985. THOMAS GARLOCK has provided organizational and merger and acquisition consulting services to technology companies in the computer hardware/software and wireless telecommunications industry since 1980. Mr. Garlock has been the principal in a variety of communications license-based ventures that have developed cellular telephone systems in 55 "metropolitan statistical areas" in the United States. He is the co-founder and Chairman of In Sync Interactive Corporation, the nation's largest owner of interactive video data service licenses issued by the Federal Communications Commission. In October 2001, In Sync filed for bankruptcy protection with respect to 29 of its 42 subsidiaries. Mr. Garlock attended Kent State University, the University of California at Los Angeles, and the Otis 29 Parsons School of Design. Mr. Garlock joined our Board of Directors in October 1996, and is currently a member of our Compensation Committee. JOHN P. HOULIHAN has been President and owner of Zalkin, Inc., a worldwide exporter of used clothing with offices in Council Bluffs, Iowa and Brownsville, Texas, since 1979. Before that, Mr. Houlihan owned Goodrich Dairy, a chain of 47 retail stores, and Riekes Equipment, a material handling and forklift company. Mr. Houlihan holds a Bachelor of Arts from Creighton University, which he received in 1968, and a Juris Doctorate from Creighton University, which he received in 1971. Mr. Houlihan joined our Board of Directors in January 2001, and he is currently the Chairman of the Compensation Committee of our Board of Directors. ROBERT H. KITE has been President of KFT, Inc., the managing entity of KFT, LLLP, a private investment entity, since 1981. Mr. Kite has also served on the Board of National Energy, Inc., a publicly traded energy exploration and exploitation company, since 1987. National Energy, Inc. filed for Chapter 11 bankruptcy in 1999 and was subsequently reorganized. Mr. Kite is also on the Board of Directors of the FBI Citizens' Academy (Charter Academy) of Phoenix, Arizona, and Child Health U.S.A. of Scottsdale, Arizona. Mr. Kite holds a Bachelor of Science in Political Science and Psychology which he received from Southern Methodist University 1977. Mr. Kite joined our Board of Directors in December 2002, and is currently a member of the Compensation Committee of the Board of Directors. THOMAS E. MURPHY has been employed by Oftring & Company, Inc., a registered broker-dealer located in Worcester, Massachusetts, since 1989, where he currently holds the title of Senior Vice President. Mr. Murphy holds a Bachelors of the Arts in Investments from Babson College, which he received in 1981. Mr. Murphy joined our Board of Directors on March 28, 2003, and he is currently the chairman of the Audit Committee of our Board of Directors. GERARD SCALLEY has been employed by the Woburn, Massachusetts Police Department for the past 22 years, where he currently holds the rank of Lieutenant. His current responsibilities include supervision of that department's detective bureau and its Drug Abuse Resistance Education (DARE) program. He has also worked as a crime prevention officer and as commander of the North Eastern Massachusetts Law Enforcement Council Regional Drug Task Force. Mr. Scalley has been affiliated with numerous law enforcement related organizations during his career, including the National Technical Investigator's Association, the Narcotic Enforcement Officer's Association, the National DARE Officer's Association and the Irish American Police Officer's Association. Mr. Scalley also lectures at the University of Massachusetts at Lowell on criminal justice matters. Mr. Scalley received a Bachelor of Arts in Criminal Justice from Salem State College in 1998, and a Master of Arts in Criminal Justice from the University of Massachusetts at Lowell in 2000. Mr. Scalley joined our Board of Directors in June 2002, and is currently a member of our Audit Committee. We do not have any employment agreements with any of our employees. BOARD OF DIRECTORS We currently have seven members of our Board of Directors, who are elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees. Our Board of Directors currently has two committees, the Compensation Committee and the Audit Committee. AUDIT COMMITTEE The Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of our independent auditors, reviews the scope of the audit services provided by our independent accountants, and reviews our accounting practices and internal accounting controls. Currently, the members of the Audit Committee are Messrs. Murphy and Scalley. There is one vacancy on the Audit Committee of the Board of Directors. Mr. Murphy serves as the Chairman of the Audit Committee. 30 COMPENSATION COMMITTEE The compensation committee of the board of directors reviews and recommends To the board of directors the salaries, benefits and stock option Grants of all employees, consultants, directors and other individuals Compensated by us. The compensation committee also administers our equity Compensation plan and other employee benefits plans that we may adopt from time To time. Currently, the members of the compensation committee are messrs. Garlock, houlihan and kite. Mr. Houlihan serves as the Chairman of the Compensation Committee. DIRECTORS' COMPENSATION On February 1, 2002, we adopted a Non-employee Director Stock Option Policy. Under the Non-employee Director Stock Option Policy, we will make annual grants (beginning on the date of adoption of the policy or the first day that a director is elected to our Board of Directors, if later) to our non-employee directors of warrants to purchase 35,000 shares of our Class B Non-voting Common Stock as compensation for service on our Board of Directors (and any committees). Each of these warrants will be immediately exercisable and will have an exercise price that is equal to the fair market value of our Class B Non-voting Common Stock as of the date of grant. No separate compensation is provided to directors for service on either of our two committees. 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. We will also reimburse our directors for out-of-pocket costs associated with their activities on the Board of Directors. BENEFIT PLANS 1999 STOCK OPTION PLAN On November 16, 1999, our Board of Directors ratified and adopted an Incentive and Non-Qualified Stock Option Plan, which we refer to as the "1999 Stock Option Plan". The 1999 Stock Option Plan set aside 15,000,000 shares of our Class A Voting Common Stock (then referred to as our "Common Stock") for issuance pursuant to the exercise of incentive and non-qualified stock options to be awarded to our employees, officers and directors at the recommendation of the equity compensation plan's administrator and subject to the approval of our Board of Directors. We strongly believe in the concept of each employee having some form of equity participation as an incentive toward excellence in individual performance and our further success. In June 2000, our 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. As of March 31, 2003, 7,810,000 incentive stock options and 2,902,716 non-qualified stock options were outstanding under the equity compensation plan. The weighted average exercise price of all options granted under the equity compensation plan was $0.20 per share as of March 31, 2003. As of March 31, 2003, one option to purchase 5,000 shares of Class A Voting Common Stock had been exercised. The 1999 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. Our 1999 Stock Option Plan was approved by our stockholders on November 16, 1999. 2003 STOCK PLAN On March 28, 2003, the Board of Directors adopted the 2003 Stock Plan, an equity compensation plan which will allow us to grant awards of incentive and non-qualified (also referred to as "non-statutory") stock options, rights to acquire stock subject to forfeiture (i.e., restricted stock), and shares of stock not subject to forfeiture (i.e., stock bonuses) to our employees and consultants in consideration for services rendered for us. By means of the 2003 Stock Plan, we seek to retain the services of eligible recipients and to provide incentives for eligible recipients to exert efforts for our success, with the goal of maximizing shareholder value. We anticipate that we will file a registration statement on Form S-8 with respect to the shares available for issuance under that plan within 30 days of this prospectus. 31 A total of 25,000,000 shares of Class A Voting Common Stock, and 25,000,000 shares of Class B Non-voting Common Stock, are available under the 2003 Stock Plan. If there is a change of the number or kind of shares issuable under the 2003 Stock Plan as a result of declaration of stock dividend, stock split, combination, exchange, merger, consolidation, reclassification or any similar extraordinary event affecting either class of our common stock, an Adjustment will be made in the maximum aggregate number of shares that will be Subject to the 2003 stock plan, as well as in the number of shares Subject to outstanding options and the exercise price of options granted Under the 2003 stock plan. The Compensation Committee of the Board of Directors is authorized to determine the employees, officers, directors and consultants to whom awards will be granted and the number of shares subject to each award. The Compensation Committee also interprets the 2003 Stock Plan and the awards granted under that plan and is authorized to adopt, amend or rescind the rules and regulations and make all other determinations necessary or advisable for the administration of the 2003 Stock Plan. The Board may amend the 2003 Stock Plan at any time, although certain amendments would require stockholder approval, the approval of award recipients, or both. Among other things, the Compensation Committee of the Board of Directors has the discretion to determine the extent to which an option may be exercised in part and the extent to which any part may or may not be exercised prior to expiration of specified periods of time after the grant. However, no option will be exercisable to any extent after the expiration of ten years (five years in the case of an incentive stock option granted to a greater than 10% stockholder). The exercise price of incentive stock options granted under the 2003 Stock Plan must be at least equal to the fair market value of our Common Stock on the date of grant. The exercise price of incentive stock options granted to an option recipient who is a 10% or greater stockholder must equal at least 110% of the fair market value of the Common Stock on the date of grant. The exercise price of non-qualified stock options must be at least 85% of the fair market value of our Common Stock on the date of grant. PLANS NOT APPROVED BY SECURITY HOLDERS From time to time, we have issued options or warrants to employees and non-employees (such as directors, consultants, advisors, vendors, customers, suppliers and lenders) in exchange for services or other consideration provided to us. These issuances have not been made pursuant to a formal policy or plan, but instead are issued with such terms and conditions as may be determined by our Board of Directors from time to time. Generally, our stockholders have not approved or disapproved these issuances. The following table reflects equity compensation granted or issued by us as of the March 31, 2003, to employees and non-employees (such as directors, consultants, advisors, vendors, customers, suppliers and lenders) in exchange for consideration in the form of goods or services.
NUMBER OF SECURITIES TO BE - NUMBER OF SECURITIES REMAINING ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR FUTURE ISSUANCE OUTSTANDING OPTIONS, WARRANTS PRICE OF OUTSTANDING OPTIONS UNDER EQUITY COMPENSATION AND RIGHTS WARRANTS AND RIGHTS PLANS(1) ----------------------------- ----------------------------- ------------------------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS: Class A Voting Common Stock . . . . . . . . . . . . 10,712,716 $ 0.20 4,282,284 - ----------------------------- ----------------------------- ----------------------------- ------------------------------- Class B Non-voting Common Stock. . . . . . . . . 0 - - - ----------------------------- ----------------------------- ----------------------------- ------------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS: Class A Voting Common Stock . . . . . . . . . . . . 869,239 $ 0.41 N/A Class B Non-voting Common Stock. . . . . . . . . 4,897,139 $ 0.15 N/A - ----------------------------- ----------------------------- ----------------------------- ------------------------------- TOTAL: Class A Voting Common Stock . . . . . . . . . . . . 11,581,955 $ 0.21 N/A Class B Non-voting Common Stock. . . . . . . . . 4,897,139 $ 0.15 N/A - ----------------------------- ----------------------------- ----------------------------- -------------------------------
(1) Excludes securities reflected in column titled "Number of securities to be issued upon exercise of outstanding options, warrants and rights". 32 401(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. Mr. Murphy, a director who is otherwise entitled to participate in the Non-employee Directors Stock Option Policy, has waived his right to compensation (but not reimbursement of expenses incurred) in 2003. Pursuant to the Non-employee Directors Stock Option Policy: - - On February 1, 2002, Messrs. Garlock and Houlihan were each issued a warrant to purchase 35,000 shares of our Class B Non-voting Common Stock for $0.15 per share. - - On August 27, 2002, Dr. Richard B. Yules, a former member of our Board of Directors, was issued a warrant to purchase 35,000 shares of our Class B Non-voting Common Stock for $0.22 per share. - - On August 27, 2002, Mr. Scalley was issued a warrant to purchase 35,000 shares of our Class B Non-voting Common Stock for $0.22 per share. - - 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. * * * 33 SUMMARY COMPENSATION TABLE The following table sets forth, for 2002, 2001 and 2000, certain compensation paid by us, including salary, bonuses and certain other compensation, to our Chief Executive Officer and all other executive officers whose annual compensation for the years ended December 31, 2002, 2001 and 2000 exceeded $100,000.
SECURITIES UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND ($) ($) (#) ($) PRINCIPAL POSITION YEAR - ------------------------ ----------- JON R. LATORELLA . . . . 2002 50,100(1) - - 13,200(3) President and. . . . . . 2001 48,850(1) - - 13,200(3) Chief Executive Officer. 2000 127,462(1) 275,000(2) - 13,200(3) JAMES C. FIELDS(4) . . . 2002 104,160 - - - Acting Chief Financial . 2001 86,673 - 500,000 - Officer, Treasurer and . 2000 - - - - Secretary ROBERT A. GODDARD(5) . . 2002 123,658 - - 8,079(6) Former Chief Financial . 2001 123,802 - - 8,079(6) Officer, Treasurer and . 2000 125,000 125,000(2) - 6,384(6) Secretary
(1) Mr. Latorella elected to reduce his annual salary to $50,100 in September of 2000. On June 17, 2002, the Board of Directors voted to return Mr. Latorella's salary to his pre-reduction salary of $150,000 per annum. Notwithstanding the Board's vote, Mr. Latorella decided to forego the increase and, as a result, his salary was not modified in 2002. (2) On January 3, 2000, the Board of Directors approved, and we made, a term loan to Mr. Latorella in the amount of $275,000, and a loan to Mr. Goddard in the amount of $125,000. The loans included certain cancellation features if Mr. Latorella and Mr. Goddard, as applicable, remained employed by us through January 3, 2003. The loans were intended to deter Messrs. Latorella and Goddard from terminating their services for us as well as to provide executive compensation. As both Messrs. Latorella and Goddard remained employed with us as of January 3, 2003, these loans have been forgiven in accordance with the loans' terms, and, also in accordance with these loans' terms, certain tax equalization payments are anticipated to be made Messrs. Latorella and Goddard in 2004 (which we anticipate will not exceed $214,439 in the aggregate). (3) Mr. Latorella and his family are allowed use of two company cars, the value of which is approximately $1,100 per month to Mr. Latorella. (4) Mr. Fields commenced his employment with us in 2001. Mr. Fields became an executive officer with the Company on March 31, 2003. (5) Mr. Goddard ceased employment with us on March 31, 2003. As part of a severance arrangement that we entered into with Mr. Goddard, an incentive stock option to purchase 1,000,000 shares of Class A Voting Common Stock owned by Mr. Goddard was cancelled and, in lieu of that option, Mr. Goddard was issued a fully vested non-qualified stock option to purchase 250,000 shares with an exercise price of $0.15 per share. (6) Mr. Goddard received a monthly automobile allowance of $523 and a fuel allowance as part of his compensation; he will continue to do so until the end of his severance period (June 30, 2003). None of Messrs. Latorella, Goddard, or Fields was granted options or issued shares in 2002. None of Messrs. Latorella, Goddard or Fields exercised any option held by him in 2002. The table below outlines the value, as of December 31, 2002, of options granted to Messrs. Latorella, Goddard, and Fields in prior years that remain exercisable. 34
AGGREGATED FISCAL YEAR END OPTION VALUES NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT DECEMBER 31, 2002 VALUE OF UNEXERCISED IN-THE-MONEY (#) OPTIONS AT DECEMBER 31, 2002 EXERCISABLE/UNEXERCISABLE ($) NAME EXERCISABLE/UNEXERCISABLE(1) ------------------------------------ JON R. LATORELLA. . . . . . . . . . . . . 190,000 / 0(2) $ 11,400 / 0 President and Chief Executive Officer JAMES C. FIELDS . . . . . . . . . . . . . 250,000 / 250,000(3) $ 20,000 / 20,000 Acting Chief Financial Officer Treasurer and Secretary ROBERT A. GODDARD(3). . . . . . . . . . . 1,000,000 / 0(4)(5) $ 80,000 / 0 Former Chief Financial Officer Treasurer and Secretary
(1) Based on the closing price ($0.28 per share) of our Class A Voting Common Stock as quoted on the Over the Counter Bulletin Board. This amount reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. (2) Consists of options to purchase shares of Class A Voting Common Stock with an exercise price of $0.22 per share in the case of Mr. Latorella. (3) Consists of options to purchase 500,000 shares of Class A Voting Common Stock with an exercise price of $0.20. (4) Consists of options to purchase shares of Class A Voting Common Stock with an exercise price of $0.20 per share. (5) Mr. Goddard ceased his employment with us on March 31, 2003. On March 31, 2003, and in connection with a severance agreement that we entered into with Mr. Goddard, incentive stock option to purchase 1,000,000 shares of Class A Voting Common Stock owned by Mr. Goddard was cancelled and, in lieu of that option, Mr. Goddard was issued a fully vested non-qualified stock option to purchase 250,000 shares with an exercise price of $0.15 per share. ADVISORY BOARD On December 2, 1999, our Board of Directors authorized the formation of an Advisory Board to provide ongoing advice and consultation to the Board of Directors to enhance the development and operation of our LocatePLUS product. The Advisory Board will consist of up to eight members (none of which will be employees or directors) selected by the Board of Directors based on each candidate's experience, accomplishments and national recognition in the fields encompassed by our target markets. Compensation for members of our advisory board consists of expense reimbursement and a grant of a fully vested non-qualified stock option or immediately exercisable warrant. The Advisory Board meets informally from time to time with management. DALE C. JENKINS, JR. On December 2, 1999, we appointed Dale C. Jenkins, Jr., as the first member of our Advisory Board. In 1999, Mr. Jenkins was appointed to the position of Special Assistant for Law Enforcement and Public Safety to the Chancellor of Higher Education of the Commonwealth of Massachusetts. Mr. Jenkins was also appointed to the Advisory Board of the U.S. Commission on Civil Rights and the Massachusetts Governor's Crime Watch Committee and was a consultant to the U.S. Department of Justice. In addition, Mr. Jenkins directed the Lead Advanced Security Team for Presidents Ronald Reagan and George H. W. Bush and acted as Deputy Director of Inaugural Security for then President-Elect George H. W. Bush. On November 17, 1999, our Board of Directors granted a ten-year option to Mr. Jenkins to purchase 25,000 shares of our Class A Voting Common Stock with an exercise price of $0.20 per share as compensation for his services on the Advisory Board. 35 JAMES A. CORRY On July 20, 2000, our Board of Directors appointed James A. Corry as the second member of our Advisory Board. Since July 2001, Mr. Corry has been the Chief Operating Officer of Abel Telecom, Inc., based in Scottsdale, Arizona. Prior to that, Mr. Corry was a criminal investigation and security expert for the United States Secret Service. During his more than twenty years with that agency, Mr. Corry worked on security issues globally, conducting criminal and fraud investigations and managing the security of political personnel, including President George H. W. Bush. On June 1, 2001, the Board of Directors issued to Mr. Corry a ten-year option to purchase 25,000 shares of our Class A Voting Common Stock with an exercise price of $0.20 per share as compensation for his services on the Advisory Board. WILLIAM H. SHAHEEN On October 1, 2001, our Board of Directors appointed William H. Shaheen to our Advisory Board. Mr. Shaheen is currently the Managing Partner of the law firm of Shaheen and Cohen, with offices in Concord and Dover, New Hampshire. Mr. Shaheen served as U.S. Attorney for the District of New Hampshire from 1976 to 1981. In 1981, he was appointed a New Hampshire District Court Judge in Durham, New Hampshire. Mr. Shaheen resigned his judgeship in 1997 upon the election of his wife as Governor of the State of New Hampshire. On October 12, 2001 in consideration for his services on the Advisory Board, Mr. Shaheen received a ten-year warrant to purchase 25,000 shares of our Class B Non-voting Common Stock, with an exercise price of $0.20. DAVID G. DUCHESNEAU On October 1, 2001, our Board of Directors also appointed David G. Duchesneau to our Advisory Board. From 1991 to the present, Mr. Duchesneau has been General Manager of Standa, Inc., a full service private investigative agency and consulting firm. From 1971 to 1991, Mr. Duchesneau was the Commander and Senior Officer of the Organized Crime Unit and Fugitive Apprehensive Unit of the New Hampshire State Police. On October 12, 2001 Mr. Duchesneau was issued a ten-year warrant to purchase 25,000 shares of our Class B Non-voting Common Stock, with an exercise price of $0.20 per share in consideration for his services on the Advisory Board. CHARLES LYONS On November 20, 2001, our Board of Director appointed Charles Lyons to the Advisory Board. Mr. Lyons is the Superintendent Director of the Shawsheen Valley Technical School District located in Billerica, Massachusetts. He is also the Chairman of the Arlington, Massachusetts Board of Selectmen. On that date, our Board of Directors granted a ten-year warrant to Mr. Lyons to purchase 12,500 shares of 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. Matters Presented to Stockholders for Approval On May 29, 2003, we held our 2003 Annual Meeting of Stockholders, at which three matters were presented to the stockholders for approval: the election of our Board of Directors, the ratification of Carlin, Charron & Rosen LLP as our independent auditors for the year ending December 31, 2003, and the ratification of our 2003 Stock Plan. At the meeting, the stockholder votes for election of the Board were as follows:
Member For Against Abstain - -------------- ---------- ------- ------- Sonia Bejjani. 31,927,266 638,670 30,000 - -------------- ---------- ------- ------- Thomas Garlock 32,217,586 378,350 - - -------------- ---------- ------- ------- John Houlihan. 32,267,586 328,350 - - -------------- ---------- ------- ------- Robert Kite. . 32,215,036 380,900 - - -------------- ---------- ------- ------- Jon Latorella. 32,240,936 325,000 30,000 - -------------- ---------- ------- ------- Thomas Murphy. 32,265,936 330,000 - - -------------- ---------- ------- ------- Gerard Scalley 31,997,266 595,320 3,350 - -------------- ---------- ------- -------
