SB-2/A 1 sb2a1.txt SB2A1 As filed with the Securities and Exchange Commission on July 31, 2006 Registration No. 333-132585 ------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (Amendment 1) ------------------ LocatePLUS Holdings Corporation (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of 7379 04-3332304 Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification 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) ------------------ 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 Proposed Maximum Proposed Aggregate of Securities to be Amount to be Maximum Offering Registered Registered (1) Offering Price (2) Amount of Price per Registration Share (2) Fee (2) Common Stock, $.01 par value per share 5,975,000 $1.45 $8,627,500 $ 923.14 (1) The maximum number of shares being registered was calculated by adding the number of shares to be registered pursuant to a private placement of 400,000 shares already issued, a promissory note convertible into up to 950,000 shares of the Registrant's capital stock and common stock purchase warrants exercisable for up to 1,125,000 of the Registrant's capital stock and 3,500,000, a bona fide estimate of the number of shares subject to issuance pursuant to the exercise of a put right under a certain Investment Agreement between the Registrant and a third party. The Registrant's management currently anticipates that the Registrant will not cause the put right to be exercised in a manner that will result in the issuance of more than 3,500,000 shares. (2) The offering price is estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c), using the closing price of the Registrant's Common stock as reported on the OTCBB on July 28, 2006, which was $1.45 per share. 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. DATED JULY 31, 2006 [GRAPHIC OMITED] LOCATEPLUS HOLDINGS CORPORATION PROSPECTUS The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement containing this prospectus, which was filed with the Securities and Exchange Commission, is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JULY 31, 2006, 2006 LOCATEPLUS HOLDINGS CORPORATION 5,975,000 Shares of Common Stock $.01 par value This prospectus relates to the resale of up to 5,950,000 shares of our Common Stock by Dutchess Private Equities Fund L.P. or Dutchess Private Equities Fund II, L.P.(collectively "Dutchess"), which currently owns 400,000 shares and will acquire up to 950,000 shares pursuant to the terms of a convertible note, up to 1,125,000 pursuant to the terms of a common stock purchase warrant, and 3,500,000 pursuant to a "put right" under an Investment Agreement that we have entered into with Dutchess. That Investment Agreement (also referred to as an "Equity Line of Credit" arrangement) permits us to "put" up to $10.0 million in shares 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 shares of Common Stock pursuant to our exercise of the put right. All costs associated with this registration will be borne by us. The shares of 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 Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol "LPHC.OB." During the 90 day period ending on February 24, 2006, the lowest reported trading price per share for our Common Stock was $2.42 and the highest reported trading price per share for our Common Stock was $4.50. The sole selling stockholder is Dutchess, which intends to resell up to 5,975,000 shares of our Common Stock. Dutchess is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection with the resale of Common Stock under the Investment Agreement. Dutchess will pay us 93% of the lowest closing bid price of the 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 Investment Agreement. With the exception of Dutchess, no other underwriter or person has been engaged to facilitate the sale of shares of 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 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 10. ________________________________________________ INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. YOU SHOULD CAREFULLY REVIEW THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS", WHICH BEGINS ON PAGE 5, BEFORE YOU MAKE AN INVESTMENT DECISION. 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 31, 2006. TABLE OF CONTENTS ----------------- PAGE ---- Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . 1 Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 3 Forward-Looking Statements. . . . . . . . . . . . . . . . . . . 9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 9 Dividend Policyz. . . . . . . . . . . . . . . . . . . . . . . . 9 Selling Security Holders. . . . . . . . . . . . . . . . . . . . 9 Plan of Distribution. . . . . . . . . . . . . . . . . . . . . 10 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . 13 Selected Consolidated Financial Data. . . . . . . . . . . . . 14 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . .15 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Executive Officers and Directors. . . . . . . . . . . . . . . 29 Organization Within the Past Five Years . . . . . . . . . . . .35 Certain Relationships and Related Transactions. . . . . . . . 36 Market for Common Equity. . . . . . . . . . . . . . . . . . . 38 Principal Stockholders. . . . . . . . . . . . . . . . . . . . 39 Description of Capital Stock. . . . . . . . . . . . . . . . . 41 Shares Eligible for Future Sale . . . . . . . . . . . . . . . .44 Transfer Agent and Registrar. . . . . . . . . . . . . . . . . 44 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . .44 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Additional Information. . . . . . . . . . . . . . . . . . . . 