Carlin, Charron & Rosen LLP was ratified as our independent auditors by our stockholders at the meeting by a vote of 32,580,086 shares in favor and 617,500 against with 125,000 abstaining. Our 2003 Stock Plan was ratified by our stockholders by a vote of 31,853,436 shares in favor and 617,500 against with 125,000 abstaining. * * * 36 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 equity, 100 shares of common stock, par value $0.01. We capitalized Worldwide Information, Inc. with all of our CD-ROM-based Worldwide Information business, in consideration for all of its equity, 100 shares of common stock, par value $0.01. We created these subsidiaries for two primary reasons: - - We wished to isolate any potential liabilities in one of our products (such as claims associated with errors or omissions in our databases, as described in the section above titled "Risk Factors" beginning on page 4) in a manner that would reduce the impact of any such liabilities on our other product line. There are no claims pending relating to errors or omissions in either of our two product lines, nor does management currently anticipate any such claims. However, as disclosed above, claims associated with defects in our databases may arise from time to time. - - We wished to administratively separate the operations associated with our LocatePLUS product from our Worldwide Information product. Operations associated with our Worldwide Information 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. LocatePLUS Holdings Corporation provides certain administrative and executive functions on behalf of each of the two subsidiaries, such as management of payroll and other accounts payable. We presently hold all of the equity of each subsidiary, and we account for each subsidiary on a consolidated basis. No options, warrants or similar rights to acquire equity in either subsidiary currently exists, nor do we anticipate any such rights being created in the future. We have no present intention of selling or otherwise disposing of either subsidiary. * * * 37 CERTAIN TRANSACTIONS On June 17, 2002, the Board of Directors 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. THOMAS GARLOCK (a member of our Board of Directors) In consideration for his service as a member of our Board of Directors and for strategic advisory and shareholder relations services rendered for us, we issued warrants to Mr. Garlock to purchase 386,670 shares of our Class B Non-voting Common Stock, of which warrants to purchase 324,581 were issued in December 2001 and warrants to purchase 62,089 were issued in February 2002. These ten-year warrants have an exercise price of $0.15 per share. In consideration for his strategic advisory and shareholder relations services, Mr. Garlock was also issued options under our 1999 Stock Option Plan to purchase an aggregate of 1,034,720 shares of our Class A Voting Stock (with an average exercise price of $0.31), of which options to purchase 836,112 were granted in November 1999, options to purchase 38,067 were granted in June 2001, and options to purchase 160,541 were granted in 2002. JOHN HOULIHAN (a member of our Board of Directors) On March 7, 2001, we borrowed $15,000 from Mr. Houlihan pursuant to a promissory note providing for an interest rate of 12% per annum. The interest on this loan was paid on April 26, 2001. On that date, the principal on this loan was exchanged for 150,000 shares of our Class B Non-voting Common Stock. In conjunction with this note, we also issued to Mr. Houlihan a warrant to purchase shares of our capital stock. This warrant currently permits Mr. Houlihan to purchase 75,000 shares of our Class A Voting Common Stock for $0.20 per share. ROBERT KITE (a member of our Board of Directors) Mr. Kite purchased 333,333 of our Units in our initial public offering under the terms and conditions of that offering. On December 5, 2002, we borrowed $250,000 from Mr. Kite through KFT LLLP, a private equity fund, pursuant to a promissory note providing for an interest rate of 10% per annum payable monthly. In conjunction with this note, we also issued to Mr. Kite a warrant to purchase shares of our capital stock. This warrant currently permits KFT LLLP to purchase 250,000 shares of the Company's Class B Non-Voting Common Stock at $0.22 per share. JON R. LATORELLA (our President and Chief Executive Officer and Chairman of our Board of Directors) Mr. Latorella elected to reduce his annual salary to $50,100 in September 2000. On June 17, 2002, the Board of Directors voted to return Mr. Latorella's salary prospectively to its pre-reduction level of $150,000 per annum. However, Mr. Latorella elected to forego that increase and, as a result, his salary remained approximately $50,000 per annum. On January 3, 2000, the Board of Directors approved, and we made, a ten year term loan to Mr. Latorella for $275,000, which we refer to as Mr. Latorella's "Incentive Loan." This Incentive Loan was intended to provide a bonus to Mr. Latorella for services rendered in conjunction with the development and launch of our LocatePLUS product and to deter Mr. Latorella from terminating his employment with us. The loan was evidenced by two promissory notes, pursuant to which interest on the loan was computed at an annual rate equal to the 90-day Treasury Bill Rate. Among other things, the Incentive Loan provided that, if Mr. Latorella was still employed by us as of January 3, 2003, then the obligations and debt evidenced by the notes would be immediately canceled, and we would make a tax equalization payment to Mr. Latorella. As a result, we amortized this loan assuming its cancellation as of January 3, 2003. As Mr. Latorella was employed by us on January 3, 2003, this loan has been forgiven in accordance with its terms, and we anticipate that, in accordance with the loan's terms, we will make a tax equalization payment to Mr. Latorella in 2004 in the amount of approximately $147,427. Mr. Latorella and his family are allowed use of two company cars, the value of which is approximately $1,100 per month to Mr. Latorella. 38 THOMAS MURPHY (a member of our Board of Directors) Mr. Murphy is a Vice President at Oftring & Company, Inc., the underwriter of our initial public offering. In connection certain private offerings prior to our initial public offering, we issued a five year warrant to purchase 300,000 shares of our Class B Non-Voting Common Stock with an exercise price of $0.30 per share. Oftring & Company has also been paid $166,000 in fees and expenses by us during 2002 for services as a placement agent and in connection with the initial public offering. ROBERT A. GODDARD (our former Chief Financial Officer; Mr. Goddard resigned on March 31, 2003) In connection with the cessation of his employment with the Company on March 31, 2003, we entered into a severance agreement with Mr. Goddard. Among other things, that severance agreement provides that he will receive three months' severance and, in exchange for canceling an incentive stock option to purchase 1,000,000 shares of our Class A Voting Common Stock with an exercise price of $0.20 per share, Mr. Goddard was issued an option to purchase 250,000 shares of our Class A Voting Common Stock with an exercise price of $0.15 per share. On January 3, 2000, the Board of Directors approved, and we made, a ten year term loan to Mr. Goddard for $125,000, which we refer to as Mr. Goddard's "Incentive Loan." This Incentive Loan was intended to provide a bonus to Mr. Goddard for services rendered in conjunction with the development and launch of our LocatePLUS product and to deter Mr. Goddard from terminating his employment with us. The loan was evidenced by a promissory note, pursuant to which interest on the loan was computed at an annual rate equal to the 90-day Treasury Bill Rate. Among other things, the Incentive Loan provided that, if Mr. Goddard was still employed by us as of January 3, 2003, then the obligations and debt evidenced by the note would be immediately and without further action by either party canceled, and we would make a tax equalization payment to Mr. Goddard. As a result, the Company amortized this loan assuming its cancellation as of January 3, 2003. As Mr. Goddard was employed by us on January 3, 2003, this loan has been forgiven in accordance with its terms, and we anticipate that, in accordance with the loan's terms, we will make a tax equalization payment to Mr. Goddard in 2004 in the amount of approximately $67,012. GREGORY B. LINDAE (a former member of our Board of Directors and a holder of more than 5% of our Class B Non-voting Common Stock; Mr. Lindae resigned from the Board of Directors on April 12, 2001) On January 31, 2002, we issued a ten-year warrant to Mr. Lindae to purchase 1,177,680 shares of our Class B Non-voting Common Stock for $0.15 per share for strategic advisory, investment banking and public relations services rendered by him. USE OF OUR ASSETS Certain of our executives are allowed use of company cars for both business and personal purposes. These cars have been capitalized as assets of the Company, totaling $104,379 as of December 31, 2002. * * * 39 PRINCIPAL STOCKHOLDERS As of the close of business on March 31, 2003, we had 54,850,293 shares of Class A Voting Common Stock and 68,640,726 shares of Class B Non-voting Common Stock issued and outstanding. There were also unexercised options and warrants issued to purchase 23,581,955 shares of Class A Voting Stock and unexercised warrants to purchase 5,202,139 shares of Class B Non-voting Common Stock (including both vested and unvested options). The table on the following page sets forth certain information known to us with respect to the beneficial ownership of our Class A Voting Common Stock and Class B Non-voting Common Stock as of the close of business on March 31, 2003, by: - - each of our directors; - - each of our executive officers; - - each person known to us to beneficially own more than 5% of either class of our common stock; and - - all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock underlying options or warrants held by that person that are currently exercisable or will become exercisable within 60 days of March 31, 2003 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. 40 OWNERSHIP OF LOCATEPLUS HOLDINGS CORPORATION SECURITIES
Class A Voting Common Stock Class B Non-voting Common Stock NUMBER OF SHARES BENEFICIAL OWNER BENEFICIALLY PERCENTAGE OF NUMBER OF SHARES - - OWNED SHARES BENEFICIALLY - - - OWNED - DIRECTORS - ------------------------------------- SONIA P. BEJJANI 2,500,000(1) 4.4% - THOMAS GARLOCK 1,577,838(2) 2.8% 421,670(3) JOHN P. HOULIHAN 550,000(4) * 2,395,000(5) ROBERT H. KITE 333,333(6) * 618,333(7) JON R. LATORELLA 27,690,500(8) 50.3% - THOMAS E. MURPHY 75,000(9) * 335,000(10) GERARD SCALLEY - - 35,000(11) OFFICERS - ------------------------------------- JAMES C. FIELDS 250,000(12) * - 5% STOCKHOLDERS - ------------------------------------- GREGORY LINDAE P.O. Box 9062 Truckee, CA 96162 700,000(13) 1.3% 6,300,000(14) MANAGEMENT GROUP - ------------------------------------- All directors and executive officers as a group (7 persons) 32,976,671(15) 55.6% 3,805,003(16) BENEFICIAL OWNER PERCENTAGE OF - - SHARES - - DIRECTORS - ------------------------------------- SONIA P. BEJJANI. . . . . . . . . . . - THOMAS GARLOCK. . . . . . . . . . . . * JOHN P. HOULIHAN. . . . . . . . . . . 3.5% ROBERT H. KITE. . . . . . . . . . . . * JON R. LATORELLA. . . . . . . . . . . - THOMAS E. MURPHY. . . . . . . . . . . * GERARD SCALLEY. . . . . . . . . . . . * OFFICERS - ------------------------------------- JAMES C. FIELDS . . . . . . . . . . . - 5% STOCKHOLDERS - ------------------------------------- GREGORY LINDAE P.O. Box 9062 Truckee, CA 96162 . . . . . . . . . . 9.0% MANAGEMENT GROUP - ------------------------------------- All directors and executive officers as a group (7 persons). . . . . . . . 5.5%
___________________________ * Less than one percent of outstanding shares. 41 (1) Consists of 2,500,000 shares issuable upon the exercise of an immediately exercisable option with an exercise price of $0.20 per share. (2) Includes (I) 543,118 shares held by the Kenai River Trust, over which Mr. Garlock has voting and dispositional authority; and (II) 1,034,720 shares issuable upon the exercise of immediately exercisable options with a weighted average exercise price of $0.20 per share. (3) Consists of 421,670 shares issuable upon exercise of immediately exercisable warrants with an exercise price of $0.15 per share (including warrants to purchase 70,000 shares granted pursuant to our Non-employee Directors' Stock Option Policy). (4) Includes (I) 75,000 shares held by the Houlihan Trust, over which Mr. Houlihan has voting and dispositional authority; and (II) 75,000 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.20 per share. (5) Includes (I) 425,000 shares held by the Houlihan Trust, over which Mr. Houlihan has voting and dispositional authority; (II) 66,667 shares held by Failte Investments, over which Mr. Houlihan has voting and dispositional authority; and (III) 70,000 shares issuable on the exercise of immediately exercisable warrants with an exercise price of $0.15 per share (granted pursuant to our Non-employee Directors' Stock Option Policy). 41 (6) Includes 333,333 shares issuable upon the exercise of three-year public warrants issued in our initial public offering, with an exercise price of $0.50 per share. (7) Includes (I) 250,000 shares issuable upon the exercise of immediately exercisable warrants to with an exercise price of $0.22 per share owned by KFT LLLP, over which Mr. Kite has voting and dispositional authority; and (II) 35,000 shares issuable upon the exercise of immediately exercisable options with an exercise price of $0.15 per share (granted pursuant to our Non-employee Directors' Stock Option Policy). (8) Includes 190,000 shares issuable upon the exercise of an immediately exercisable option with an exercise price of $0.22 per share. (9) Consists of 75,000 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.22 per share. (10) Includes 300,000 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.15 per share. (11) Consists of 35,000 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.15 per share (granted pursuant to our Non-employee Directors' Stock Option Policy). (12) Consists of the vested portion (250,000 shares) of an option to purchase 500,000 shares with an exercise price of $0.20 per share. The option will be vested in full on February 8, 2005, assuming Mr. Fields is employed by us as of that date. (13) Includes 564,840 shares issuable upon the exercise of a fully vested stock option with an exercise price of $0.20 per share. (14) Includes (I) 500,000 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.10 per share, and (II) 1,177,680 shares issuable upon the exercise of immediately exercisable warrants with an exercise price of $0.15 per share. (15) Includes 4,458,053 shares issuable upon the exercise of convertible securities (i.e., options and warrants). (16) Includes 1,111,670 shares issuable upon the exercise of warrants. * * * 42 DESCRIPTION OF CAPITAL STOCK The authorized capital of LocatePLUS Holdings Corporation consists of: - - 150,000,000 shares of Class A Voting Common Stock; and - - 250,000,000 shares of Class B Non-voting Common Stock. The following description of our capital stock does not purport to be complete and is governed by and qualified by our Second Amended and Restated Certificate of Incorporation (which we refer to as our "Charter") and By-laws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK As of July 15, 2003, there were 61,787,384 shares of Class A Voting Common Stock and 68,765,726 shares of Class B Non-Voting Common Stock issued and outstanding. The holders of both classes of our common stock are entitled to receive ratably dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of both classes of our common stock are entitled to share ratably in all assets remaining after payment of liabilities. Neither class of our common stock has any preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to either class of our common stock. CLASS A VOTING COMMON STOCK Shares of Class A Voting Common Stock are entitled to one vote per share held of record on all matters submitted to a vote of stockholders. Holders of Class A Voting Common Stock do not have cumulative voting rights, and, therefore, the holder of a majority of the shares of Class A Voting Common Stock (currently, Mr. Latorella) may elect all of our directors standing for election. CLASS B NON-VOTING COMMON STOCK Shares of Class B Non-voting Common Stock have no voting rights, but are otherwise identical to shares of Class A Voting Common Stock. CLASS A REDEEMABLE WARRANTS GENERAL Each Class A Redeemable Warrant entitles the holder to purchase one share of our Class A Voting Common Stock for $0.50 per share. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the Class A Redeemable Warrant certificate and as summarized below. Our Class A Redeemable Warrants may be exercised at any time until October 12, 2005, which is their expiration date. Those of our Class A Redeemable Warrants which have not previously been exercised will expire on the expiration date. A Class A Redeemable Warrant holder will not be deemed to be a holder of the underlying shares of our Class A Voting Common Stock for any purpose until the Class A Redeemable Warrant has been properly exercised. EXERCISE A Class A Redeemable Warrant holder may exercise our Class A Redeemable Warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of Class A Voting Common Stock underlying our Class A Redeemable Warrants are qualified for sale under the securities laws of the state in which the holder resides. We will use commercially reasonable efforts to maintain the registration of the Class A Voting Common Stock underlying the warrants until the expiration date of the Class A Redeemable Warrants and to qualify for sale the shares of Class A Voting Common Stock in each U.S. jurisdiction in which our Class A Redeemable Warrant holders reside, although we can give no guarantee that such registration will be permitted under applicable state law. 43 Our Class A Redeemable Warrants may be exercised by delivering to our Transfer Agent the applicable Class A Redeemable Warrant certificate on or prior to the expiration date, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of Class A Redeemable Warrants being exercised plus payment of any taxes required by the holder's jurisdiction. Fractional shares of Class A Voting Common Stock will not be issued upon exercise of our Class A Redeemable Warrants. ADJUSTMENTS OF EXERCISE PRICE If we effect any stock split or stock combination with respect to our Class A Voting Common Stock, the exercise price in effect immediately prior to such stock split or combination will be proportionately reduced or increased, as the case may be. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a Class A Redeemable Warrant. REDEMPTION We may repurchase the Class A Redeemable Warrants for $0.001 per warrant upon 30 days' notice to the holders of the Class A Redeemable Warrants in the event that the closing bid on the Over the Counter Bulletin Board for our Class A Voting Stock is at or above $1.25 per share for five consecutive days. RESTRICTED WARRANTS We have issued restricted warrants to purchase an aggregate of 5,488,489 shares of our Class A Voting Common Stock, for which the weighted average exercise price of these warrants is $0.20 per share. We have also issued restricted warrants to purchase an aggregate of 6,202,139 shares of our Class B Non-voting Common Stock, for which the weighted average exercise price of these warrants is $0.14 per share. These restricted warrants include "net issuance" provisions, permitting a holder to exchange a portion of the warrants for shares of the underlying security in lieu of payment of a cash exercise price. CONVERTIBLE NOTE In consideration for a $10,000 loan made to us on March 9, 2001, we issued a convertible promissory note. This convertible promissory note bears interest at the rate of 12% per annum. This note is convertible into 44,444 shares of our Class A Voting Common Stock at the election of the holder. The note originally matured on September 9, 2001. On July 22, 2002, the holder of the note agreed with us to convert the note into a demand note providing for quarterly payments of interest on the note until the principal of the note is repaid or converted. "BRIDGE NOTES AND WARRANTS" From September 2000 to January 2001, we sold $312,000 in convertible notes and restricted warrants in a private placement. We refer to these securities as our "Bridge Notes and Warrants". Pursuant to the terms of these securities, the Bridge Notes converted into 1,681,712 shares of Class A Voting Common Stock on October 12, 2002 (the closing of our initial public offering), and the Bridge Warrants were exercised or otherwise converted into 80,000 shares of Class A Voting Common Stock. As a result of these transactions, the Bridge Notes and Warrants are no longer outstanding. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION Our Charter provides that members of our Board of Directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director except for liability: - - 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. 44 Our Charter also provides that if the General Corporation Law of the State of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of members of our Board of Directors will be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Our Charter and By-laws also provide that we may indemnify our directors and officers to the fullest extent permitted by Delaware law. A right of indemnification shall continue as to a person who has ceased to be a director or officer and will inure to the benefit of the heirs and personal representatives of such a person. The indemnification provided by our Charter and By-laws will not be deemed exclusive of any other rights that may be provided now or in the future under any provision currently in effect or hereafter adopted by our Charter, By-laws, by any agreement, by vote of our stockholders, by resolution of our directors, by provision of law or otherwise. We have also secured directors' and officers' liability insurance on behalf of our directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons in accordance with the provisions contained in our Charter and By-laws, Delaware law or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and we will follow the court's determination. * * * 45 SHARES ELIGIBLE FOR FUTURE SALE Investors should note that, with the exception of shares held by our affiliates, all of our issued and outstanding shares of Class A Voting Common Stock and Class B Non-voting Common Stock, as well as shares of Class A Voting Common Stock and Class B Non-voting Common Stock underlying all of our issued options, warrants and convertible debt, are anticipated to be available for public resale, without restriction, either through our registration of those securities or through the provisions of the Securities and Exchange Commission's Rule 144(k). The following table outlines our capital stock as of the date of this prospectus:
Shares of Class A Voting Common Stock outstanding 61,787,384 (1) Shares of Class A Voting Common Stock issuable upon exercise of the put right 28,500,000 (2) ----------- Shares of Class A Voting Common Stock issued following such exercise 90,287,384 (2) Shares of Class B Non-voting Common Stock outstanding 68,765,726 (3) Total shares of both classes of Common Stock outstanding 159,053,110 (1)(2)(3)
______________ (1) Assuming no exercise or conversion of: - - warrants to purchase 18,894,739 shares of Class A Voting Common Stock currently outstanding; - - options to purchase up to 13,833,300 shares of Class A Voting Common Stock pursuant to our 1999 Incentive and Non-qualified Stock Option Plan; - - options to purchase up to 25,000,000 shares of Class A Voting Common Stock pursuant to our 2003 Stock Plan; or - - debt convertible into 44,444 shares of Class A Voting Common Stock at the election of one debtholder. (2) Assuming, for presentation purposes only, the exercise of the put right to sell up to $5.0 million in shares of our Class A Voting Common Stock is exercised at a time at when the lowest closing bid price on the Over-the-Counter Bulletin Board of our Class A Voting Common Stock during the ten day period following our put notice is $0.185. (3) Assuming no exercise or conversion of: - - warrants and options to purchase up to 6,422,139 shares of Class B Non-voting Common Stock; or - - options to purchase up to 25,000,000 shares of Class B Non-Voting Common Stock pursuant to our 2003 Stock Plan. As of the date of this prospectus, our affiliates hold 28,518,618 shares of Class A Voting Common Stock and 2,658,333 shares of our Class B Non-voting Common Stock. In general, under Rule 144, as currently in effect, after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned shares of our common stock for at least one year, including any person who is deemed to be our affiliate, will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - - 1% of the number of shares of such class of common stock then outstanding, which will equal approximately 617,874 shares (in the case of Class A Voting Common Stock) and 687,657 shares (in the case of our Class B Non-voting Common Stock); or - - the average weekly trading volume of our Common Stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also governed by other requirements regarding the manner of sale, notice filing and the availability of current public information about us. Under Rule 144(k), however, a person who is not, and for the three months prior to the sale of such shares has not been, an affiliate of the company will be free to sell "restricted securities" (e.g., shares issued in a private placement) which have been held for at least two years without regard to the limitations described above. 46 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our securities is Transfer Online, Inc. Transfer Online's address is 227 SW Pine Street, Suite 300, Portland, Oregon 97204. LEGAL MATTERS The validity of the securities offered by this prospectus will be passed upon for us by Kirkpatrick & Lockhart LLP. EXPERTS The financial statements as of December 31, 2001 and 2002 and for each of the years in the period ended December 31, 2001 and 2002 included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 1 to the financial statements) of Carlin, Charron, & Rosen, LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of Common Stock in the offering, of which this prospectus is a part. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and the Units, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov. * * * 47 LOCATEPLUS HOLDINGS CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Accountants..................................F-1 Consolidated Balance Sheets as of December 31, 2002, and March 31, 2003 (unaudited)........................................F-2 Consolidated Statements of Operations for the years ended December 31, 2001 and 2002, and for the three months ended March 31, 2002 (unaudited) and 2003 (unaudited).................F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2001 and 2002, and for the three months ended March 31, 2003 (unaudited)..............F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2002, and for the three months ended March 31, 2002 (unaudited) and 2003 (unaudited).................F-5 Notes to Consolidated Financial Statements........................F-6 REPORT OF INDEPENDENT ACCOUNTANTS 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, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LocatePLUS Holdings Corporation as of December 31, 2002, and the results of its consolidated operations and its consolidated cash flows for each of the two years in the period ended December 31, 2002, 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, 2002 and has suffered substantial net losses in each of the last two years, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are disclosed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. CARLIN, CHARRON & ROSEN LLP Worcester, Massachusetts March 24, 2003 The accompanying financial statements as of March 31, 2003 and for the three months ended March 31, 2003, and 2002 have not been audited as disclosed in Note 1. F-1
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 2003 2002 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 1,593,416 $ 1,661,213 Accounts receivable, trade - net . . . . . . . . . . . . . . . . . . . 369,338 269,566 Prepaid expenses and other current assets. . . . . . . . . . . . . . . 531,351 375,966 Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191,132 1,231,474 Total current assets . . . . . . . . . . . . . . . . . . . . . . . 3,685,237 3,538,219 Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . 1,186,569 1,301,468 Security deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,790 97,748 Notes receivable - related parties, net. . . . . . . . . . . . . . . . . 1,389 9,722 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,970,985 $ 4,947,157 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454,144 $ 293,900 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326,531 1,177,014 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 559,254 433,942 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,334 124,459 Current portion of capital lease obligation. . . . . . . . . . . . . . 119,305 142,172 Note payable - related party . . . . . . . . . . . . . . . . . . . . . 222,268 211,867 Convertible notes payable. . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 Total current liabilities. . . . . . . . . . . . . . . . . . . . . 2,786,836 2,393,354 Notes Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,299 - Capital lease obligation, net of current portion . . . . . . . . . . . . 176,978 202,222 Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 3,183,113 2,595,576 Stockholders' equity: Class A common stock, $0.01 par value; 150,000,000 shares authorized; 54,850,292 shares issued and outstanding at December 31, 2002. . . . . . 548,503 548,503 Class B common stock, $0.01 par value, 250,000,000 shares authorized; 68,640,726 shares issued and outstanding at December 31, 2002. . . . . . 686,407 686,407 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 17,749,748 17,749,748 Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,868,879 1,824,833 Common stock subscriptions receivable. . . . . . . . . . . . . . . . . - (174,908) Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (19,065,665) (18,283,002) Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 1,787,872 2,351,581 Total liabilities and stockholders' equity . . . . . . . . . . . . $ 4,970,985 $ 4,947,157
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-2
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED MARCH 31, DECEMBER 31, ----------------------------- ----------------------------- 2003 2002 2002 2001 (UNAUDITED) (UNAUDITED) Revenues: Information Sales - CD Rom. . . . . . . . . . . . $ 130,159 $ 66,494 $ 345,003 $ 268,701 - Online. . . . . . . . . . . . 571,249 277,547 1,471,188 752,109 - Channel Partner . . . . . . . 44,053 4,114 32,284 - - Wireless. . . . . . . . . . . 1,485 - 1,980 - Engineering Services. . . . . . . . 10,667 - 53,333 388,187 --------------- ------------ ------------- ------------ Total revenues. . . . . . . . . . . 757,613 348,155 1,903,788 1,408,997 --------------- ------------ ------------- ------------ Costs and expenses: Costs of revenues CD Rom . . . . . . . . . . . . . 14,742 26,173 90,397 96,561 Online and Channel Partner . . . 514,977 190,983 1,217,809 986,240 Engineering. . . . . . . . . . . 687 - 9,297 49,347 Wireless . . . . . . . . . . . . 3,115 - 1,100 - Selling and marketing . . . . . . . 245,599 274,980 1,001,529 799,486 General and administrative. . . . . 730,567 903,581 3,257,546 3,317,128 --------------- ------------ ------------- ------------ Total operating expenses . . . . 1,509,687 1,395,717 5,577,678 5,248,762 --------------- ------------ ------------- ------------ Operating loss . . . . . . . . . . . . (752,074) (1,047,562) (3,673,890) (3,839,765) Other income (expense): Interest income . . . . . . . . . . 34,413 16,426 53,835 67,768 Interest expense. . . . . . . . . . (77,063) (34,744) (397,674) (590,970) Other income. . . . . . . . . . . . 12,061 4,548 21,122 6,712 --------------- ------------ ------------- ------------ Net loss . . . . . . . . . . . . . . . $ (782,663) $ (1,061,332) $ (3,996,607) $(4,356,255) =============== ============ ============= ============ Basic and diluted net loss per share. . . . . . . . . . . . . . . . . $ (0.006) $ (0.010) $ (0.036) $ (0.044) Shares used in computing basic and diluted net loss per share . . . . 123,491,018 108,397,027 111,798,301 99,613,673
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-3
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CLASS A CLASS B ADDITIONAL COMMON STOCK COMMON STOCK PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL Balance at December 31, 2000 . . . . . . . . . . . . . . . . . 53,108,580 $531,086 - $ - $ 8,846,452 Issuance of detachable warrants to purchase common stock in conjunction with convertible debt . . . . . . . . . . - - - - - Issuance of options to purchase common stock in exchange for services. . . . . . . . . . . . - - - - 101,488 Beneficial conversion feature on convertible debt. . . . . . . . . . . . . . . . . . . . . . . - - - - 293,912 Issuance of common stock at $0.10 per share, net of issuance costs of $1,750. . . . . . . . . . - - 30,209,121 302,091 2,717,071 Issuance of common stock in exchange for services. . . . . . . . . . . . . . . . . . . . . - - 75,000 750 6,750 Issuance of common stock at $0.15 per share, net of issuance costs of $22,626 . . . . . . . . . - - 12,307,836 123,078 1,700,472 Issuance of warrants to purchase common stock in exchange for services . . . . . . . . . . . . - - - - - Exchange of convertible notes payable to related Party plus accrued interest at $0.075 per share. . . . . . . . - - 2,996,000 29,960 269,640 Exchange of convertible notes payable plus accrued interest at $0.10 per share. . . . . . . . . . . . . . - - 2,672,430 26,724 240,519 Exchange of convertible notes payable plus accrued interest at $0.15 per share. . . . . . . . . . . . . . - - 266,667 2,667 37,333 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - ---------- -------- ---------- -------- ----------- Balance at December 31, 2001 . . . . . . . . . . . . . . . . . 53,108,580 531,086 48,527,054 485,270 14,213,637 ---------- -------- ---------- -------- ----------- Payment of stock subscription receivable . . . . . . . . . . . - - - - - Issuance of common stock at $0.15 per share, net of issuance costs of $28,478. . . . . . . . . . - - 8,113,672 81,137 1,107,436 Issuance of warrants to purchase common stock in exchange for services. . . . . . . . . . . . . - - - - - Issuance of Units at $0.30 per unit net of $590,662 issuance cost . . . . . . . . . . . . . . - - 12,000,000 120,000 1,929,338 Exchange of convertible notes payable plus accrued interest at $0.22 per share . . . . . . . . . . . 1,681,712 16,817 - - 386,794 Exercise of detachable warrants. . . . . . . . . . . . . . . . 60,000 600 - - 8,040 Beneficial conversion feature on convertible debt. . . . . . . - - - - 104,503 Issuance of detachable warrants to purchase common stock in conjunction with debt and lease financing . . . . . . - - - - - Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - ---------- -------- ---------- -------- ----------- Balance at December 31, 2002 . . . . . . . . . . . . . . . . . 54,850,292 $548,503 68,640,726 $686,407 $17,749,748 ---------- -------- ---------- -------- ----------- Payment of stock subscription receivable . . . . . . . . . . . - - - - - Issuance of detachable warrants to purchase common stock in conjunction with debt and lease financing . . . . . . - - - - - Net loss for the three months ended March 31, 2003 (unaudited) - - - - - ---------- -------- ---------- -------- ----------- Balance at March 31, 2003. . . . . . . . . . . . . . . . . . . 54,850,292 $548,503 68,640,726 $686,407 $17,749,748 ---------- -------- ---------- -------- ----------- LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON WARRANTS STOCK - TOTAL - SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS' - RECEIVABLE DEFICIT EQUITY Balance at December 31, 2000 . . . . . . . . . . . . . . . . . $ 126,732 $ - $ (9,930,140) $ (425,870) Issuance of detachable warrants to purchase common stock in conjunction with convertible debt . . . . . . . . . . 126,541 - - 126,541 Issuance of options to purchase common stock in exchange for services. . . . . . . . . . . . - - - 101,488 Beneficial conversion feature on convertible debt. . . . . . . . . . . . . . . . . . . . . . . - - - 293,912 Issuance of common stock at $0.10 per share, net of issuance costs of $1,750. . . . . . . . . . - (4,500) - 3,014,662 Issuance of common stock in exchange for services. . . . . . . . . . . . . . . . . . . . . - - - 7,500 Issuance of common stock at $0.15 per share, net of issuance costs of $22,626 . . . . . . . . . - - - 1,823,550 Issuance of warrants to purchase common stock in exchange for services . . . . . . . . . . . . 294,721 - - 294,721 Exchange of convertible notes payable to related Party plus accrued interest at $0.075 per share. . . . . . . . - - - 299,600 Exchange of convertible notes payable plus accrued interest at $0.10 per share. . . . . . . . . . . . . . - - - 267,243 Exchange of convertible notes payable plus accrued interest at $0.15 per share. . . . . . . . . . . . . . - - - 40,000 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (4,356,255) (4,356,255) ---------- --------------- ------------- --------------- Balance at December 31, 2001 . . . . . . . . . . . . . . . . . 547,994 (4,500) (14,286,395) 1,487,092 ---------- --------------- ------------- --------------- Payment of stock subscription receivable . . . . . . . . . . . - 4,500 - 4,500 Issuance of common stock at $0.15 per share, net of issuance costs of $28,478. . . . . . . . . . - - - 1,188,573 Issuance of warrants to purchase common stock in exchange for services. . . . . . . . . . . . . 236,177 - - 236,177 Issuance of Units at $0.30 per unit net of $590,662 issuance cost . . . . . . . . . . . . . . 960,000 (174,908) - 2,834,430 Exchange of convertible notes payable plus accrued interest at $0.22 per share . . . . . . . . . . . - - - 403,611 Exercise of detachable warrants. . . . . . . . . . . . . . . . - - - 8,640 Beneficial conversion feature on convertible debt. . . . . . . - - - 104,503 Issuance of detachable warrants to purchase common stock in conjunction with debt and lease financing . . . . . . 80,662 - - 80,662 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (3,996,607) (3,996,607) ---------- --------------- ------------- --------------- Balance at December 31, 2002 . . . . . . . . . . . . . . . . . $1,824,833 $ (174,908) $(18,283,002) $ 2,351,581 ---------- --------------- ------------- --------------- Payment of stock subscription receivable . . . . . . . . . . . - 174,908 - 174,908 Issuance of detachable warrants to purchase common stock in conjunction with debt and lease financing . . . . . . 44,046 - - 44,046 Net loss for the three months ended March 31, 2003 (unaudited) - - (782,663) (782,663) ---------- --------------- ------------- --------------- Balance at March 31, 2003. . . . . . . . . . . . . . . . . . . $1,868,879 $ - $(19,065,665) $ 1,787,872 ========== =============== ============= ===============
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-4
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FOR THE YEARS MONTHS ENDED ENDED MARCH 31, DECEMBER 31, 2003 2002 2002 2001 (UNAUDITED) (UNAUDITED) - - CASH FLOWS FROM OPERATING ACTIVITIES: Net loss. . . . . . . . . . . . . . . . . . . . $ (782,663) $ (1,061,332) $(3,996,607) $(4,356,255) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment . . . . . . . . . . . 121,298 117,387 475,542 421,542 Provision for doubtful accounts. . . . . . . 10,592 6,689 32,180 - Interest on convertible debt converted into common stock. . . . . . . . . - - - 26,943 Interest expense related to warrants issued with debt. . . . . . . . . . 16,651 - 4,020 126,541 Interest expense related to beneficial conversion features . . . . . . . - 12,699 104,503 293,912 Interest expense recorded on mandatorily convertible debt . . . . . . . . - - 40,773 45,863 Loss on sale of property and equipment. . . . . . . . . . . . . . . . . . - - - 4,940 Amortization of notes receivable from related parties . . . . . . . . . . . . 8,333 33,333 133,334 133,333 Expense recorded upon exchange Of convertible notes payable to a related party. . . . . . . . . . . . . . . - - - 74,900 Expense recorded for fair value of common stock issued for services . . . . . . . . . . . . . . . . - - - 7,500 Expense recorded for fair value of options and warrants issued for services. . . . . . . . . . . . . - 184,513 238,603 396,209 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . (110,364) (57,802) (148,156) (62,431) Prepaid expenses and other assets. . . . . . . . . . . . . . . (155,385) (240,501) (154,432) (111,924) Security deposits . . . . . . . . . . . . 149,518 32,769 50,488 (15,847) Accounts payable. . . . . . . . . . . . . 125,312 (61,269) 115,678 (165,246) Accrued expenses. . . . . . . . . . . . . (29,125) 34,395 101,550 141,317 Deferred revenue. . . . . . . . . . . . . (42) 50,238 (145,545) (49,189) --------------- --------------- ------------ ------------ Net cash used in operating activities . . . . . . . . . (645,875) (948,881) (3,148,069) (3,087,892) --------------- --------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Principal repayment of purchased notes receivable . . . . . . . . . 81,492 750,000 1,018,525 - Purchase of notes receivable . . . . . . . . (41,147) - (1,250,000) (1,000,000) Purchases of property and equipment. . . . . (6,405) (112,006) (150,636) (310,167) Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . - - - 12,000 --------------- --------------- ------------ ------------ Net cash used in investing activities . . . . . . . . . . . . . . 33,940 637,994 (382,111) (1,298,167) --------------- --------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash overdraft. . . . . . . . . . - - - (16,395) Repayment of debt. . . . . . . . . . . . . . (21,831) - (600,000) (30,000) Proceeds from issuance of debt . . . . . . . 440,000 - 1,382,900 551,000 Payments of obligation under capital lease. . . . . . . . . . . . . . . . (48,939) (40,191) (169,514) (40,894) Proceeds from issuance of common stock and collection of stock subscriptions receivable, net of issuance costs. . . . . . . . . . . . 174,908 1,193,073 3,662,143 4,838,212 --------------- --------------- ------------ ------------ Net cash provided by financing activities . . . . . . . . . 544,138 1,152,882 4,275,529 5,301,923 --------------- --------------- ------------ ------------ Net increase in cash and cash equivalents . . . (67,797) 841,995 745,349 915,864 Cash and cash equivalents, beginning of period. 1,661,213 915,864 915,864 - --------------- --------------- ------------ ------------ Cash and cash equivalents, end of period. . . . $ 1,593,416 $ 1,757,859 $1, 661,213 $ 915,864 =============== =============== ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest. . . . . . . . . . . . . - - $ 144,215 $ 97,711 - - Supplemental disclosure of non-cash investing and financing activities: Acquisition of property and Equipment under capital leases. . . . . . . . . - - $ 211,436 $ - Exchange of convertible debt for common stock. . . . . . . . . . . . . . . . . . - - 312,000 505,000 Relative fair value of detachable warrants issued in conjunction with convertible debt. . . . . . . . . . . . . . . . - - 4,020 126,541 Value ascribed to beneficial conversion features on convertible debt . . . . - - 104,503 293,912 Issuance of common stock for subscription receivable . . . . . . . . . . . . - - 174,908 4,500 Fair value of warrants issued in conjunction with prepaid legal. . . . . . . . . - - 26,687 -
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-5 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION LocatePLUS Holdings Corporation (the "Company") was initially incorporated in Massachusetts in 1996 as Worldwide Information, Inc. In July 1999, the Company reincorporated in Delaware and changed its name to LocatePLUS.com, Inc. On August 1, 2001, the Company changed its name from LocatePLUS.com, Inc. to LocatePLUS Holdings Corporation as part of a corporate restructuring. As part of the restructuring, the Company created two wholly-owned subsidiaries, LocatePLUS Corporation and Worldwide Information, Inc. The restructuring was completed by commonly-controlled entities and, accordingly, was accounted for based on historical cost. All intercompany accounts 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. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements of the Company for the three months ended March 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2003, and for the three months ended March 31, 2003 and 2002. 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 results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any future period. LIQUIDITY AND OPERATIONS The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred substantial losses in each of the last two years, as well as the quarter ended March 31, 2003. In addition, the Company has incurred an accumulated deficit of approximately $19.1 million through March 31, 2003. The financial statements included in this report have been prepared assuming that the Company will continue as a going concern, and contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred significant net losses in each of the last two years as well as the quarter ended March 31, 2003. In addition, the Company has incurred an accumulated deficit of approximately $19.1 million through March 31, 2003. The Company raised approximately $4.8 million of equity during 2002 and $440,000 of debt in the quarter ended March 31, 2003. 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. Management believes the Company's current sources of liquidity, funding, and customer demand are adequate to sustain its current level of operations through the end of 2003. Management's plans include increasing sales, expanding infrastructure, and hiring additional staff. To accomplish this will require obtaining additional financing. Management plans to explore both debt and equity options, which the board of directors is willing to pursue. There can be no assurance, however that the Company's operations will be profitable or generate sufficient cash to fund the business in the future or that the Company will be able to obtain additional financing if needed. These circumstances raise substantial doubt about the Company's ability to continue as a going F-6 concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all 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, notes receivable, and the notes receivable - related parties. The risk with respect to cash and cash equivalents is minimized by the Company's policies in which such investments are placed only with highly rated financial institutions and in instruments with relatively short maturities. The financial stability of these financial institutions is constantly reviewed by senior management. The notes receivable are placed with unrelated companies that are also reviewed by management. Consequently, the carrying value of cash and cash equivalents, and notes receivable approximates their fair value based on the short-term maturities of these instruments. The risk with respect to accounts receivable is minimized by the large number of customers comprising the Company's customer base, none of which are individually significant, and by their dispersion across many geographical regions. The Company generally does not require collateral, but evaluations of customers' credit and financial condition are performed periodically. The notes receivable - related parties are being amortized to expense as they will be completely forgiven in 2003. 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. 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. UNUSED SICK LEAVE Employees of the Company are entitled to paid sick days off, which may be accumulated indefinitely. Unused sick leave in the event of termination, however, is forfeited and is not reimbursable to the employee. It is impracticable to estimate the amount of compensation for such future absences and, accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the cost of sick time when actually paid to employees. 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 F-7 customer is entitled. Deferred revenue principally relates to undelivered compact disks. Subsequent to October, 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 2001 related to integration services provided to a third party database provider with whom the Company was to have an arrangement whereby the Company provided the third party access to the Company's database. This arrangement was not consummated and the third party paid the Company for software development services through the date of termination. Engineering services in 2002 relate to integration services provided to a third party database provider with whom the Company has an arrangement whereby the Company provides the third party access to the Company's database. Revenue is recognized over the term of the contract when there is evidence of an arrangement, the fees are fixed or determinable, and collectibility is reasonably assured. COSTS OF REVENUES AND SOFTWARE DEVELOPMENT COSTS Costs of revenues relating to CD Rom sales consist primarily of costs for data acquisition, materials and costs associated with compilation of compact disks, such as labor. Costs of revenues relating to online sales consist primarily of costs for license agreements related to data acquisition, software development and maintenance costs and costs associated with delivery of such services that include labor and depreciation. Software development costs are generally charged to operations as incurred, as they relate to ongoing maintenance of data and the Company's website. The Company evaluates certain software development costs for capitalization in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Costs incurred relating to the Company's own personnel and outside consultants who are directly associated with software developed for internal use may be capitalized. Costs eligible for capitalization under SOP 98-1 have been immaterial to date. STOCK COMPENSATION PLANS The Company accounts for stock option awards granted to officers, directors and employees (collectively "employees") under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no stock-based employee compensation cost is reflected in net income, as all options granted to employees under these plans have been granted at no less than fair market value on the date of grant. The Company applies the disclosure only provisions of statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-based Compensation" ("SFAS 123") and SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS 148") for such employee stock option awards. The Company accounts for stock option awards granted to consultants under the fair value recognition provisions of SFAS 123. Under this method, options are valued using the Black-Scholes option pricing method, and the calculated option value is recorded as an expense in the financial statements F-8 For purposes of providing pro forma disclosures for employee grants, the fair value of options was estimated at the date of grant using the minimum value option pricing method since all employee options were issued prior to the Company's Initial Public Offering of securities during the current year with the following weighted average assumptions:
2002 2001 Expected life (years). . . . . . 5 5 Average risk-free interest rate. 2.8% 5.5% Volatility . . . . . . . . . . . 0.00% 0.00% Dividend yield . . . . . . . . . 0.00% 0.00%
The weighted average fair value of options granted during 2002 and 2001 was .03 and .05 respectively. The Company recognizes forfeitures as they occur. Had the Company determined compensation expense for the Plan in accordance with the fair value methodology prescribed by SFAS 123, the Company's pro forma net loss and loss per share would have been as follows:
YEAR ENDED DECEMBER 31 ------------------------ 2002 2001 ------------------------ ------------ Net loss - reported. . . . . . . . . . . . . . . $ (3,996,607) $(4,356,255) Amortization of stock compensation expense . . . (100,407) (79,337) Pro forma net loss . . . . . . . . . . . . . . . $ (4,097,014) $(4,435,592) ------------------------ ------------ Pro forma net loss per share - basic and diluted $ (0.04) $ (0.04) ======================== ============