44 Index to Financial Statements . . . . . . . . . . . . . . . . F-1 * * * PROSPECTUS SUMMARY You should read the following summary together with the more detailed information in this prospectus regarding us and the risks associated with purchasing our securities. OUR COMPANY ----------- We are a provider of public information via our proprietary data integration solutions through our wholly-owned subsidiaries, LocatePLUS Corporation, Worldwide Information, Inc., Certifion Corporation (d/b/a Entersect), Dataphant, Inc., and Metrigenics, Inc. (together with LocatePLUS Holdings Corporation, we refer to these companies collectively as the "LocatePLUS Group"). Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , 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 December 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 that product as LocatePLUS AnyWhere . Our wholly-owned subsidiary, Certifion Corporation (d/b/a Entersect), has offered on-line self-certification products since September 2003. Metrigenics, Inc., another wholly-owned subsidiary, was formed in January 2004 to develop methods for using DNA to determine biometrics, such as height, body-type, foot and hand size, head shape, facial features, and ethnic origin. SUMMARY OF THE OFFERING ----------------------- This offering relates to the offer and sale of up to 5,975,000 shares of our Common Stock held by certain selling stockholders named in this prospectus. Although we have agreed to pay the expenses related to the registration of the shares being offered, we will not receive any of the proceeds from the sale of the shares. We estimate our total registration costs to be $30,000. The selling stockholders may, from time to time, sell, transfer or otherwise dispose of any or all of their shares or interests in shares on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. The selling stockholders may use any one or more of the methods described in this prospectus when disposing of shares or interests therein. We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act of 1933. We have agreed to indemnify the selling stockholders against liabilities, including liabilities under the Securities Act of 1933 and state securities laws, relating to the registration of the shares offered by this prospectus. We have agreed with the selling stockholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act of 1933. 1 IMPORTANT NOTE CONCERNING OUR FINANCIAL CONDITION ------------------------------------------------- Our financial statements were prepared on the assumption that we will continue as a going concern, and our independent accountants have expressed doubt as to that assumption. Our management estimates that our projected cash flow from operations, plus our cash reserves, will be sufficient to permit us to continue our current level of operations for at least twelve months from the date of this prospectus. However, we plan to increase our sales and marketing, product development, and administrative expenses. We will not receive any of the proceeds from the sale of the shares covered by this prospectus. For more information on this matter, you should review our financial statements, which begin on page F-1 of this prospectus, as well as the section of this prospectus titled "Management's Discussion and Analysis of Financial Condition and Results of Operations". OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE --------------------------------------------------------- The following table outlines our capital stock as of July 15, 2006: Shares of Common Stock outstanding 6,883,289 (1) ______________ (1) Assuming no exercise or conversion of warrants and options to purchase 3,210,053 shares of Common Stock outstanding as of July 15, 2006. HOW TO CONTACT US ----------------- Our executive offices are located at 100 Cummings Center, Suite 235M, Beverly, Massachusetts 01915. Our phone number is (978) 921-2727. Our website is http://www.locateplus.com. Information on our website is not intended to be incorporated into this prospectus. * * * 2 RISK FACTORS Any investment in our securities involves a high degree of risk. You should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase any of our securities. We have not attempted to rank the following risks in order of their likelihood. RISKS RELATED TO OUR BUSINESS ----------------------------- OUR FINANCIAL STATEMENTS WERE PREPARED ON THE ASSUMPTION THAT WE WILL CONTINUE AS A GOING CONCERN, AND OUR INDEPENDENT ACCOUNTANTS HAVE EXPRESSED DOUBT AS TO THAT ASSUMPTION. Our financial statements were prepared on the assumption that we will continue as a going concern, and our independent accountants have expressed doubt as to that assumption. If sufficient capital is not available, we would likely be required to reduce or discontinue our operations. We plan to increase our sales and marketing, product development, and administrative expenses. We will not receive any of the proceeds from the sale of the shares covered by this prospectus. As a result, we may be required to raise additional capital, which may not be available to us on favorable terms, if at all. If we are unable to generate sufficient cash from operations and we are unable to raise additional capital, we will be forced to discontinue some or all of our operations, reduce the development of some or all of our products, or reduce our workforce, all of which would materially adversely affect our business. 