For purposes of this disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods. The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years since the pro forma expense includes only one year of option grants. EARNINGS PER SHARE Basic earnings per share is based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume the issuance of potential common shares that have an anti-dilutive effect. Diluted per share computations are not presented since the effect would be antidilutive. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT PRONOUNCEMENTS During 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This statement requires the Company to estimate the fair value of liabilities associated with asset retirement obligations. The associated asset retirement costs are to be capitalized as part of the carrying value of the long-lived asset and allocated to expense over the asset's useful life. The Company is currently evaluating the effects of this pronouncement. In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability F-9 Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring" which previously governed the accounting treatment for restructuring activities. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". These costs include, but are not limited to, the following: (1) termination benefits provided to current employees who are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred-compensation contract, (2) costs to terminate a contract that is not a capital lease, and (3) costs to consolidate facilities or relocate employees. SFAS 146 does not apply to costs associated with the retirement of long-lived assets covered by SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 146 will be applied prospectively and is effective for exit or disposal activities initiated after December 31, 2002. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-based Compensation and Disclosure - an amendment of FASB Statement No.123" (FAS 148). This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative transition methods for a voluntary change to fair value accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management is currently evaluating the effects of this pronouncement. 3. ACCOUNTS RECEIVABLE, TRADE Trade accounts receivable are presented net of an allowance for doubtful collections of $41,078 at December 31, 2002. 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. 4. NOTES RECEIVABLE RELATED PARTIES During 2000, the Company issued cash loans of $400,000 in exchange for promissory notes from certain officers. Although the notes were due January 3, 2010, in the event that, as of January 3, 2003, the officers were (i) still employed by the Company; (ii) an independent contractor of the Company; or (iii) a member of the Company's Board of Directors, then the obligations and debt evidenced by the notes would be canceled without further action by any party. In the event that the note is canceled pursuant to the conditions noted above, the Company agrees to pay to the officer, no later than two months after the end of the officer's applicable tax year in which such cancellation occurs, an amount in cash sufficient to fulfill the officer's tax liability attributable to the cancellation of the notes. As such, the Company has been expensing the principal of the notes on a monthly basis and in 2002 and 2001 recognized $133,000 each year of amortization expense on notes receivable from related parties. Additionally, the Company has accrued approximately $44,000 in 2002 and $57,000 in 2001 ($209,000 cumulative through December 31, 2002) relating to an estimate of the officers' tax liability expected to be reimbursed by the Company. UNRELATED PARTIES Demand promissory note receivable with an unrelated leasing company, with an 11% interest rate. One million dollars was advanced to the leasing company near the end of 2002 as proceeds from the Company's initial public offering were collected. There is no business relationship between the Company and this leasing company or any officers or directors of either company. Interest income on the note receivable was approximately $23,000 in 2002 and $58,000 in 2001 and the entire $81,000 is unpaid at December 31, 2002 which is included in prepaid expenses and other current assets. The remaining principal balance at December 31, 2002 and March 31, 2003 was $1,095,000 and $1,014,000 respectively. Unsecured note payable with an unrelated entity. There is an oral agreement to advance up to $250,000 on this note. There is no business relationship between the Company and this entity or any officers or directors of either company, except that the Company is currently performing some administrative and bookkeeping services for the unrelated entity in exchange for approximately $1,000 per month. In 2002, F-10 the Company advanced a total of $250,000 to this unrelated entity in the form of cash and services. The remaining balance at December 31, 2002, and March 31, 2003 was $136,474 and $177,000 respectively. There is no stated interest rate on these advances but the Company believes it is entitled to warrants that would allow it to buy stock in the unrelated entity; however, the terms and conditions of the warrants have yet to be agreed on. 5. INVESTMENT During 2000, the Company entered into certain agreements, as amended, with a third party ("IntelliCorp") under which the Company invested cash of $500,000 in exchange for contingently convertible promissory notes. The Company reserved all amounts owed to it by IntelliCorp. On January 22, 2002 both parties agreed to the repayment of the $500,000 through an addendum to the Channel Partner Agreement signed in August 2001 between the parties. The addendum provides for a 75:25 sharing of revenues received by the third party resulting from this Channel Partner Agreement in favor of the Company. One third of proceeds remitted to the Company under this arrangement will be treated as repayment of the $500,000 plus accrued interest and the balance will be recorded as revenue. On full repayment of the $500,000 plus accrued interest, the revenue sharing arrangement will change to a 50:50 basis. Interest on the note ceased to accrue on January 21, 2002 in accordance with the arrangement. As of that date, interest receivable of $76,280 was due but not recorded as income. In 2002, the Company recognized $16,000, as partial repayment towards the $500,000, recorded as other income. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following at:
MARCH 31, DECEMBER 31, 2003 2002 (UNAUDITED) Equipment. . . . . . . . . . . . . 1,448,005 $ 1,441,606 Vehicles . . . . . . . . . . . . . 104,379 104,379 Software . . . . . . . . . . . . . 121,107 155,907 Furniture and fixtures . . . . . . 388,493 388,493 Leasehold improvements . . . . . . 525,796 525,796 2,587,780 2,616,181 Less accumulated depreciation and amortization . . . . . . . . . . (1,401,211) 1,314,713 Property and equipment, net. . . . $ 1,186,569 $ 1,301,468
The carrying value of assets under capital leases was $536,933, net of amortization of $392,412 as of December 31, 2002. Depreciation and amortization expense was $475,542 and $421,542 for the years ended December 31, 2002 and 2001, respectively, which includes amortization expense on the equipment under capital lease of $163,532 and $136,088 for the years ended December 31, 2002 and 2001, respectively. F-11 7. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, :
MARCH 31, DECEMBER 31, 2003 2002 (UNAUDITED) Payroll and related taxes. . . . . . . . 277,206 $ 278,842 Sales tax. . . . . . . . . . . . . . . . 47,743 47,859 Accounting, legal and professional fees. - 50,000 Interest . . . . . . . . . . . . . . . . - 20,000 Deposit for Units. . . . . . . . . . . . 202,935 - Other. . . . . . . . . . . . . . . . . . 31,370 37,241 Total. . . . . . . . . . . . . . . . . . 559,254 $ 433,942
Included in Accrued Expenses is approximately $203,000 received by the Company in connection with a proposed subscription for units at $0.18 per unit. It is anticipated that each unit will consists of one share of Class A Voting Common stock and a warrant which is convertible into three shares of Class A Voting Common Stock with an exercise price at $0.18 per share. A price adjustment mechanism included in the warrants provides that, if the stock price decreases, the warrants will nevertheless permit the holder to receive, upon a cashless exercise of the warrants, at least one share of Class A Voting Common Stock per warrant without any cash payment. As of March 31, 2003, the Company had not yet accepted this proposed subscription and, accordingly, this amount is recorded as an accrued expense at March 31, 2003. 8. CONVERTIBLE DEBT AND NOTES PAYABLE MANDATORILY CONVERTIBLE DEBT During October, November and December 2000 and January 2001, the Company issued convertible subordinated notes with detachable warrants to purchase 156,000 shares of the Company's Class A Voting Common Stock for proceeds of $312,000. The notes paid interest at a rate of 14% per year, compounded semiannually on the unpaid balance of the principal amount until paid in full or converted. All outstanding principal and accrued unpaid interest was due and payable on the first to occur of: the fifth-year anniversary on various dates during 2005 and 2006, or the occurrence of an event of default as defined in the agreements to the notes. The notes were not convertible at the discretion of the holder. The entire outstanding principal amount of the notes and any accrued unpaid interest was to automatically convert into shares of Class A Voting Common Stock of the Company, upon the first to occur of: (i) the Company's initial public offering; (ii) the closing of at least a $5 million equity investment in the Company in an offering subsequent to the issuance of the convertible debt; or (iii) a transaction involving a change of control of the Company. The conversion price for the debt and warrants contained a beneficial conversion feature and was to be equal to: (i) 80% of the per share value of the common stock as determined by the Board of Directors of the Company, in good faith; or (ii) 80% of the value of the consideration offered to each stockholder for each share of the Company's common stock in the event of a change of control transaction, in which all or substantially all of the common stock of the Company is acquired or transferred. On October 12, 2002 the Company completed its initial public offering and as a result these notes were converted at $0.24 into 1,681,712 Class A Common Shares and the Company recorded $100,903 interest expense as a result of the beneficial conversion. In addition, all detachable warrants were exercised either through purchase or cashless conversion into 60,000 shares of Class A Common Stock. CONVERTIBLE 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. F-12 NOTES PAYABLE Between May and August 2002 the Company received $314,000 in cash by issuing subordinated promissory notes with simple interest at 10% per annum. The terms of the notes required repayment in one year from date of issuance. These note were repaid in October 2002. On June 4, 2002, the Company received $750,000 from Gemstone Investment Company, Inc. by issuing a promissory note collateralized by all of the Company's assets and a personal guarantee the Chief Executive Officer (including a pledge of five million shares of the Chief Executive Officer's LocatePlus Holdings Corporation Class A Voting Common Stock and a mortgage on certain of his other personal assets). Gemstone Investment Company, Inc. is an unaffiliated third party lender that specializes in loans to start-up and early stage businesses. There is no business relationship between Gemstone and any of the Company's officers or directors, nor is there, to management's knowledge, any affiliation between Gemstone and any 5% or greater stockholder of the Company. As of October 2002, $600,000 had been repaid on this note, however the terms of this loan called for its repayment in full, including accrued interest, by the earlier of October 3, 2002 or two business days after the closing of the initial public offering. As such, the terms of the note were renegotiated and all accrued interest and principal were converted to a $285,000 demand note with interest payable at 42%. In addition, there are three small unsecured subordinated promissory notes outstanding at December 31, 2002 with simple interest at 10% per annum due June 1, 2003, that total $8,900. During 2003, the Company received $440,000, net of issuance costs, by issuing subordinated promissory notes with simple interest at 10% per annum. The terms on $75,000 of the notes require repayment 12 months from issuance and the remaining notes require repayment 18 months from issuance. In conjunction with the notes, warrants to purchase 485,000 shares of Class B Non-Voting Common stock with a weighted average exercise price of $0.14 were also issued. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $44,047, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount is being amortized to interest expense over the term of the debt. The fair value of the warrants was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 28% volatility, 3.7% average risk-free interest rate, a ten-year life and an underlying Class B Non-Voting Common Stock value of $0.14 per share. 9. NOTE PAYABLE - RELATED PARTY In December 2002, the Company issued a note with detachable warrants payable to one of its current board members in exchange for $250,000 in cash. The note has a twelve-month term with interest at a rate of 10% per annum payable monthly. The detachable warrants were for the purchase of 250,000 shares of the Company's Class B Non-Voting Common Stock at $0.22 per share. The warrants had a term of ten years and became exercisable upon issue. The Company allocated the investment proceeds to the debt and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $41,599, which was recorded as debt discount, a reduction of the carrying amount of the debt. This amount is being amortized to interest expense over the term of the debt. The fair value of the warrants was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 4.1% average risk-free interest rate, a ten-year life and an underlying Class B Non-Voting Common Stock value of $0.22 per share. 10. RELATED PARTY TRANSACTIONS Certain members of the Company's Board of Directors have performed consulting services for the Company. Expense relating to these services amounted to $303,892 in 2001 and was recorded as part of general and administrative expenses. F-13 In 2001, the Company granted options to purchase 119,104 shares of Class A Voting Common Stock at $0.20 per share for services rendered as a consultant to a former board member. The Company recorded expense of $21,645 associated with the options. On January 31, 2002, the Company granted a warrant to purchase 1,177,680 shares of Class B Non-voting Common Stock at $0.15 per share for consulting services rendered by the former board member and recorded expense of $161,026 associated with the warrants. In 2001 and 2002, the Company granted options to purchase 38,067 and 160,541shares of Class A Voting Common Stock, respectively, with an average exercise price of $0.20 and $.90 per share, respectively, and warrants to purchase 324,581 and 27,089 shares of Class B Non-voting Common Stock, respectively, at $0.15 per share in consideration for services rendered by a member of the Company's Board of Directors. The Company recorded expenses of $51,195 and $40,238, respectively, associated with these options and warrants. On February 1, 2002, the Company issued warrants to purchase a total of 70,000 shares of Class B Non-voting Common Stock to two directors of the Company and recorded expense of $9,569 associated with the warrants. The fair value of the options granted in 2001 to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 5.0% average risk-free interest rate, a ten-year life and an underlying Class A Voting Common Stock value of $0.20 per share. The fair value of the warrants granted in 2001 and 2002 to purchase shares of Class B Non-voting Common Stock was based on the Black-Scholes Model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 5.0% average risk-free interest rate, a ten-year life and an underlying Class B Voting Common Stock value of $0.15 per share. 11. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and equipment under various non-cancelable operating lease agreements which terminate on various dates through 2005. Rent expense amounted to $493,701 and $494,466 for 2001 and 2002, respectively. Future minimum payments under non-cancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, 2003 . . . . . . . . . . $ 530,419 2004 . . . . . . . . . . 522,027 2005 . . . . . . . . . . 87,005 Total. . . . . . . . . . $1,139,451
CAPITAL LEASES The Company acquired equipment under long-term capital leases. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases. F-14 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, 2002.
YEAR ENDING DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,662 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 142,001 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 105,081 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,044 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,268 445,056 - -------------------------------------------------------- Less: amounts representing interest and executory costs (100,662) Present value of future minimum lease payments . . . . . 344,394 Less: current portion of obligation under capital lease 142,172 Long-term obligation under capital lease . . . . . . . . $ 202,222
LICENSE AGREEMENTS The Company obtains its data from multiple sources and has entered into various license agreements with the related data providers. In 2001 and 2002, the Company recorded $648,500 and $665,366 respectively in costs related to these agreements. In the event that any of the primary sources of data are no longer available to the Company, management believes that it would be able to integrate alternate sources of data without significant disruption to the business or operations, as there are currently a number of providers of such data. The Company is required to make minimum payments under these agreements as follows:
YEAR ENDING DECEMBER 31, 2003. . . . . . . . . . . $813,125 2004. . . . . . . . . . . 417,594 2005. . . . . . . . . . . 347,156 1,577,875
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. There are no pending or known actions for which the amount of ultimate liability could have a material adverse effect on the Company's financial position or results of operations. F-15 12. INCOME TAXES Deferred tax assets consist of the following at December 31:
2002 Net operating loss carryforwards . . $ 5,851,000 Depreciation and amortization. . . . 342,350 Bad debt reserve . . . . . . . . . . 16,600 Investment loss. . . . . . . . . . . 202,500 Capitalized research and development 644,000 Other. . . . . . . . . . . . . . . . 85,000 Gross deferred tax assets. . . . . . 7,141,450 Valuation allowance. . . . . . . . . (7,141,450) $ -
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, 2002, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $14,450,000. The federal and state net operating loss carryforwards expire through 2022. 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. 13. COMMON STOCK DESCRIPTION OF COMMON STOCK On March 23, 2001, the Company amended its articles of incorporation wherein it renamed all the authorized 150,000,000 shares of common stock, par value $0.01 per share, Class A Voting Common Stock and authorized the issuance of 250,000,000 shares of Class B Non-voting Common Stock. Each Class A Voting Common stockholder is entitled to one vote for each share held on all matters submitted to a vote of stockholders. The holders of both classes of common stock are entitled to dividends on a pro rata basis, when-and-if declared by the Company's Board of Directors. Through December 31, 2002, 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. This offering was fully subscribed and as of December 31, 2002 all but $174,908 had been received. As of December 31, 2002, a total of 15,864,239 shares of Class A Voting Common Stock were reserved for issuance upon exercise of outstanding stock option and warrant agreements. As of December 31, 2002, F-16 4,412,139 shares of Class B Non-voting Common Stock were reserved for issuance upon exercise of outstanding warrant agreements. STOCK OPTIONS AND WARRANTS In 2001, the Company issued warrants to purchase 137,500 shares of its Class A Voting Common Stock at a price of $0.20 per share in consideration for services rendered by third parties. The warrants vested fully on the date of grant and will expire on various dates through April 2011. The Company recorded general and administrative expense of $25,057 associated with these warrants. In October 2001, the Company canceled the warrants issued in November 2000 and issued warrants to purchase 138,663 shares of Class B Non-voting Common Stock, for an exercise price of $0.15 per share. The Company recorded expense of $18,851 related to these warrants. Also during 2001, the Company issued options to purchase 460,171 shares of Class A Voting Common Stock at $0.20 per share and warrants to purchase 1,779,634 shares of Class B Non-Voting Common Stock at $0.15 and $0.20 per share to third parties in exchange for services. The Company recorded expense of $90,945 and $242,450, respectively, associated with these options and warrants. In 2000 and 2001, the Company also issued warrants to purchase 156,000 shares of its Class A Voting Common Stock in conjunction with the issuance of $312,000 of convertible debt. During 2001, the Company issued warrants to purchase 970,000 shares of the Company's Class A Voting Common Stock in conjunction with the issuance of $545,000 of convertible debt. During 2001, the Company issued options to purchase 57,922 shares of Class A Voting Common Stock and warrants to purchase 62,500 shares of Class B Non-voting Common Stock to members of the Company's advisory board. The exercise price was $0.20 per share, the term was ten years, and these options and warrants were exercisable immediately upon issuance. The Company determined the fair value of the options and warrants to be $10,543 and $8,363, respectively, and recorded the amounts as compensation expense on the date of issuance. As of December 31, 2001, each of these options and warrants were outstanding and there were total of 763,500 and 2,480,797 options and warrants outside the Stock Plan for Class A Voting and Class B Non-Voting Stock respectively. During 2001, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 5.0% average risk-free interest rate, a ten-year life and an underlying Class A Voting Common Stock value of $0.20 per share. During 2001, the fair value of the warrants to purchase shares of Class B. Non-voting Common Stock was based on the Black-Scholes Model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 5.0% average risk-free interest rate, a ten-year life and an underlying Class B Voting Common Stock value of $0.15 per share. During 2002, the Company issued options to purchase 261,739 shares of Class A Voting Common Stock at an average exercise price of $0.90 per share and warrants to purchase 1,304,158 shares of Class B Non-Voting Common Stock at an average exercise price of $0.15 per share to third parties in exchange for services. The Company recorded expense of $59,573 and $190,586, respectively, associated with these options and warrants. During 2002, the Company issued warrants to purchase 307,184 shares of Class B Non-Voting Common Stock at an average exercise price of $0.23 per share to third parties as part of financing arrangements. The Company will record interest expense of $51,549 over the life of the financing agreements associated with these warrants. F-17 During 2002, the Company issued warrants to purchase 250,000 shares of Class B Non-Voting Common Stock at an exercise price of $0.22 per share to third parties in exchange for legal services. The Company will record legal expense of $29,113 over the life of the contract associated with these warrants. During 2002, the Company issued 36,000 shares of Class A Common Stock for the exercise of warrants associated with manditorily convertible debt. During 2002, the Company issued 24,000 shares of Class A Common Stock for the cashless exercise of 120,000 warrants associated with manditorily convertible debt. During 2002, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 5.0% average risk-free interest rate, a ten-year life and an underlying Class A Voting Common Stock average value of $0.90 per share. During 2002, the fair value of the warrants to purchase shares of Class B. Non-voting Common Stock was based on the Black-Scholes Model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 100% volatility, 4.4% average risk-free interest rate, a ten-year life and an underlying Class B Voting Common Stock average value of $0.18 per share. As of December 31, 2002, each of these options and warrants were outstanding and there were total of 869,239 and 4,412,139 options and warrants outside the Stock Plan for Class A Voting and Class B Non-Voting Stock respectively. 14. STOCK OPTION PLAN On November 16, 1999, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan as amended (the "Plan"). Under the terms of the Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors. The Board of Directors administers the Plan. A maximum of 15,000,000 shares of Class A Voting Common Stock has been approved for issuance under the Plan of which 4,267,284 are available for grant at December 31, 2002. The options are not transferable except by will or domestic relations order. F-18 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 Plan for the years ended December 31, 2002 and 2001:
WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at December 31, 2000 6,579,623 0.20 Issued . . . . . . . . . . . . . 4,148,093 0.20 Canceled . . . . . . . . . . . . (125,000) 0.20 Outstanding at December 31, 2001 10,602,716 0.20 Issued . . . . . . . . . . . . . 300,000 0.25 Canceled . . . . . . . . . . . . (170,000) 0.20 Outstanding at December 31, 2002 10,732,716 0.20
he following table summarizes information relating to options outstanding at December 31, 2002:
WEIGHTED - - AVERAGE WEIGHTED WEIGHTED RANGE OF OPTIONS REMAINING AVERAGE OPTIONS AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE 0.20 - $0.25 10,652,716 7.51 $ 0.20 8,480,216 $ 0.20 - - 0.30 . . . . 80,000 8.01 $ 0.30 80,000 $ 0.30 ----------- ----------- 10,732,716 7.57 $ 0.20 8,560,216 $ 0.20 =========== ===========
F-19 15. 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 $2,806 and $4,469 in 2002 and 2001, respectively. 16. SEGMENT INFORMATION The Company has two reportable segments which management operates as distinct sales organizations; these two segments are segregated by the nature of products and services provided. The Company measures and evaluates its two reportable segments based on revenues and costs of revenues. The CD ROM segment provides information on motor vehicles and drivers' licenses, contained on compact disks. The online segment provides information on individuals throughout the United States of America through the Company's website. No material operating costs, other than costs of revenues, or assets and liabilities relate to the CD ROM segment.
FOR THE THREE FOR THE YEAR MONTHS ENDED ENDED MARCH 31, DECEMBER 31, 2003 2002 2001 2002 (UNAUDITED) (UNAUDITED) Information sales: CD Rom. . . . . . . . $ 130,159 $ 66,494 $ 268,701 $ 345,003 Online and Channel. . 615,302 281,661 752,109 1,503,472 Total information sales. $ 745,461 $ 348,155 1,020,810 1,848,475 Costs of revenues: CD Rom. . . . . . . . $ 14,742 $ 26,173 96,561 90,397 Online and Channel. . 514,977 190,983 986,240 1,217,809 Total costs of revenue . $ 529,719 $ 217,156 $1,082,801 1,308,206
17. SUBSEQUENT EVENTS (UNAUDITED) Effective March 31, 2003, Robert A Goddard resigned as Chief Financial Officer, Treasurer, and Secretary of LocatePLUS Holdings Corporation, and its two subsidiaries, LocatePLUS Corporation and Worldwide Information, Inc., to pursue other interests. As set forth in Mr. Goddard's severance agreement, he will be paid three months salary and his employee stock options will be canceled and the Company will issue non qualified stock options to purchase 250,000 shares of Class A Voting Common stock with an exercise price of $0.15. The associated expense related to Mr. Goddard's severance will be recorded in April of 2003. In April, the Company entered into a capital lease agreement to purchase data center equipment. Future minimum lease payments under this lease are $380,483. In May, the Company entered into a capital lease agreement to purchase data center equipment. Future minimum lease payments under this lease are $159,415. Through May 2003, the Company issued notes payable with detachable warrants in exchange for $1,500,000. $300,000 of the proceeds from the issuance of these notes was used to pay off existing debt. The notes have an eighteen-month term with interest at a rate of 12% per annum payable monthly. The detachable warrants were for the purchase of 1,300,000 shares of the Company's Class B Non-Voting Common Stock at $0.10 per share. The warrants have a term of ten years and became exercisable upon issue. As part of the transaction, detachable warrants to purchase 300,000 shares of the Company's Class B Non-Voting Common Stock with an exercise price of $0.22 per share were canceled. F-20 In April, an employee of the Company exercised an employee stock option and purchased 800,000 shares of Class A Voting Common Stock. The employee did not purchase the stock with cash therefore the purchase price will be recorded as compensation expense by the Company. SEE INDEPENDENT AUDITORS' REPORT F-21 TABLE OF CONTENTS ----------------- Prospectus Summary................................................1 Risk Factors......................................................4 Forward-Looking Statements.......................................12 Use of Proceeds.................................................12 Determination of Offering Price................................12 Dividend Policy..................................................12 Dilution..........................................................13 Plan of Distribution............................................14 Capitalization....................................................17 Selected Consolidated Financial Data...........................18 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................19 Business..........................................................24 Executive Officers and Directors...............................29 Organization Within the Past Five Years......................37 Certain Transactions.............................................38 Principal Stockholders...........................................40 Description of Capital Stock...................................43 Shares Eligible for Future Sale...............................46 Transfer Agent and Registrar...................................47 Legal Matters....................................................47 Experts...........................................................47 Additional Information...........................................47 Index to Financial Statements.................................F-1 * * * UNTIL [90 DAYS FROM THE DATE OF EFFECTIVENESS], ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS. [GRAPHIC OMITED] [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. Our selling security owners are offering to sell our securities and seeking offers to buy our securities only in jurisdictions where such offers and sales are permitted. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. We estimate that the approximate expenses in connection with this Registration Statement will be as follows: SEC registration fee $ 1,500 Legal fees and expenses 25,000 Accounting fees and expenses 5,000 Miscellaneous 8,500 ------------ Total $40,000 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The following is a list of the Registrant's securities sold within the past three years without registration under the Securities Act of 1933, as amended. - - From November 1999 to June 2001, the Registrant granted options to purchase 11,142,716 shares our Common Stock (now referred to as Class A Voting Common Stock) to 43 employees and consultants under the terms of the Registrant's Incentive and Non-qualified Stock Option Plan. These options have varying exercise prices. Of these options to purchase 11,142,716 shares, an option to purchase 5,000 shares of Common Stock was exercised by one employee. The offer and sale of these securities were exempt from registration under the Securities Act pursuant to Rules 701 and 506 promulgated thereunder. - - From December 1999 to February 2000, the Registrant sold 3,000,000 shares of Common Stock (now referred to as Class A Voting Common Stock) to 120 accredited investors for $1.00 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated under the Securities Act, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. - - From March 2000 to September 2000, the Registrant sold 3,000,000 shares of Common Stock (now referred to as Class A Voting Common Stock) to 96 accredited investors for $1.00 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - From October 2000 through January 2001, the Registrant issued a total of $312,000 in convertible promissory notes with detachable restricted warrants to nine accredited investors. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. - - In January 2001, the Registrant issued $200,000 in the form of a convertible promissory note with a detachable warrant to one investor, then a member of the Registrant's Board of Directors. The offer and sale of that security were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder. - - In February and March 2001, the Registrant issued $345,000 in six-month convertible term promissory notes to 11 accredited investors. The offer and sale of that security were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. - - In April 2001, the Registrant made a non-transferable offer to its accredited stockholders to sell three shares of the Registrant's Class B Non-voting Common Stock for $0.10 per share for each share of Class A Voting Common Stock held by each stockholder. Pursuant to that offer, the Registrant sold approximately 31.6 million shares of Class B Non-voting Common Stock to 270 of the Registrant's stockholders. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - At various times from November 17, 2000 to March 12, 2002, the Registrant issued warrants to purchase an aggregate of 537,902 shares of Class A Voting Common Stock to 11 accredited consultants and to members of the Registrant's Advisory Board in consideration for services rendered. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - From August 2001 to April 2002, the Registrant issued warrants to purchase an aggregate of 3,272,455 shares of Class B Non-Voting Common Stock to 17 accredited consultants and to members of the Registrant's Advisory Board in consideration for services rendered. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - From September 2001 through February 13, 2002, the Registrant sold 20,421,510 shares of Class B Non-voting Common Stock to 175 accredited investors (of which 82 were existing stockholders) for $0.15 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 promulgated thereunder, as we received representations from all offerees that they were accredited investors at the time of the offer and sale and no general solicitation was undertaken. A Form D Notice of Sale of Securities Pursuant to Regulation D was not filed with the Securities and Exchange Commission in a timely manner. - - On May 22, 2002 the Registrant received $190,000 by issuing subordinated promissory notes with simple interest at ten percent per annum to five lenders. The Registrant does not believe that these subordinated promissory notes constitute securities because the subordinated promissory notes do not convert into our equity and are in the nature of commercial loans. - - On August 27, 2002, the Registrant issued warrants to purchase an aggregate of 70,000 shares of Class B Non-voting Common Stock to two members of our Board of Directors pursuant to our Non-employee Director Stock Option Policy. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as both recipients are accredited and no general solicitation was undertaken. - - In December 2002, we issued a one year term note with ten year, fully vested detachable warrants to an individual who, as a condition of his investment, required that he be appointed to the Board of Directors of the Company. The note bears interest at the rate of 10% per annum and is payable in one lump sum at maturity. The detachable warrants provide for the purchase of 250,000 shares of our Class B Non-Voting Common Stock with an exercise price of $0.22 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as both recipients are accredited and no general solicitation was undertaken. - - On March 28, 2003, the Registrant issued warrants to purchase 105,000 shares of Class B Non-voting Common Stock to three members of the Registrant's Board of Directors pursuant to the Registrant's Non-employee Director Stock Option Policy. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rules 506 and 508 promulgated thereunder, as the recipients were accredited and no general solicitation was undertaken. - - Through May 2003, the Registrant issued notes payable with detachable warrants in exchange for $1,500,000. The notes have an eighteen-month term and bear interest at a rate of 12% per annum payable monthly. The detachable warrants were for the purchase of 1,300,000 shares of the Company's Class B Non-Voting Common Stock at $0.10 per share. The offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Rule 506 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During 2003, the Registrant received $440,000, net of issuance costs, by issuing subordinated promissory notes with simple interest at 10% per annum. The terms on $75,000 of the notes require repayment 12 months from issuance and the remaining notes require repayment 18 months from issuance. In conjunction with the notes, warrants to purchase 485,000 shares of Class B Non-Voting Common stock with a weighted average exercise price of $0.14 were also issued. The offer and sale of these securities was exempt from registration under the Securities Act under the provisions of Rule 506 promulgated thereunder, as the recipient was accredited and no general solicitation was undertaken. - - During 2003, the Registrant received $398,000 by issuing units at $0.16 per unit. Each unit consists of one share of Class A Voting Common stock and a warrant which is convertible into three shares of Class A Voting Common Stock with an exercise price at $0.16 per share. A price adjustment mechanism included in the warrants provides that, if the stock price decreases, the warrants will nevertheless permit the holder to receive, upon a cashless exercise of the warrants, at least one share of Class A Voting Common Stock per warrant without any cash payment. - - During June 2003, the Registrant issued 2,500,000 shares of Class A Voting Common Stock to one investor and 125,000 shares of Class B Non-Voting Common Stock to three different investors. The Registrant believes that the offer and sale of these securities were exempt from registration under the Securities Act under the provisions of Section 4(2) thereunder. INITIAL PUBLIC OFFERING On August 12, 2002, we commenced our initial public offering of securities (Registration No. 333-85154, effective August 12, 2002), pursuant to which we 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. This offering was fully subscribed and, as of December 31, 2002, all but $174,908 of the subscriptions were paid in full. Subsequent to December 31, 2002, all subscriptions in that offering were paid in full. Through December 31, 2002, we had used approximately $1.66 million of the net proceeds from that offering approximately as follows: Repayment of Note Payable $ 600,000 Purchases of Data 650,000 Other Working Capital/General Corporate Purposes: 410,000 TOTAL: $ 1,660,000 ----------- ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 3.1 Second Amended and Restated Certificate of Incorporation of LocatePLUS Holdings Corporation, as filed with the Secretary of State of the State of Delaware on March 19, 2002.(1) 3.2 By-Laws of LocatePLUS Holdings Corporation.(1) 4.1 Warrant and Unit Agreement by and between LocatePLUS Holdings Corporation and Transfer Online, Inc., dated March 22, 2002.(1) 4.2 Form of Warrant Certificate.(2) 4.3 Form of Unit Certificate.(2) 4.4 Form of Class A Voting Common Stock Certificate.(2) 4.5 Form of Class B Non-voting Common Stock Certificate.(2) 4.6 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class A Voting Common Stock).(1) 4.7 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class B Non-voting Common Stock).(2) 4.8 $10,000 Convertible Promissory Note, dated March 9, 2001.(1) 4.9 Amended Form of Warrant Certificate.(3) 4.10 Amendment to $10,000 Convertible Promissory Note, dated July 23, 2002.(3) 5.1 Opinion of Kirkpatrick & Lockhart LLP (To be filed by amendment) 10.1 Master Lease Agreement between Cummings Properties, Inc. and Worldwide Information, Inc., dated November 20, 1999.(1) 10.2 Secured Note, dated June 1, 2001.(1) 10.3 $750,000 Loan Agreement between LocatePLUS Holdings Corporation and Gemstone Investment Company, Inc., dated June 4, 2002.(2) 10.4 Security Agreement between LocatePLUS Holdings Corporation and Gemstone Investment Company, Inc., dated June 4, 2002.(2) 10.5 Pledge Agreement between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.(2) 10.6 Mortgage between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.(2) 10.7 Guaranty Agreement, between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.(2) 10.8 $175,000 Ten Year Term Promissory Note, made by Jon R. Latorella, dated January 3, 2000.(2) 10.9 $100,000 Ten Year Term Promissory Note, made by Jon R. Latorella, dated January 3, 2000.(2) 10.10 $125,000 Ten Year Term Promissory Note, made by Robert A. Goddard, dated January 3, 2000.(2) 10.11 $750,000 Promissory Note, made by LocatePLUS Holdings Corporation, dated June 4, 2002.(2) 10.12 Amendment to $750,000 Promissory Note, dated August 30, 2002.(4) 10.13 $285,000 Loan Agreement between LocatePLUS Holdings Corporation and Gemstone Investment Company, Inc., dated June 4, 2002. 10.14/A Equity Line of Credit Agreement, dated June 2, 2003, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund, L.P. 10.15/A Registration Rights Agreement, dated June 2, 2003 by and between LocatePLUS and Dutchess Private Equities Fund, L.P. 10.16 Placement Agent Agreement, dated June _, 2003 by and among LocatePLUS, Dutchess Private Equities Fund, L.P. and Oftring 21.1 Subsidiaries of LocatePLUS Holdings Corporation.(1) 23.1 Consent of Carlin, Charron & Rosen, LLP. 23.2 Consent of Kirkpatrick & Lockhart LLP.(To be filed by amendment) (1) Filed as an Exhibit to Form SB-2, filed with the Securities and Exchange Commission on March 28, 2002 (Registration No. 333-85154). (2) Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on June 21, 2002 (Registration No. 333-85154). (3) Filed as an Exhibit to Form SB-2/A, filed with the Securities and Exchange Commission on July 24, 2002 (Registration No. 333-85154). (4) Filed as Exhibit to Form SB-2/A (post-effective amendment), filed with the Securities and Exchange Commission on September 10, 2002 (Registration No. 333-85154). ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes to: (1) For determining any liability under the Securities Act, treat the information omitted from this form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act of 1933 as part of this registration statement as of the time the Securities and Exchange Commission declared it effective. (2) For determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in this registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. The undersigned Registrant hereby undertakes with respect to the securities being offered and sold in the offering: (1) To file, during any period in which it offers or sells securities, a post- effective amendment to this Registration Statement to: (A) Include any prospectus required by Section 10(a)(3) of the Securities Act; (B) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (C) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act of 1933, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person relating to the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the Commonwealth of Massachusetts, on July 15, 2003. LOCATEPLUS HOLDINGS CORPORATION (Registrant) By /S/ Jon R. Latorella ---------------------------------------------------- Chairman, President and Chief Executive Officer Each person whose signature appears below appoints Jon R. Latorella as his or her attorney-in-fact, with full power of substitution and re-substitution, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form SB-2 of LocatePlus Holdings Corporation and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all the said attorney-in-fact and agent or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act, this registration statement was signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE - -------------------- --------------------------------- ------------- /S/ Jon R. Latorella Chairman of the Board, President July 15, 2003 - ----------------------- and Chief Executive Officer Jon R. Latorella /S/ James C. Fields Acting Chief Financial Officer, July 15, 2003 - ----------------------- Treasurer and Secretary James C. Fields (Chief Accounting Officer) /S/ Jon R. Latorella Director, July 15, 2003 - ----------------------- President, Worldwide Sonia P. Bejjani Information, Inc. By Jon Latorella as POA /S/ Jon R. Latorella Director July 15, 2003 - ----------------------- Thomas W. Garlock By Jon Latorella as POA /S/ Jon R. Latorella Director July 15, 2003 - ----------------------- Thomas E. Murphy By Jon Latorella as POA /S/ Jon R. Latorella Director July 15, 2003 - ----------------------- Robert H. Kite By Jon Latorella as POA /S/ Jon R. Latorella Director July 15, 2003 - ----------------------- John P. Houlihan By Jon Latorella as POA /S/ Jon R. Latorella Director July 15, 2003 - ----------------------- Gerard Scalley By Jon Latorella as POA EX-5.1 3 doc2.txt [Kirkpatrick & Lockhart LLP. Letterhead] July 15, 2003 LocatePLUS Holdings Corporation 100 Cummings Center Suite 235M Beverly, Massachusetts 01915 Re: LocatePLUS Holdings Corporation Registration Statement on Form SB-2 Ladies and Gentlemen: We have acted as special counsel to LocatePLUS Holdings Corporation (the "Corporation") in connection with the preparation of the Registration Statement on Form SB-2 (File Number 333-105944), as amended, filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"), relating to the proposed resale of up to 31,000,000 shares of the Corporation's Class A Voting Common Stock, par value $0.01 per share (the "Common Stock"). We are furnishing this opinion to you in accordance with Item 601(b)(5) of Regulation S-B promulgated under the Securities Act for filing as Exhibit 5.1 to the Registration Statement. We are familiar with the Registration Statement, and we have examined the Corporation's Amended and Restated Certificate of Incorporation, as amended to date, the Corporation's By-laws, as amended to date, and minutes and resolutions of the Corporation's Board of Directors and stockholders. We have also examined such other documents, certificates, instruments and corporate records, and such statutes, decisions and questions of law as we have deemed necessary or appropriate for the purpose of this opinion. Based upon the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Selling Stockholders (as defined in the Registration Statement) to the public, when issued and sold in the manner described in the Registration Statement (as amended), will be validly issued, fully paid and non-assessable. Very truly yours, /s/ Kirkpatrick & Lockhart LLP KIRKPATRICK & LOCKHART LLP EX-10.14/A 4 doc3.txt Exhibit 10.14/A INVESTMENT AGREEMENT -------------------- INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of June 2, 2003 by and between LocatePLUS Holdings Corporation, a Delaware corporation (the "COMPANY"), and Dutchess Private Equities Fund, L.P., a Delaware limited partnership (the "INVESTOR"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Investor shall invest up to $5,000,000 to purchase the Company's Class A Voting Common Stock,.$0.01 par value per share (the "COMMON STOCK"); WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) under the Securities Act of 1933, as amended (the "1933 ACT"), Rule 506 of Regulation D, and the rules and regulations promulgated thereunder, and/or upon such other exemption from the registration requirements of the 1933 Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder; and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit A (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act, and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall ------------ have the following meanings specified or indicated, and such meanings shall be equally applicable to the singular and plural forms of the defined terms. "1933 ACT" shall mean the Securities Act of 1933, as it may be amended. "1934 ACT" shall mean the Securities Exchange Act of 1934, as it may be amended. "AFFILIATE" shall have the meaning specified in Section 5(h). "AGREED UPON PROCEDURES REPORT" shall have the meaning specified in Section 2(o). "AGREEMENT" shall mean this Investment Agreement. "BRING DOWN COLD COMFORT LETTER" shall have the meaning specified in Section 2(n). "BUY-IN" shall have the meaning specified in Section 6. "BUY-IN ADJUSTMENT AMOUNT" shall have the meaning specified in Section 6. "CLOSING" shall have the meaning specified in Section 2(h). "CLOSING DATE" shall mean, as defined in Section 2(h), the date which is the earlier of: thirteen (13) Trading Days following the Put Notice Date or when the Investor deems the Put closed. "COMMON STOCK" shall have the meaning set forth in the preamble to this Agreement. "CONTROL" or "CONTROLS" shall have the meaning specified in Section 5(h). "COVERING SHARES" shall have the meaning specified in Section 6. "EFFECTIVE DATE" shall mean the date the SEC declares effective under the 1933 Act the Registration Statement covering the Securities. "ENVIRONMENTAL LAWS" shall have the meaning specified in Section 4(m). "EXECUTION DATE" shall mean the date all Transaction Documents are executed by the Company and Investor. "INDEMNITEES" shall have the meaning specified in Section 10. "INDEMNIFIED LIABILITIES" shall have the meaning specified in Section 10. "INEFFECTIVE PERIOD" shall mean any period of time that the Registration Statement or any Supplemental Registration Statement (as defined in the Registration Rights Agreement) becomes ineffective or unavailable for use for the sale or resale, as applicable, of any or all of the Registrable Securities (as defined in the Registration Rights Agreement) for any reason (or in the event the prospectus under either of the above is not current and deliverable) during any time period required under the Registration Rights Agreement. "INVESTOR" shall mean Dutchess Private Equities Fund, L.P., a Delaware limited partnership. "MAJOR TRANSACTION" shall have the meaning specified in Section 2(g). "MATERIAL ADVERSE EFFECT" shall have the meaning specified in Section 4(a). "MATERIAL FACTS" shall have the meaning specified in Section 2(m). "MAXIMUM COMMON STOCK ISSUANCE" shall have the meaning specified in Section 2(j). "MINIMUM ACCEPTABLE PRICE" with respect to any Put Notice Date shall mean 75% of the average of the closing bid prices for the fifteen (15) Trading Day period immediately preceding such Put Notice Date. "OPEN PERIOD" shall mean the period beginning on and including the Trading Day immediately following the Effective Date and ending on the earlier to occur of (i) the date which is 36 (thirty-six) months from the Effective Date and (ii) termination of the Agreement in accordance with Section 9. "PAYMENT AMOUNT" shall have the meaning specified in Section 2(p). "PARTIAL RELEASE FORM" shall have the meaning specified in Section 2(i). "PRICING PERIOD" shall mean the period beginning on the Put Notice Date and ending on and including the date which is ten (10) Trading Days after such Put Notice Date. "PRINCIPAL MARKET" shall mean the American Stock Exchange, Inc., the National Association of Securities Dealer's, Inc. OTC-BB, the BBX, the Nasdaq National Market System or the Nasdaq SmallCap Market, whichever is the principal market on which the Common Stock is listed. "PROSPECTUS" shall mean the prospectus, preliminary prospectus and supplemental prospectus used in connection with the Registration Statement. "PURCHASE AMOUNT" shall mean the total amount being paid by the Investor on a particular Closing Date to purchase the Securities. "PURCHASE PRICE" shall mean 95% (ninety-five percent) of the lowest closing bid price of the Common Stock during the Pricing Period. "PUT AMOUNT" shall have the meaning set forth in Section 2(b) hereof. "PUT NOTICE" shall mean a written notice sent to the Investor by the Company stating the Put Amount of Shares the Company intends to sell to the Investor pursuant to the terms of the Agreement and stating the current number of Shares issued and outstanding on such date. "PUT NOTICE DATE" shall mean the Trading Day immediately following the day on which the Investor receives a Put Notice, however a Put Notice shall be deemed delivered on (x) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 9:00 am Eastern Time, or (y) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 9:00 am Eastern Time on a Trading Day. No Put Notice may be deemed delivered on a day that is not a Trading Day. "PUT RESTRICTION" shall mean the days between the end of the Pricing Period and the date on which the Investor deems the Put closed. During this time, the Company shall not be entitled to deliver another Put Notice. "REGISTRATION PERIOD" shall have the meaning specified in Section 5(c). "REGISTRATION RIGHTS AGREEMENT" shall mean the Agreement entered into by the Company with Investor for the registration of the Securities. "REGISTRATION STATEMENT" means the registration statement of the Company filed under the 1933 Act covering the Common Stock issuable hereunder. "RELATED PARTY" shall have the meaning specified in Section 5(h). "REPURCHASE EVENT" shall have the meaning specified in Section 2(p). "RESOLUTION" shall have the meaning specified in Section 8(f). "SEC" shall mean the U.S. Securities & Exchange Commission. "SEC DOCUMENTS" shall have the meaning specified in Section 4(f). "SECURITIES" shall mean the shares of Common Stock issued pursuant to the terms of the Agreement. "SHARES" shall mean the shares of the Company's Common Stock. "SOLD SHARES" shall have the meaning specified in Section 6. "SUBSIDIARIES" shall have the meaning specified in Section 4(a). "TRADING DAY" shall mean any day on which the Principal Market for the Company's common stock is open for trading, from the hours of 9:30 am until 4:00 pm. "TRANSACTION DOCUMENTS" shall mean this Agreement, the Registration Rights Agreement, and each of the other agreements entered into by the parties hereto in connection with this Agreement. "VALUATION EVENT" shall have the meaning specified in Section 2(k). 