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 $7.5 million in 2004, $5.6 million in 2005 and approximately $426,000 for the three months ended March 31, 2006. Our accumulated deficit as of March 31, 2006 was approximately $36.3 million. We anticipate that our expenses relating to our sales and marketing and product development, as well as our general and administrative expenses, to stabilize in the foreseeable future. To achieve profitability, we must generate more revenue than we have in prior years. Even if we ultimately achieve profitability, we may not be able to sustain or increase our profitability. If our revenue grows more slowly than we anticipate, or if our operating expenses exceed our expectations, our operating results and financial condition will be adversely affected. For more information on our history of losses, you should review our financial statements, which are included in this prospectus beginning on page F-1. OUR RIGHT TO USE CERTAIN THIRD PARTY DATA IS SUBJECT TO TERMINATION BY OUR CURRENT DATA PROVIDERS. ANY SUCH TERMINATION COULD DISRUPT OUR BUSINESS. We obtain our data from a variety of sources. Some of our data providers may terminate our right to use their data in their sole discretion and without any recourse to us. If our access to certain data sources is restricted, there can be no assurance that we would be able to obtain and integrate replacement data on a timely basis. In such an event, our products would likely be less attractive to current and potential customers and our revenue would likely decrease, which could materially adversely affect our business. OUR FUTURE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD ADVERSELY AFFECT THE PRICE OF OUR SECURITIES. You should not rely on quarter-to-quarter comparisons of our historical results as an indication of our future performance. If our quarterly operating results do not meet the expectations of our investors, the market price of our securities will likely decline. Our future quarterly results may fluctuate as a result of many factors, some of which are outside our control, including: - legal and regulatory developments that may adversely affect our ability to collect or disseminate data; - the timing, introduction and commercialization of our new products and services (including the integration of additional datasets into our databases); - increased unemployment in the United States, which may result in reduced use of our products by human resources personnel; - the potential costs of protecting our intellectual property rights; - 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; - 3 the introduction of similar or substitute databases by our competitors; and - the timing and establishment of our marketing and channel partnership arrangements. WE HAVE LIMITED PRODUCT OFFERINGS, AND IF DEMAND FOR THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT, OUR REVENUE WILL DECLINE. We derive the majority of our current consolidated net revenue from two products. Specifically, in the year ended December 31, 2005, and in the three months ended March 31, 2006, we derived substantially all of our recurring consolidated 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 products or product enhancements could require us to obtain substitute data, which may be less current. In such an event, our products would likely be less attractive to current and potential customers and our revenue would likely decrease, which could materially adversely affect our business. IF WE CANNOT INTEGRATE, UPDATE AND IMPROVE OUR PRODUCTS, OUR PRODUCTS MAY BE LESS ATTRACTIVE TO OUR TARGET MARKET, WHICH WOULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL CONDITION. We must continuously update our databases so that we may provide datasets to customers that are accurate and current. We must also integrate additional datasets for our products to remain competitive. Updating our databases and integrating additional datasets are time-consuming processes and often require extensive resources, as we often obtain public documents in a form that is not suitable for use in any of our products. For example, we often receive "raw data" on electronic tape media from state motor vehicle licensing agencies that must be modified so that it can be searched rapidly based upon partial information. We can give no assurance that we will have adequate resources to update our datasets or to integrate new datasets. If we are unable to update our datasets or integrate new datasets, our products are likely to be less desirable to our target market than those of our competitors, and our sales and financial condition would be adversely affected. THE MARKET FOR DATABASE PRODUCTS AND SERVICES IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THIS MARKET. Our industry is intensely competitive and we expect competition to continue to increase from both existing competitors and new market entrants. Many of the companies that currently compete with us, as well as other companies with whom we may compete in the future, are national or international in scope and have greater resources than we do. Those resources could enable those companies to initiate price cuts or take other measures in an effort to gain market share in our target markets. We may have inadequate resources to compete against such businesses. For example, our LocatePLUS product competes with products offered by: - confi-chek.com; - FlatRateInfo; - 4 - Accurint; - ChoicePoint; and - Lexis-Nexis. Our Worldwide Information product primarily competes with the registries of motor vehicles of various states that sell their data to screened users. These state agencies generally provide data in "raw form" without the search capabilities that we provide in our Worldwide Information product. We cannot assure you that we will be able to compete successfully against these or other current and future participants in our markets or against alternative technologies, nor can we assure you that the competitive pressures that we face will not adversely affect our business. WE FACE RISKS ASSOCIATED WITH OUR STRATEGIC ALLIANCES, WHICH COULD LIMIT OUR ABILITY TO INCREASE OUR MARKET SHARE. From time to time, we enter into "channel partner" arrangements and similar strategic alliances, through which we license access to our databases to third parties in exchange for royalties. We can give no assurance that we will be able to identify and secure appropriate channel partners or that any channel partner arrangements will be profitable. If we are unable to enter into appropriate channel partner arrangements, use of our database may not grow sufficiently to meet our business objectives. Disruptions in our relations with our channel partners may adversely effect our financial condition and the results of our operations. TO INCREASE OUR REVENUE, WE MUST INCREASE OUR SALES FORCE AND EXPAND OUR DISTRIBUTION CHANNELS. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN THESE EFFORTS. To date, we have sold our products primarily through our direct sales and tele-sales force. Our future revenue growth will depend in large part on recruiting and training additional direct sales and tele-sales personnel and expanding our distribution channels. We may experience difficulty recruiting qualified sales and support personnel and establishing third-party distribution relationships, such as channel partner arrangements. We may not be able to successfully expand our tele-sales force or other distribution channels, and any such expansion, if achieved, may not result in increased revenue or profits. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS THAT MAY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. Our products consist of publicly available, third-party data that we organize to permit rapid and effective computerized searches. Because our datasets consist of publicly available data, we cannot prevent competitors from developing equivalent databases. We anticipate that our success will depend, in part, on our proprietary data integration and linking methodologies. We have not obtained, and do not anticipate that we will obtain, patent protection for these methodologies. We rely on trade secret rights, confidentiality agreements and procedures and licensing arrangements to establish and protect our proprietary rights with respect to our data integration methodologies. Despite our efforts, third parties could attempt to copy or otherwise obtain and make unauthorized use of our products or independently develop similar products. WE FACE SIGNIFICANT SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF CONFIDENTIAL INFORMATION. IF WE ARE UNABLE TO ADEQUATELY PROTECT CERTAIN CONFIDENTIAL INFORMATION, OUR REPUTATION AND BUSINESS WOULD BE ADVERSELY AFFECTED, AND WE COULD BE SUBJECT TO LIABILITY IN CERTAIN JURISDICTIONS. We rely on commercially available encryption software and other technologies to provide system security and to effect secure transmission of confidential information, such as credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the security measures used by us to protect customer transaction data. If our security systems were to be compromised, it could have a material adverse effect on our reputation and business and, under the laws of certain jurisdictions, we may be subject to significant liabilities and reporting obligations. A party who is able to circumvent our security measures could misappropriate our information, cause interruptions in our operations, damage our reputation and customers' willingness to use our products and subject us to possible liability under applicable states' privacy laws. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. 5 OUR PRODUCTS MAY HAVE UNKNOWN DEFECTS WHICH COULD HAVE ADVERSE EFFECTS ON OUR CUSTOMER RELATIONS AND FINANCIAL RESULTS. Datasets as complex as those that we develop may contain undetected defects or errors. For example, our products may contain unknown defects due to errors in the data that we purchase from our data providers. Despite testing, defects or errors may occur in our existing or new products, which could make them less attractive to our target markets. As a result, defects and errors in our datasets could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation and an adverse effect on our business, financial condition and results of operation. DEFECTS OR ERRORS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT MAY NOT BE COVERED BY OUR INSURANCE. Our datasets may contain errors, which may give rise to claims against us. We generally disclaim all warranties on the data we include in our products. However, our disclaimers may not be enforceable. In such an event, or if liabilities arise that are not contractually limited, our business could be adversely affected. We currently do not maintain professional liability insurance, and our general liability insurance may not cover claims of this nature. WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR PLANNED GROWTH. We intend to expand our customer base and develop new products. To manage our anticipated growth, we must continue to improve our operational and financial systems and expand, train, retain and manage our employee base. Any growth of our business may place a strain on our managerial and financial resources. IF WE ARE NOT ABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS AS PRESENTLY CONDUCTED. The recent growth in our business has resulted in an increase in the responsibilities of our personnel. Several of our personnel are presently serving in more than one capacity. Competition for experienced and qualified personnel in our industry is intense. We may not be able to retain our current key employees, or attract, integrate or retain other qualified personnel in the future. If we do not succeed in attracting new personnel or in integrating, retaining and motivating our current personnel, our business could be harmed. WE DEPEND ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS; THE LOSS OF ANY OF OUR KEY EMPLOYEES COULD DELAY OUR PLANNED GROWTH AND LIMIT OUR ABILITY TO ACHIEVE PROFITABILITY. Our success depends to a significant extent on the performance and continued service of our senior management and other key employees, and particularly those of our President and Chief Executive Officer, Mr. Jon R. Latorella. We have no employment agreements with any of our employees. The loss of the services of any of our senior management or any of our other key employees would disrupt our operations and would delay our planned growth while we worked to replace those employees. We do not maintain "key man" life insurance on any of our employees. As a result, if any of our key employees were to die or become unable to provide services for us, our operations would be disrupted and we would have no means of recovering any resulting losses. WE DO NOT CURRENTLY PAY DIVIDENDS, NOR DO WE ANTICIPATE DOING SO IN THE IMMEDIATE FUTURE. ACCORDINGLY, THERE IS NO ASSURANCE THAT WE WILL PAY DIVIDENDS IN THE FUTURE. We have never declared or paid a dividend. At this time, we do not anticipate paying any dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends. The timing and amount of any future dividends and distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business. You should not purchase our securities on the expectation of future dividends. 