2. PURCHASE AND SALE OF COMMON STOCK -------------------------------------- a. Purchase and Sale of Common Stock. Subject to the terms and --------------------------------------- conditions set forth herein, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, up to that number of Shares having an aggregate Purchase Price of $5,000,000. b. Delivery of Put Notices. (i) Subject to the terms and conditions ----------------------- of the Transaction Documents, and from time to time during the Open Period, the Company may, in its sole discretion, deliver a Put Notice to the Investor which states the Put Amount (designated in shares of Common Stock) which the Company intends to sell to the Investor on a Closing Date. The Put Notice shall be in the form attached hereto as Exhibit "F" and incorporated herein by reference. The Put Amount designated by the Company in the form of a Put Notice shall be as follows: The amount that the Company shall be entitled to Put to the Investor shall be equal to, at the Company's election, either: (a) 200% of the average daily volume (U.S. market only) of the Common Stock for the 20 (twenty) Trading Days prior to the applicable Put Notice Date multiplied by the average of the three (3) daily closing bid prices immediately preceding the Put Date, or (b) $50,000; but in no event more than $1,000,000. During the Open Period, the Company shall not be entitled to submit a Put Notice until after the previous Closing has been completed. The Purchase Price for the Common Stock identified in the Put Notice shall be equal to 95% (ninety-five percent) of the lowest closing bid price of the Common Stock during the Pricing Period. (ii) If the closing bid price during the applicable Pricing Period with respect to that Put Notice is less than 75% (seventy-five percent) of the closing bid prices of the Common Stock for the fifteen (15) Trading Days prior to the Put Notice Date ("MINIMUM ACCEPTABLE PRICE") the Put Notice will terminate, only at the Company's request, sent via FACSIMILE to the Investor, the Investor will continue the Put until the FACSIMILE is received by the Investor. In the event that the closing bid price for the applicable Pricing Period is less than the Minimum Acceptable Price, the Company may elect, by sending written notice to the Investor via facsimile with a copy to the Investor, to cancel that portion of the Put Notice remaining for that number of Trading Days remaining after the written cancellation notice is received by the Investors. The written notice shall be deemed received by the Investors on (i) the Trading Day it is actually received by facsimile or otherwise by the Investors if such notice is received on or prior to 9:00 A.M. New York time, or (ii) the immediately succeeding Trading Day if it is received by facsimile after 9:00 A.M. New York time on a Trading Day or at anytime on a day which is not a Trading Day. Notwithstanding the foregoing, there shall be a closing with respect to, and the Company shall be responsible for delivering, that number of shares of Common Stock to the Investor that were sold by the Investors through and including the end of the Trading Day the written cancellation notice is received by the Investor. (iii) Within Thirteen (13) calendar days after the commencement of each calendar quarter occurring subsequent to the commencement of the Open Period, the Company undertakes to notify Investor as to its reasonable expectations as to the Put Amount it intends to raise during such calendar quarter, if any, through the issuance of Put Notices. Such notification shall constitute only the Company's good faith estimate with respect to such calendar quarter and shall in no way obligate the Company to raise such amount during such calendar quarter or otherwise limit its ability to deliver Put Notices during such calendar quarter. The failure by the Company to comply with this provision can be cured by the Company's notifying Investor at any time as to its reasonable expectations with respect to the current calendar quarter. c. Interest. It is the intention of the parties that any interest that -------- may be deemed to be payable under this Agreement shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Agreement which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Agreement exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the legally permitted limit; and (2) any sums already collected (if any) from the Company which exceed the legally permitted limits will be refunded to the Company. The Investor may choose to make this refund by reducing the amount that the Company owes under this Agreement or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Investor, the reduction will be treated as a partial payment. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. d. reserved. -------- e. Limitation on Investor's Obligation to Purchase Shares. ------------------------------------------------------------ Notwithstanding anything to the contrary in this Agreement, in no event shall the Investor be required to purchase, and the Company shall in no event sell to the Investor, that number of Shares, which when added to the sum of the number of Shares "beneficially owned" (as such term is defined under Section 13(d) and Rule 13d-3 of the1934 Act), by the Investor, would exceed 4.99% of the number of Shares outstanding on the Put Notice Date for such Pricing Period, as determined in accordance with Rule 13d-1(j) promulgated under the 1934 Act. In no event shall the Investor purchase Shares other than pursuant to this Agreement until such date as this Agreement is terminated. Each Put Notice shall include a representation of the Company as to the number of Shares outstanding on the related Put Notice Date. In the event that the number of Shares outstanding is different on any date during a Pricing Period than the number of Shares outstanding on the Put Notice Date associated with such Pricing Period, then the number of Shares outstanding on such date during such Pricing Period shall govern for purposes of determining whether the Investor would be acquiring beneficial ownership of more than 4.99% of the number of Shares outstanding during such period. f. Conditions to Investor's Obligation to Purchase Shares. ------------------------------------------------------------ Notwithstanding anything to the contrary in this Agreement, the Company shall not be entitled to deliver a Put Notice and the Investor shall not be obligated to purchase any Shares at a Closing (as defined in Section 2(h)) unless each of the following conditions are satisfied: (i) a Registration Statement shall have been declared effective and shall remain effective and available for the resale of all the Registrable Securities (as defined in the Registration Rights Agreement) at all times until the Closing with respect to the subject Put Notice; (ii) at all times during the period beginning on the related Put Notice Date and ending on and including the related Closing Date, the Common Stock shall have been listed on the Principal Market and shall not have been suspended from trading thereon for a period of five (5) consecutive Trading Days during the Open Period and the Company shall not have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock; (iii) the Company has complied with its obligations and is otherwise not in breach of a material provision of, or in default under, this Agreement, the Registration Rights Agreement or any other agreement executed in connection herewith which has not been corrected prior to delivery of the Put Notice Date; (iv) no injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Securities; and (v) the issuance of the Securities will not violate the shareholder approval requirements of the Principal Market. If any of the events described in clauses (i) through (v) above occurs during a Pricing Period, then the Investor shall have no obligation to purchase the Put Amount of Common Stock set forth in the applicable Put Notice. g. For purposes of this Agreement, a "MAJOR TRANSACTION" shall be deemed to have occurred upon the closing of any of the following events: (i) the consolidation, merger or other business combination of the Company with or into another person (other than pursuant to a migratory merger effected solely for the purposes of changing the jurisdiction of incorporation of the Company or other than a transaction in which the Company is the surviving corporation) (ii) the sale or transfer of all or substantially all of the Company's assets; or (iii) the consummation of a purchase, tender or exchange offer made to, and accepted by, the holders of more than 50% of the economic interest in, or the combined voting power of all classes of voting stock of, the Company. h. Mechanics of Purchase of Shares by Investor. Subject to the ------------------------------------------------- satisfaction of the conditions set forth in Sections 2(f), 7 and 8, the closing of the purchase by the Investor of Shares or the Investor deeming a Put closed (a "CLOSING") shall occur on the date which is no later than Thirteen (13) Trading Days following the applicable Put Notice Date or when the Investor deems a Put closed (each a "CLOSING DATE"). Prior to each Closing Date, (i) the Company shall deliver to the Investor pursuant to the this Agreement, certificates representing the Shares to be issued to the Investor on such date and registered in the name of the Investor and (ii) the Investor shall deliver to the Company the Purchase Price to be paid for such Shares, determined as set forth in Section 2(b) and (d). In lieu of delivering physical certificates representing the Securities and provided that the Company's transfer agent then is participating in The Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the --- ---- Investor, the Company shall use its commercially reasonable efforts to cause its transfer agent to electronically transmit the Securities by crediting the account of the Investor's prime broker (which shall be specified by the Investor a reasonably sufficient time in advance) with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. ---- The Company understands that a delay in the issuance of Securities beyond the Closing Date could result in economic loss to the Investor. After the Effective Date, as compensation to the Investor for such loss, the Company agrees to pay late payments to the Investor for late issuance of Securities (delivery of Securities after the applicable Closing Date) in accordance with the following schedule (where "No. of Days Late" is defined as the number of days beyond the ---------------- Closing Date): Late Payment For Each No. of Days Late $10,000 of Common Stock ------------------- -------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 Over 10 $1,000 + $200 for each Business Day late beyond 10 The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Nothing herein shall limit the Investor's right to pursue actual damages for the Company's failure to issue and deliver the Securities to the Investor, except to the extent that such late payments shall constitute payment for and offset any such actual damages alleged by the Investor, and any Buy In Adjustment Amount. i. Partial Release of Shares. After Investor has received a Put --------------------------- Notice, but prior to the related Closing Date, the Investor may authorize the release, every five (5) Trading Days, a portion of the Purchase Amount to the Company in exchange for a fixed number of Shares, subject to the following conditions: (i) The Investor shall fill out and sign a Partial Release of Purchase Amount and Shares (the "Partial Release Form"). The Partial Release Form shall set forth the number of Shares to be released to Investor and the dollar amount the Investor shall wire to the Company. (ii) The Partial Release Form shall be filled out and signed by the Investor and faxed to the Company prior to 12:00 p.m. New York City time. The number of Shares stated in the Partial Release Form shall be equal to the dollar amount to be released divided by 95% (ninety-five percent) of the lowest closing bid price during that number of Trading Days of the Pricing Period that have expired. The Company and Investor agree that on the related Closing Date, an adjustment shall be made so that the terms set forth in this Agreement shall be honored with the balance of the Purchase Amount being released to the Company and the balance of the Shares owed to the Investor being released to Investor. j. Overall Limit on Common Stock Issuable. Notwithstanding anything ------------------------------------------ contained herein to the contrary, if during the Open Period the Company becomes listed on an exchange that limits the number of shares of Common Stock that may be issued without shareholder approval, then the number of Shares issuable by the Company and purchasable by the Investor, including the shares of Common Stock issuable to the Investors pursuant to Section 11(b), shall not exceed that number of the shares of Common Stock that may be issuable without shareholder approval, subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalization affecting the Common Stock (the "MAXIMUM COMMON STOCK ISSUANCE"), unless the issuance of Shares, including any ------ Common Stock to be issued to the Investors pursuant to Section 11(b), in excess of the Maximum Common Stock Issuance shall first be approved by the Company's shareholders in accordance with applicable law and the By-laws and Amended and Restated Certificate of Incorporation of the Company, if such issuance of shares of Common Stock could cause a delisting on the Principal Market. The parties understand and agree that the Company's failure to seek or obtain such shareholder approval shall in no way adversely affect the validity and due authorization of the issuance and sale of Securities or the Investor's obligation in accordance with the terms and conditions hereof to purchase a number of Shares in the aggregate up to the Maximum Common Stock Issuance limitation, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance limitation provided in this Section 2(j). k. "VALUATION EVENT" means the Company taking any of the following actions at any time during a "Pricing Period": (i) subdivides or combines its Common Stock; (ii) pays a dividend in Common Stock or makes any other distribution of its Common Stock, except for dividends paid with respect to the Preferred Stock; (iii) issues any options or other rights to subscribe for or purchase Common Stock ("Options") and the price per share for which Common Stock may at any time thereafter be issuable pursuant to such Options shall be less than the Bid Price in effect immediately prior to such issuance of such Options; (iv) issues any securities convertible into or exchangeable for Common Stock ("Convertible Securities") and the consideration per share for which shares of Common Stock may at any time thereafter be issuable pursuant to the terms of such Convertible Securities shall be less than the Bid Price in effect immediately prior to such issuance of the Convertible Securities; (v) issues shares of Common Stock otherwise than as provided in the foregoing subsections (i) through (iv), at a price per share less, or for other consideration lower, than the Bid Price in effect immediately prior to such issuance, or without consideration; or; (vi) makes a distribution of its assets or evidences of indebtedness to the holders of Common Stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (i) through (v). l. The Company agrees that it shall not take any action that would result in a Valuation Event occurring during a Pricing Period. m. [Reserved] n. (i) Whenever reasonably requested by Investor, the Company shall engage its independent auditors to prepare in accordance with the provisions of Statement on Auditing Standards No. 71, as amended, such written report (the "BRING DOWN COLD COMFORT LETTERS") with respect to the financial information contained in the Registration Statement and shall have delivered to the Investor such a report addressed to the Investor, on or prior to each Registration Opinion Deadline; (ii) in the event that the Investor shall have requested delivery of an Agreed Upon Procedures Report pursuant to Section 2(o), the Company shall engage its independent auditors to perform certain agreed upon procedures and report thereon as shall have been reasonably requested by the Investor with respect to certain financial information of the Company and the Company shall deliver to the Investor a copy of such report addressed to the Investor. In the event that the report required by this Section 2(n) cannot be delivered by the Company's independent auditors, the Company shall, if necessary, promptly revise the Registration Statement and the Company shall not deliver a Put Notice to Investor until such report is delivered. o. Procedure if Material Facts are Reasonably believed to be untrue or are omitted. In the event after such consultation the Investor or the Investor's counsel reasonably believes that the Registration Statement contains an untrue statement or a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading, (i) the Company shall file with the SEC an amendment to the Registration Statement responsive to such alleged untrue statement or omission and provide the Investor, as promptly as practicable, with copies of the Registration Statement and related Prospectus, as so amended, or (ii) if the Company disputes the existence of any such material misstatement or omission, and in the event the dispute relates to the adequacy of financial disclosure and the Investor shall reasonably request, the Company's independent auditors shall provide to the Company a letter ("AGREED UPON PROCEDURES REPORT") outlining the performance of such "agreed upon procedures," which shall not require any more than the SAS 71 review described above as shall be reasonably requested by the Investor and the Company shall provide the Investor with a copy of such letter. p. Delisting; Suspension. If at any time during the Open Period or ---------------------- within thirty (30) calendar days after the end of the Open Period, (i) the Registration Statement, after it has been declared effective, shall not remain effective and available for sale of all the Registrable Securities for a period exceeding 10 calendar days, (ii) the Common Stock shall not be listed on the Principal Market or shall have been suspended from trading thereon (excluding suspensions of not more than one trading day resulting from business announcements by the Company) or the Company shall have been notified of any pending or threatened proceeding or other action to delist or suspend the Common Stock, (iii) there shall have occurred a Major Transaction (as defined in Section 2(g)) or the public announcement of a pending Major Transaction which has not been abandoned or terminated, or (iv) the Registration Statement is no longer effective or stale for a period of more than five (5) Trading Days as a result of the Company's failure to timely file its financial statements or for any other reason, the Company shall repurchase within thirty (30) calendar days of the occurrence of one of the events listed in clauses (i), (ii), (iii) or (iv) above (each a "REPURCHASE EVENT") and subject to the limitations imposed by applicable federal and state law, all or any part of the Securities issued to the Investor within the sixty (60) Trading Days preceding the occurrence of the Repurchase Event and then held by the Investor at a price per Share equal to the highest closing bid price during the period beginning on the date of the Repurchase Event and ending on and including the date on which the Investor is paid by the Company for the repurchase of the Shares (the "PAYMENT AMOUNT"). If the Company fails to pay to the Investor the full aggregate Payment Amount within ten (10) calendar days of the occurrence of a Repurchase Event, the Company shall pay to the Investor, on the first Trading Day following such tenth (10th) calendar day, in addition to and not in lieu of the Payment Amount payable by the Company to the Investor, an amount equal to two (2%) percent of the aggregate Payment Amount then due and payable to the Investor, in cash by wire transfer, plus compounded annual interest of 18% on such Payment Amount during the period, beginning on the day following such tenth calendar day, during which such Payment Amount, or any portion thereof, is outstanding. 3. INVESTOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. -------------------------------------------------------- The Investor represents and warrants to the Company, and covenants, that: a. Sophisticated Investor. The Investor has, by reason of its business and financial experience, such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that it is capable of (A) evaluating the merits and risks of an investment in the Securities and making an informed investment decision, (B) protecting its own interest and (C) bearing the economic risk of such investment for an indefinite period of time. b. Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Investor and is a valid and binding agreement of the Investor enforceable against the Investor in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. c. Section 9 of the 1934 Act. During the Open Period, the Investor will comply with the provisions of Section 9 of the 1934 Act, and the rules promulgated thereunder, with respect to transactions involving the Common Stock. The Investor agrees not to short, either directly or indirectly through its affiliates, principals or advisors, the Company's common stock during the term of this Agreement, however, it shall not be deemed a short if the Investor sells common stock after the delivery of the Put Notice from the Company. d. Accredited Investor. Investor is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D of the 1933 Act. e. No Conflicts. The execution, delivery and performance of the Transaction Documents by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby will not result in a violation of the Articles of Incorporation, the By-laws or other organizational documents of the Investor. f. The Investor has had an opportunity to discuss the business, management and financial affairs of the Company with the Company's management; g.The Investor is purchasing the Securities for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise dispose of the Securities solely in accordance with the registration provisions of the Securities Act (or pursuant to an exemption from such registration provisions); and h. The Investor is not and will not be required to be registered as a "dealer" under the 1934 Act, either as a result of its execution and performance of its obligations under this Agreement or otherwise. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. -------------------------------------------------- Except as set forth in the Schedules attached hereto, the Company represents and warrants to the Investor that: a. Organization and Qualification. The Company is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction, and has the requisite corporate power and authorization to own its properties and to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents (as defined in Section 1 and 4(b)below). b. Authorization; Enforcement; Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "TRANSACTION DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the reservation for issuance and the issuance of the Securities pursuant to this Agreement, have been duly and validly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors, or its shareholders, (iii) the Transaction Documents have been duly and validly executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. c. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 150,000,000 shares of Class A Common Stock, $0.01 par value per share, of which, 59,690,043 shares are issued and outstanding; 250,000,000 shares of Class B Common Stock, $0.01 par value per share, of which as of the date hereof, 68,640,726 shares are issued and outstanding. As of May 15, 2003, there were 28,501,205 shares of Class A Voting Common Stock and 6,227,139 shares of Class B Non-voting Common Stock subject to issuance pursuant to options, warrants, convertible debt, or other convertible securitiesAll of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 4(c) which is attached hereto and made a part hereof, (i) no shares of the Company's capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) there are no outstanding debt securities, (iii) there are no outstanding shares of capital stock, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement), (v) there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries, (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement, (vii) the Company does not have any stock appreciation rights or "phantom stock" plans or agreements or any similar plan or agreement and (viii) there is no dispute as to the class of any shares of the Company's capital stock. The Company has furnished to the Investor, or the Investor has had access through EDGAR to, true and correct copies of the Company's Amended and Restated Certificate of Incorporation, as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS '), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. d. Issuance of Shares. A sufficient number of Shares issuable pursuant to this Agreement has been duly authorized and reserved for issuance (subject to adjustment pursuant to the Company's covenant set forth in Section 5(f) below) pursuant to this Agreement. Upon issuance in accordance with this Agreement, the Securities will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. In the event the Company cannot register a sufficient number of Shares, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable. e. No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture mortgage, indebtedness or instrument to which the Company or any of its Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market or principal securities exchange or trading market on which the Common Stock is traded or listed) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected. Except as disclosed in Schedule 4(e), neither the Company nor its Subsidiaries is in violation of any term of, or in default under, the Certificate of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or their organizational charter or by-laws, respectively, or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations that would not individually or in the aggregate have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, statute, ordinance, rule, order or regulation of any governmental authority or agency, regulatory or self-regulatory agency, or court, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization, permit or order of, or make any filing or registration (except the filing of a registration statement) with, any court, governmental authority or agency, regulatory or self-regulatory agency or other third party in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Transaction Documents in accordance with the terms hereof or thereof. All consents, authorizations, permits, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof and are in full force and effect as of the date hereof. Except as disclosed in Schedule 4(e), the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not, and will not be, in violation of the listing requirements of the Principal Market as in effect on the date hereof and on each of the Closing Dates and is not aware of any facts which would reasonably lead to delisting of the Common Stock by the Principal Market in the foreseeable future. f. SEC Documents; Financial Statements. Since at least January 1999, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to the Investor or its representatives, or they have had access through EDGAR to, true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other written information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents, including, without limitation, information referred to in Section 4(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Investor with any material, nonpublic information which was not publicly disclosed prior to the date hereof and any material, nonpublic information provided to the Investor by the Company or its Subsidiaries or any of their officers, directors, employees or agents prior to any Closing Date shall be publicly disclosed by the Company prior to such Closing Date. g. Absence of Certain Changes. Except as disclosed in Schedule 4(g), the Company does not intend to change the business operations of the Company. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. h. Absence of Litigation. Except as set forth in Schedule 4(h), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a Material Adverse Effect. i. Acknowledgment Regarding Investor's Purchase of Shares. The Company acknowledges and agrees that the Investor is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Investor or any of its respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor's purchase of the Securities. The Company further represents to the Investor that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. j. No Undisclosed Events, Liabilities, Developments or Circumstances. Since March 31, 2003, no event, liability, development or circumstance has occurred or exists, or to the Company's knowledge is contemplated to occur, with respect to the Company or its Subsidiaries or their respective business, properties, assets, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced. k. Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Company's employ or otherwise terminate such officer's employment with the Company. l. Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth on Schedule 4(l), none of the Company's trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights necessary to conduct its business as now or as proposed to be conducted have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on Schedule 4(l), there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its Subsidiaries have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties. m. Environmental Laws. The Company and its Subsidiaries (i) are, to the knowledge of management of the Company, in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have, to the knowledge of management of the Company, received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance, to the knowledge of the Company,with all terms and conditions of any such permit, license or approval where, in each of the three foregoing cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect. n. Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 4(n) or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. o. Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company reasonably believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. p. Regulatory Permits. The Company and its Subsidiaries have in full force and effect all certificates, approvals, authorizations and permits from the appropriate federal, state, local or foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease or operate their respective properties and assets and conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, approval, authorization or permit, except for such certificates, approvals, authorizations or permits which if not obtained, or such revocations or modifications which, would not have a Material Adverse Effect. q. Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. r. No Materially Adverse Contracts, Etc. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. s. Tax Status. The Company and each of its Subsidiaries has made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. t. Certain Transactions. Except as set forth on Schedule 4(t) and in the SEC Documents filed at least ten days prior to the date hereof and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on Schedule 4(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. u. Dilutive Effect. The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Open Period. The Company's executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Transaction Documents, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. v. Right of First Refusal. The Company shall not, directly or indirectly, without the prior written consent of Investor offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any of its Common Stock or securities convertible into Common Stock at a price that is less than the market price of the Common Stock at the time of issuance of such security or investment (a "SUBSEQUENT FINANCING") for a period of one year after the Effective Date, except (i) the granting of options or warrants to employees, officers, directors and consultants, and the issuance of shares upon exercise of options granted, under any stock option plan heretofore or hereafter duly adopted by the Company, (ii) shares issued upon exercise of any currently outstanding warrants or options and upon conversion of any currently outstanding convertible debenture or convertible preferred stock, in each case disclosed pursuant to Section 4(c), (iii) securities issued in connection with the capitalization or creation of a joint venture with a strategic partner, (iv) shares issued to pay part or all of the purchase price for the acquisition by the Company of another entity (which, for purposes of this clause (iv), shall not include an individual or group of individuals), and (v) shares issued in a bona fide public offering by the Company of its securities, unless (A) the Company delivers to Investor a written ------ notice (the "SUBSEQUENT FINANCING NOTICE") of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the person with whom such Subsequent Financing shall be effected, and attached to which shall be a term sheet or similar document relating thereto and (B) Investor shall not have notified the Company by 5:00 p.m. (New York time) on the fifth (5th) Trading Day after its receipt of the Subsequent Financing Notice of its willingness to provide, subject to completion of mutually acceptable documentation, financing to the Company on substantially the terms set forth in the Subsequent Financing Notice. If Investor shall fail to notify the Company of its intention to enter into such negotiations within such time period, then the Company may effect the Subsequent Financing substantially upon the terms set forth in the Subsequent Financing Notice; PROVIDED THAT the Company shall provide Investor with a second Subsequent Financing Notice, and Investor shall again have the right of first refusal set forth above in this Section, if the Subsequent Financing subject to the initial Subsequent Financing Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Financing Notice within thirty (30) Trading Days after the date of the initial Subsequent Financing Notice. The rights granted to Investor in this Section are not subject to any prior right of first refusal given to any other person disclosed on Schedule 4(c). w. Lock-up. The Company shall cause its officers, insiders, directors, affiliates or other related parties to refrain from selling Common Stock during each Pricing Period. x. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Common Stock offered hereby. 5. COVENANTS OF THE COMPANY --------------------------- a. Best Efforts. The Company shall use commercially reasonable efforts timely to satisfy each of the conditions to be satisfied by it as provided in Section 7 of this Agreement. b. Blue Sky. The Company shall, at its sole cost and expense, on or before each of the Closing Dates, take such action as the Company shall reasonably determine is necessary to qualify the Securities for, or obtain exemption for the Securities for, sale to the Investor at each of the Closings pursuant to this Agreement under applicable securities or "Blue Sky" laws of such states of the United States, as reasonably specified by Investor, and shall provide evidence of any such action so taken to the Investor on or prior to the Closing Date. c. Reporting Status. Until the earlier to occur of (i) the first date which is after the date this Agreement is terminated pursuant to Section 9 and on which the Holders (as that term is defined in the Registration Rights Agreement) may sell all of the Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), and (ii) the date on which (A) the Holders shall have sold all the Securities and (B) this Agreement has been terminated pursuant to Section 9 (the "REGISTRATION PERIOD"), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as a reporting company under the 1934 Act. d. Use of Proceeds. The Company will use the proceeds from the sale of the Shares (excluding amounts paid by the Company for fees as set forth in the Transaction Documents) for general corporate and working capital purposes e. Financial Information. The Company agrees to make available to the Investor via EDGAR or other electronic means the following to the Investor during the Registration Period: (i) within five (5) Trading Days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-KSB, its Quarterly Reports on Form 10-QSB, any Current Reports on Form 8-K and any Registration Statements or amendments filed pursuant to the 1933 Act; (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries, (iii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders and (iv) within two (2) calendar days of filing or delivery thereof, copies of all documents filed with, and all correspondence sent to, the Principal Market, any securities exchange or market, or the National Association of Securities Dealers, Inc., unless such information is material nonpublic information. f. Reservation of Shares. Subject to the following sentence, the Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the issuance of the Securities hereunder. In the event that the Company determines that it does not have a sufficient number of authorized shares of Common Stock to reserve and keep available for issuance as described in this Section 5(f), the Company shall use its best efforts to increase the number of authorized shares of Common Stock by seeking shareholder approval for the authorization of such additional shares. g. Listing. The Company shall promptly secure and maintain the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon the Principal Market and each other national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the Common Stock's authorization for quotation on the Principal Market. Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market (excluding suspensions of not more than one trading day resulting from business announcements by the Company). The Company shall promptly provide to the Investor copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 5(g). h. Transactions With Affiliates. The Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any Subsidiary's officers, directors, persons who were officers or directors at any time during the previous two years, shareholders who beneficially own 5% or more of the Common Stock, or affiliates or with any individual related by blood, marriage or adoption to any such individual or with any entity in which any such entity or individual owns a 5% or more beneficial interest (each a "RELATED PARTY"), except for (i) customary employment arrangements and benefit programs on reasonable terms, (ii) any agreement, transaction, commitment or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, or (iii) any agreement, transaction, commitment or arrangement which is approved by a majority of the disinterested directors of the Company. For purposes hereof, any director who is also an officer of the Company or any Subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment or arrangement. "AFFILIATE" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a 5% or more equity interest in that person or entity, (ii) has 5% or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) is under common control with that person or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity. i. Filing of Form 8-K. On or before the date which is three (3) Trading Days after the Execution Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the transaction contemplated by the Transaction Documents in the form required by the 1934 Act, if such filing is required. j. Corporate Existence. The Company shall use its best efforts to preserve and continue the corporate existence of the Company. k. Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put. The Company shall promptly notify Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of the Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, and the Company shall promptly make available to Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to Investor any Put Notice during the continuation of any of the foregoing events. l. Reimbursement. If (i) Investor, other than by reason of its gross negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if Investor is impleaded in any such action, proceeding or investigation by any person (other than as a result of a breach of the Investor's representations and warranties set forth in this Agreement), or (ii) Investor, other than by reason of its gross negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by the SEC against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents (other than as a result of a breach of the Investor's representations and warranties set forth in this Agreement), or if Investor is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company will reimburse Investor for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which Investor is a named party, the Company will pay to Investor the charges, as reasonably determined by Investor, for the time of any officers or employees of Investor devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this section shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of Investor that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), as the case may be, of Investor and any such affiliate, and shall be binding upon and inure to the benefit of any successors of the Company, Investor and any such affiliate and any such person. 6. COVER. If the number of Shares represented by any Put Notices become restricted or are no longer freely trading for any reason, and after the applicable Closing Date, the Investor purchases, in an open market transaction or otherwise, the Company's Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Investor (the "Sold Shares"), which delivery such Investor anticipated to make using the Shares represented by the Put Notice (a "Buy-In"), the Company shall pay to the Investor the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the amount equal to the excess, if any, of (a) the Investor's total purchase price (including brokerage commissions, if any) for the Covering Shares over (b) the net proceeds (after brokerage commissions, if any) received by the Investor from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Investor in immediately available funds immediately upon demand by the Investor. By way of illustration and not in limitation of the foregoing, if the Investor purchases Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to the Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Investor will be $1,000. 7. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL. ---------------------------------------------------- The obligation hereunder of the Company to issue and sell the Securities to the Investor is further subject to the satisfaction, at or before each Closing Date, of each of the following conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. a. The Investor shall have executed each of this Agreement and the Registration Rights Agreement and delivered the same to the Company. b. The Investor shall have delivered to the Company the Purchase Price for the Securities being purchased by the Investor at the Closing (after receipt of confirmation of delivery of such Securities) by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. c. The representations and warranties of the Investor shall be true and correct as of the date when made and as of the applicable Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Investor shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Investor at or prior to such Closing Date. d. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. e. No Valuation Event shall have occurred since the applicable Put Notice Date. 8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE. ------------------------------------------------------------------ The obligation of the Investor hereunder to purchase Shares is subject to the satisfaction, on or before each Closing Date, of each of the following conditions set forth below. a. The Company shall have executed each of the Transaction Documents and delivered the same to the Investor. b. The Common Stock shall be authorized for quotation on the Principal Market and trading in the Common Stock shall not have been suspended by the Principal Market or the SEC, at any time beginning on the date hereof and through and including the respective Closing Date (excluding suspensions of not more than one Trading Day resulting from business announcements by the Company, provided that such suspensions occur prior to the Company's delivery of the Put Notice related to such Closing). c. The representations and warranties of the Company shall be true and correct as of the date when made and as of the applicable Closing Date as though made at that time (except for (i) representations and warranties that speak as of a specific date and (ii) with respect to the representations made in Sections 4(g), (h) and (j) and the third sentence of Section 4(k) hereof, events which occur on or after the date of this Agreement and are disclosed in SEC filings made by the Company at least ten (10) Trading Days prior to the applicable Put Notice Date) and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company on or before such Closing Date. The Investor may request an update as of such Closing Date regarding the representation contained in Section 4(c) above. d. reserved e. The Company shall have executed and delivered to the Investor the certificates representing, or have executed electronic book-entry transfer of, the Securities (in such denominations as such Investor shall request) being purchased by the Investor at such Closing. f. The Board of Directors of the Company shall have adopted resolutions consistent with Section 4(b)(ii) above (the "RESOLUTIONS") and such Resolutions shall not have been amended or rescinded prior to such Closing Date. g. If requested by the Investor, the Investor shall receive letters of the type, in the form and with the substance of the letters described in Sections 2(m) and 2(n) of this Agreement from the Company's auditors. h. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. i. The Registration Statement shall be effective on each Closing Date and no stop order suspending the effectiveness of the Registration statement shall be in effect or shall be pending or threatened. Furthermore, on each Closing Date (i) neither the Company nor Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist. j. At the time of each Closing, the Registration Statement (including information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or which would require public disclosure or an update supplement to the prospectus. k. There shall have been no filing of a petition in bankruptcy, either voluntarily or involuntarily, with respect to the Company and there shall not have been commenced any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment of indebtedness or reorganization of debtors, and there shall have been no calling of a meeting of creditors of the Company or appointment of a committee of creditors or liquidating agents or offering of a composition or extension to creditors by, for, with or without the consent or acquiescence of the Company. l. If applicable, the shareholders of the Company shall have approved the issuance of any Shares in excess of the Maximum Common Stock Issuance in accordance with Section 2(j). m. The conditions to such Closing set forth in Section 2(f) shall have been satisfied on or before such Closing Date. n. The Company shall have certified to the Investor the number of shares of Common Stock outstanding as of a date within ten (10) Trading Days prior to such Closing Date. o. The Company shall have delivered to such Investor such other documents relating to the transactions contemplated by this Agreement as such Investor or its counsel may reasonably request upon reasonable advance notice. p. On or before the execution of this Agreement, the Company shall have provided to the Investor a draft of the Registration Statement covering the Securities. 9. TERMINATION. This Agreement shall terminate upon any of the following events: (i) when the Investor has purchased an aggregate of $5,000,000 in the Common Stock of the Company pursuant to this Agreement; provided that the Company's representations, warranties and covenants contained in this Agreement insofar as applicable to the transactions consummated hereunder prior to such termination, shall survive the termination of this Agreement for the period of any applicable statute of limitations, (ii) on the date which is 36 (thirty-six) months after the Effective Date; (iii) if the Company shall file or consent by answer or otherwise to the entry of an order for relief or approving a petition for relief, reorganization or arrangement or any other petition in bankruptcy for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or shall make an assignment for the benefit of its creditors, or shall consent to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property, or shall be adjudicated a bankrupt or insolvent, or shall take corporate action for the purpose of any of the foregoing, or if a court or governmental authority of competent jurisdiction shall enter an order appointing a custodian, receiver, trustee or other officer with similar powers with respect to the Company or any substantial part of its property or an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law, or an order for the dissolution, winding up or liquidation of the Company, or if any such petition shall be filed against the Company; (iv) if the Company shall issue or sell any equity securities or securities convertible into, or exchangeable for, equity securities or enter into any other equity financing facility during the Open Period, other than in compliance with Section 4(v); (v) the trading of the Common Stock is suspended by the SEC, the Principal Market or the NASD for a period of five (5) consecutive Trading Days during the Open Period; (vi) the Company shall not have filed with the SEC the initial Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the initial Registration Rights Agreement within sixty (60) calendar days of the date hereof or the Registration Statement has not been declared effective within one hundred eighty (180) calendar days of the date hereof; or (vii) The Common Stock ceases to be registered under the 1934 Act or listed or traded on the Principal Market; or (viii) The Company requires shareholder approval under Nasdaq rules to issue additional shares and such approval is not obtained within 60 days from the date when the Company has issued its 19.9% maximum allowable shares. Upon the occurrence of one of the above-described events, the Company shall send written notice of such event to the Investor. 10. INDEMNIFICATION. In consideration of the parties mutual obligations set forth in the Transaction Documents, each of the parties (in such capacity, an "Indemnitor") shall defend, protect, indemnify and hold harmless the the other and all of the other party's shareholders, officers, directors, employees, counsel, and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES'), incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Indemnitor or any other certificate, instrument or document contemplated hereby or thereby (ii) any breach of any covenant, agreement or obligation of the Indemnitor contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (iii) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (iv) [reserved] or (v) [reserved], except insofar as any such misrepresentation, breach or any untrue statement, alleged untrue statement, omission or alleged omission is made in reliance upon and in conformity with written information furnished to Indemnitor which is specifically intended for use in the preparation of any such Registration Statement, preliminary prospectus or prospectus. To the extent that the foregoing undertaking by the Indenitor may be unenforceable for any reason, the Indemnitor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The indemnity provisions contained herein shall be in addition to any cause of action or similar rights Indemnitor may have, and any liabilities the Indemnitor or the Indemnitees may be subject to. 11. GOVERNING LAW; MISCELLANEOUS. a. Governing Law. This Agreement shall be governed by and interpreted -------------- in accordance with the laws of the Commonwealth of Massachusetts without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Boston, County of Suffolk, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. b. Legal Fees; and Miscellaneous Fees. --------------------------------------- (i) Except as otherwise set forth in the Transaction Documents, each party shall pay the fees and expenses of its advisers, counsel, the accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Any attorneys' fees and expenses incurred by either the Company or by the Investor in connection with the preparation, negotiation, execution and delivery of any amendments to this Agreement or relating to the enforcement of the rights of any party, after the occurrence of any breach of the terms of this Agreement by another party or any default by another party in respect of the transactions contemplated hereunder, shall be paid on demand by the party which breached the Agreement and/or defaulted, as the case may be. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of any Securities. c. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. d. Headings; Singular/Plural. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. e. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. f. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein (including the other Transaction Documents) contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Investor, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. g. Notices. Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: LocatePLUS Holdings Corporation Attn: James Fields, Vice President, Finance and Acting Chief Financial Officer 100 Cummings Center, Suite 235M Beverly, MA 01915 Telephone: 978-921-2727 Facsimile: 978-524-8767 With Copy to: Kirkpatrick & Lockhart 75 State St. Boston, MA 02109 Attn: Jeffrey Donohue Phone: 617-261-3100 Facsimile:: 617-261-3175 If to the Investor: Dutchess Private Equities fund, LP 312 Stuart St. Boston, MA 02116 Tel: (617) 960-3582 Fax: (617) 960-3772 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. h. No Assignment. This Agreement may not be assigned. i. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person. j. Survival. The representations and warranties of the Company and the Investor contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4 and 5, and the indemnification provisions set forth in Section 10, shall survive each of the Closings and the termination of this Agreement. k. Publicity. The Company and Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of Investor without the prior written consent of such Investor, except to the extent required by law. Investor acknowledges that this Agreement and all or part of the Transaction Documents may be deemed to be "material contracts" as that term is defined by Item 601(b)(10) of Regulation S-B, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the Securities 1933 Act or the 1934 Act. Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel. l. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. m. Placement Agent. Unless set forth in this Agreement, no fees or commissions will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other person or entity, with respect to the transactions contemplated by the Transaction Documents. The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other persons or entities for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents. The Company shall indemnify and hold harmless the Investor, their employees, officers, directors, agents, and partners, and their respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses incurred in respect of any such claimed or existing fees, as such fees and expenses are incurred. n. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. o. Remedies. The Investor and each holder of the Shares shall have all rights and remedies set forth in this Agreement and the Registration Rights Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including the recovery of reasonable attorneys fees and costs, and to exercise all other rights granted by law. p. Payment Set Aside. To the extent that the Company makes a payment or payments to the Investor hereunder or the Registration Rights Agreement or the Investor enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. q. Pricing of Common Stock. For purposes of this Agreement, the bid price of the Common Stock in this Agreement shall be as reported on Bloomberg.com. LocatePLUS Holdings Corporation SIGNATURE PAGE -------------- Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Investment Agreement and the Registration Rights Agreement. The undersigned signatory hereby certifies that he/she has read and understands the Investment Agreement, and the representations made by the undersigned in this Investment Agreement are true and accurate, and agrees to be bound by its terms. DUTCHESS PRIVATE EQUITIES FUND, L.P. BY ITS GENERAL PARTNER DUTCHESS CAPITAL MANAGEMENT, LLC By:_/s/ Douglas H. Leighton_____ Date June 4, 2003 --------------------------- Name: Douglas H. Leighton Title: A Managing Member COMPANY ACCEPTANCE PAGE ----------------------- This Investment Agreement accepted and agreed to on June 2, 2003. LocatePLUS Holdings Corporation By /s/ Jon R. Latorella____ ----------------------- Jon R. Latorella, President and Chief Executive Officer LIST OF EXHIBITS EXHIBIT A Registration Rights Agreement EXHIBIT B [reserved] EXHIBIT C Reserved EXHIBIT D Broker Representation Letter EXHIBIT E Board Resolution EXHIBIT F Put Notice EXHIBIT G Put Settlement Sheet EXHIBIT H Partial Release of Put Amount and Shares LIST OF SCHEDULES ----------------- Schedule 4(a) Subsidiaries Schedule 4(c) Capitalization Schedule 4(e) Conflicts Schedule 4(g) Material Changes Schedule 4(h) Litigation Schedule 4(l) Intellectual Property Schedule 4(n) Liens Schedule 4(t) Certain Transactions EXHIBIT A EXHIBIT B EXHIBIT C EXHIBIT D [BROKER'S LETTERHEAD] Date Via Facsimile Attention: ______________________ ______________________ ______________________ Re: LocatePLUS Holdings Corporation Dear __________________: It is our understanding that the Form______ Registration Statement bearing SEC File Number ( ___-______) filed by LocatePLUS Holdings Corporation on Form SB-2 on __________, 2003 was declared effective on _________, 2003. This letter shall confirm that ______________ shares of the common stock of LocatePLUS Holdings Corp. are being sold on behalf of __________________ and that we shall comply with the prospectus delivery requirements set forth in that Registration Statement by filing the same with the purchaser. If you have any questions please do not hesitate to call. Sincerely, ______________________ cc: . EXHIBIT E EXHIBIT F Date: RE: Put Notice Number __ Dear Mr. Leighton, This is to inform you that as of today, LocatePLUS Holdings Corporation, a Delaware corporation (the "Company"), hereby elects to exercise its right pursuant to the Investment Agreement to require Dutchess Private Equities Fund, LP. to purchase shares of its common stock. The Company hereby certifies that: The amount of this put is $__________. The Pricing Period runs from ________ until _______. The current number of shares issued and outstanding as of the Company are: ____________________ Regards, ________________________ Jon R Latorella CEO EXHIBIT G PUT SETTLEMENT SHEET Date: Jon, Pursuant to the Put given by LocatePLUS Holdings Corpto Dutchess Private Equities Fund, L.P. on _________________ 200x, we are now submitting the amount of common shares for you to issue to Dutchess. Please have a certificate baring no restrictive legend totaling __________ shares issued to Dutchess Private Equities Fund, LP immediately and send via DWAC to the following account: XXXXXX If not DWAC eligible, please send Fedex Priority Overnight to: XXXXXX Once these shares are received by us, we will have the funds wired to the Company. Regards, Douglas H. Leighton DATE PRICE Date of Day 1 Closing Bid of Day 1 Date of Day 2 Closing Bid of Day 2 Date of Day 3 Closing Bid of Day 3 Date of Day 4 Closing Bid of Day 4 Date of Day 5 Closing Bid of Day 5 Date of Day 6 Closing Bid of Day 6 Date of Day 7 Closing Bid of Day 7 Date of Day 8 Closing Bid of Day 8 Date of Day 9 Closing Bid of Day 9 Date of Day 10 Closing Bid of Day 10 LOWEST 1 (ONE) CLOSING BID IN PRICING PERIOD PUT AMOUNT AMOUNT WIRED TO COMPANY PURCHASE PRICE (95% (NINETY-FIVE PERCENT)) AMOUNT OF SHARES DUE The undersigned has completed this Put as of this ___th day of _________, 20xx. LocatePLUS Holding Corp. ________________________________ Jon R. Latorella, CEO EXHIBIT H PARTIAL RELEASE OF PURCHASE AMOUNT AND SHARES LocatePLUS Holdings Corp, Inc. James Fields 100 Cummings Center, Suite 235M Beverly, MA 01915 Telephone: 978-921-2727 Facsimile: 978-524-8767 Pursuant to the terms of the Investment Agreement the Investor requests the release from the Company of __________ shares of the Company's Common Stock by overnight delivery or DWAC, if available, and the Investor, upon confirmation of receipt of the Securities by the Investor, the Investor shall wire $____________ to the Company within two (2) Trading Days of said confirmation. INVESTOR By: Note: The number of Shares stated in this PARTIAL RELEASE OF PUT AMOUNT AND - ---- SHARES Form shall be equal to the dollar amount to be released divided by 95% - ---- (ninety-five percent) of the lowest closing bid price during that number of - -- Trading Days that have elapsed in the specified Pricing Period. - -- SCHEDULE 4(a) SUBSIDIARIES SCHEDULE 4(c) CAPITALIZATION SCHEDULE 4(e) CONFLICTS SCHEDULE 4(g) MATERIAL CHANGES SCHEDULE 4(h) LITIGATION SCHEDULE 4(l) INTELLECTUAL PROPERTY SCHEDULE 4(n) LIENS SCHEDULE 4(t) CERTAIN TRANSACTIONS EX-10.15/A 5 doc4.txt Exhibit 10.15/A REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of June 2, 2003, by and between LocatePLUS Holdign Corporation, a corporation organized under the laws of State of Delaware, with its principal executive office at 100 Cummings Center, Suite 235M, Beverly, MA 01915 (the "Company"), and Dutchess Private Equities Fund, L.P. (the "Investor"). WHEREAS, in connection with the Investment Agreement by and between the Company and the Investor of even date herewith (the "Investment Agreement"), the Company has agreed to issue and sell to the Investor an indeterminate number of shares of the Company's Class A Voting Common Stock, par value $0.01 per share (the "Common Stock"), to be purchased pursuant to the terms and subject to the conditions set forth in the Investment Agreement; and WHEREAS, to induce the Investor to execute and deliver the Investment Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Investment Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained hereinafter and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: a. "Execution Date" means the date this Agreement and the Investment Agreement are signed by the Company and the Investor. b. "Holder" means Dutchess Private Equities Fund, L.P., a Delaware limited partnership. c. "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. d. "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a Registration Statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the Registration Statement would be detrimental to the business and affairs of the Company, or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a Registration Statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the Registration Statement would be materially misleading absent the inclusion of such information. e. "Principal Market" shall mean The American Stock Exchange, National Association of Securities Dealer's, Inc. OTC electronic bulletin board, the BBX, the Nasdaq National Market or The Nasdaq SmallCap Market whichever is the principal market on which the Common Stock is listed. f. "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). g. "Registrable Securities" means (i) the shares of Common Stock issued or issuable pursuant to the Investment Agreement, and (ii) any shares of capital stock issued or issuable with respect to such shares of Common Stock, if any, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in a Registration Statement that has been declared effective by the SEC or (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act. h. "Registration Statement" means a registration statement of the Company filed under the 1933 Act covering the Registrable Securities. All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Investment Agreement. 2. REGISTRATION. a. Mandatory Registration. On or before the execution of this Agreement, the Company shall have provided a draft of the Registration Statement covering the Registrable Securities to the Investor. The Company shall, as soon as practicable, but not later than fifteen (15) calendar days following the Execution Date, file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form SB-2 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale 28,500,000 shares of Common Stock which would be issuable on the date preceding the filing of the Registration Statement based on the closing bid price of the Company's Common Stock on such date and the amount reasonably calculated that represents Common Stock issuable to other parties as set forth in the Investment Agreement. b. The Company shall use commercially reasonable efforts to have the Registration Statement(s) declared effective by the SEC within ninety (90) calendar days after the Execution Date. c. The Company agrees not to include any other securities in the Registration Statement covering the Registrable Securities without Investor's prior written consent which Investor may withhold in its sole discretion. Furthermore, the Company agrees that it will not file any other Registration Statement for other securities, until thirty (30) calendar days after the Registration Statement for the Registrable Securities is declared effective by the SEC. 3. RELATED OBLIGATIONS. At such time as the Company is obligated to prepare and file a Registration Statement with the SEC pursuant to Section 2(a), the Company will effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations: a. The Company shall use commercially reasonable efforts to cause such Registration Statement relating to the Registrable Securities to become effective within ninety (90) days after the Execution Date and shall keep such Registration Statement effective until the earlier to occur of (i) the date as of which the Holders may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Holders shall have sold all the Registrable Securities and (B) the Investor has no right to acquire any additional shares of Common Stock under the Investment Agreement (the "Registration Period"). The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall respond to all SEC comments within seven (7) business days from receipt of such comments by the Company. The Company shall cause the Registration Statement relating to the Registrable Securities to become effective no later than three (3) business days after notice from the SEC that the Registration Statement may be declared effective. The Holder agrees to provide all information which it is required by law to provide to the Company, including the intended method of disposition of the Registrable Securities, and the Company's obligations set forth above shall be conditioned on the receipt of such information. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock covered by a Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use commercially reasonable efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. c The Company shall furnish to the Holders whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as the Holders may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Holders may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities. d. The Company shall use commercially reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such states in the United States as any Holder reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), or (y) subject itself to general taxation in any such jurisdiction. The Company shall promptly notify each Holder who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event, the Company shall notify each Holder in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading ("Registration Default") and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement and take any other necessary steps to cure the Registration Default, (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Holder (or such other number of copies as such Holder may reasonably request). The Company shall also promptly notify each Holder in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Holder by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective or, (v) if Registration Statement is stale as a result of the Company's failure to timely file its financials or otherwise. The Company acknowledges that its failure to cure the Registration Default within ten (10) business days will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. It is the intention of the parties that interest payable under any of the terms of this Agreement shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Agreement which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Agreement exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Company which exceed the permitted limits will be refunded to the Company. The Investor may choose to make this refund by reducing the amount that the Company owes under this Agreement or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Investor, the reduction will be treated as a partial payment. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. f. The Company shall use commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Holder who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. The Company shall permit each Holder and one legal counsel, designated by the Holder, to review and comment upon a Registration Statement and all amendments and supplements thereto at least seven (7) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit to the SEC a request for acceleration of the effectiveness of a Registration Statement or file with the SEC a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which approval shall not be unreasonably withheld. h. At the request of any Holder, the Company shall cause to be furnished to such Holder, on the date of the effectiveness of a Registration Statement, a legal opinion, in form and substance reasonably acceptable to Holder's counsel, dated as of such date, of counsel representing the Company for purposes of such Registration Statement. i. The Company shall make available for inspection by (i) any Holder and (ii) one firm of attorneys and one firm of accountants or other agents retained by the Holders (collectively, the "Inspectors"), at the Holders' expense, all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall hold in strict confidence and shall not make any disclosure (except to a Holder) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. Each Holder agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. j. The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning a Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. k. The Company shall use commercially reasonable efforts to secure designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use commercially reasonable efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or system. If, despite the Company's commercially reasonable efforts, the Company is unsuccessful in satisfying the two preceding sentences, it will use commercially reasonable efforts to secure the inclusion for quotation on the Nasdaq SmallCap Market for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k). l. The Company shall cooperate with the Investor to facilitate the prompt preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Holders may reasonably request. m. The Company shall provide a transfer agent for all the Registrable Securities not later than the effective date of the first Registration Statement filed pursuant hereto. n. If requested by the Holders, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as such Holders reasonably determine should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by such Holders. o. The Company shall use commercially reasonable efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. p. The Company shall otherwise use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. q. Within one (1) business day after the Registration Statement which includes Registrable Securities is declared effective by the SEC, the Company shall deliver to the transfer agent for such Registrable Securities, with copies to the Investor, confirmation that such Registration Statement has been declared effective by the SEC. r. At or prior to the date of the first Put Notice (as that term is defined in the Investment Agreement) and at such other times as the Holders may reasonably request, the Company shall cause to be delivered, letters from the Company's independent certified public accountants (i) addressed to the Holders that such accountants are independent public accountants within the meaning of the 1933 Act and the applicable published rules and regulations thereunder, and (ii) in customary form and covering such financial and accounting matters as are customarily covered by letters of independent certified public accountants delivered to underwriters in connection with public offerings. s. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Holders of Registrable Securities pursuant to a Registration Statement. 4. OBLIGATIONS OF THE HOLDERS. a. At least five (5) calendar days prior to the first anticipated filing date of a Registration Statement the Company shall notify each Holder in writing of the information the Company requires from each such Holder if such Holder elects to have any of such Holder's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall furnish in writing to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall reasonably be required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Each Holder covenants and agrees that, in connection with any sale of Registrable Securities by it pursuant to a Registration Statement, it shall comply with the "Plan of Distribution" section of the current prospectus relating to such Registration Statement. b. Each Holder, by such Holder's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registrable Securities from such Registration Statement. c. Each Holder agrees that, upon receipt of written notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), such Holder will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e). 5. EXPENSES OF REGISTRATION. All expenses, other than underwriting discounts and commissions and other than as set forth in the Investment Agreement, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printing and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company; provided, however, that nothing in this Section 5 shall obligate the Company to pay the expenses or fees of Inspectors or counsel to the Holders. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Holder who holds such Registrable Securities, the directors, officers, partners, employees, counsel, agents, representatives of, and each Person, if any, who controls, any Holder within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims"), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Holders and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which is due to the inclusion in the Registration Statement of the information furnished in writing to the Company by any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (ii) shall not be available to the extent such Claim is based on (a) a failure of the Holder to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person's use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; (iii) any claims based on the manner of sale of the Registrable Securities by the Holder or of the Holder's failure to register as a dealer under applicable securities laws; (iv) any omission of the Holder to notify the Company of any material fact that should be stated in the Registration Statement or prospectus relating to the Holder or the manner of sale; and (v) any amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement. b. In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the c. same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act and the Company's agents (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation is due to the inclusion in the Registration Statement of the written information furnished to the Company by such Holder expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Holder will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the resale of the Registrable Securities by the Holders pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis in the prospectus, as then amended or supplemented. This indemnification provision shall apply separately to each Investor and liability hereunder shall not be joint and several. d. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the Indemnified Person or Indemnified Party, the representation by counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by the Holders, if the Holders are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully appraised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise e. which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party shall be surrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. f. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. g. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. With a view to making available to the Holders the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Holders to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 5(c) of the Investment Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. NO ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement shall not be assignable. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended only with the written consent of the Company and Holders. No such amendment shall be effective to the extent that it applies to less than all of the Holders of the Registrable Securities. 11. MISCELLANEOUS. a. Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: LocatePLUS Holdings Corporation James Fields, Vice President, Finance and Acting Chief Financial Officer 100 Cummings Center, Suite 235M Beverly, MA 01915 Telephone: 978-921-2727 Facsimile: 978-524-8767 With Copy to: Kirkpatrick & Lockhart 75 State St. Boston, MA 02109 Attn: Jeffrey Donohue Phone: 617-261-3100 Facsimile: 617-261-3175 If to the Investor: Dutchess Private Equities Fund, LP 312 Stuart St, Third Floor Boston, MA 02116 Telephone: 617-960-3570 Facsimile: 617-960-3772 Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number. b. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. c. The laws of the Commonwealth of Massachusetts shall govern all issues arising from or related to this Agreement without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Boston, County of Suffolk, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. d. This Agreement and the Transaction Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. e. This Agreement and the Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if all the parties had prepared the same. g. This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. h. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the day and year first above written. LocatePLUS Holdings Corporation By: _/s/ Jon R. Latorella___________ ----------------------- Name: Jon R. Latorella Title: CEO DUTCHESS PRIVATE EQUITIES FUND, L.P. BY ITS GENERAL PARTNER DUTCHESS CAPITAL MANAGEMENT, LLC By: /s/Douglas H. Leighton ------------------------ Name: Douglas H. Leighton Title: A Managing Member EX-23.2 6 doc5.txt Exhibit 23.2 [KIRKPATRICK & LOCKHART LLP LETTERHEAD] July 15, 2003 LocatePLUS Holdings Corporation 100 Cummings Center Suite 235M Beverly, Massachusetts 01915 Re: LocatePLUS Holdings Corporation Registration Statement on Form SB-2 Ladies and Gentlemen: We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name in the prospectus constituting a part thereof in connection with the matters referred to under the caption "Legal Matters." Very truly yours, /s/ Kirkpatrick & Lockhart LLP KIRKPATRICK & LOCKHART LLP -----END PRIVACY-ENHANCED MESSAGE-----