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. 6 Much of the data we provide is subject to regulation by the Federal Trade Commission under the Federal Fair Credit Reporting Act and Title V of the Financial Services Modernization Act (which is also referred to as the "Gramm-Leach-Bliley Act"), and by various other federal, state and local regulatory authorities pursuant to a variety of laws. These laws and regulations are designed to protect individuals from the misuse of their personal information. We have not engaged counsel or any other third party to review our activity in light of these laws and regulations, although we believe that our activities do not violate any law specifically applicable to the dissemination of data concerning individuals. However, our belief may be incorrect, and we may be in violation of laws governing the dissemination of data. In such a case, we may be subject to enforcement action by regulatory agencies and claims against us by individuals (to the extent such laws permit private rights of action). Any such claims could significantly disrupt our business and operations. We do not currently maintain liability insurance to cover such claims. FUTURE GOVERNMENT REGULATION MAY FURTHER LIMIT OUR ABILITY TO PROVIDE OUR PRODUCTS TO CUSTOMERS AND CAUSE US TO LOSE REVENUE. Future laws or regulations that further restrict the use of personal or public record information could disrupt our business and could cause us to lose revenue. For example, if laws were enacted that restricted our use of Social Security numbers, our ability to provide meaningful data to our customers would be adversely affected. If we are unable to respond to regulatory or industry standards effectively, our business, financial condition and results of operation would be adversely affected. Our future success will depend, in part, on our ability to enhance and improve the responsiveness, functionality and features of our products and services in accordance with newly-imposed regulatory or industry standards, of which we can give no assurance. WE COULD FACE LIABILITY BASED ON THE NATURE OF OUR SERVICES AND THE CONTENT OF THE MATERIALS THAT WE PROVIDE. We may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the data contained in our products. Although we carry a limited amount of general liability insurance, our insurance may not cover claims of these types and may not be adequate to indemnify us for liability that may be imposed. Any imposition of liability, particularly liability that is not covered by insurance or which is in excess of our insurance coverage, would negatively affect our reputation, business, financial condition and results of operations. RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES ----------------------------------------------------- WE HAVE A LARGE NUMBER OF SECURITIES THAT ARE AVAILABLE FOR RESALE. SALES OF THESE SECURITIES COULD CAUSE THE PRICE OF OUR SECURITIES TO DECLINE. Sales of a large number of shares of our securities in the public markets, or the potential for such sales, could decrease the trading price of our securities and could impair our ability to raise capital through future sales of our securities. As of July 15, 2006, we had 6,883,289 shares of Common Stock issued and outstanding. If all of our options, put rights, warrants and convertible securities issued as of July 15, 2006 were exercised as of that date, we would have had 13,593,342 shares of Common Stock issued and outstanding. 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, 2006, there were 3,210,053 shares of Common Stock issuable upon the exercise of options and warrants and 3,500,000 issuable pursuant to an investment agreement. 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 7 capital by a new offering of securities on terms more favorable to us than those of the outstanding warrants and convertible promissory notes. OUR SECURITIES HAVE BEEN THINLY TRADED ON THE OVER-THE-COUNTER BULLETIN BOARD, WHICH MAY NOT PROVIDE LIQUIDITY FOR OUR INVESTORS. Our securities are quoted on the Over-the-Counter Bulletin Board. The Over-the-Counter Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market or national or regional exchanges. Securities traded on the Over-the-Counter Bulletin Board are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The Securities and Exchange Commission's order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the Over-the-Counter Bulletin Board. Quotes for stocks included on the Over-the-Counter Bulletin Board are not listed in newspapers. Therefore, prices for securities traded solely on the Over-the-Counter Bulletin Board may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price or at any price. "PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT. Trading in our securities is subject to the Securities and Exchange Commission's "penny stock" rules, and we anticipate that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities. WE MAY SELL ADDITIONAL SHARES IN THE FUTURE, WHICH COULD CAUSE THE PRICE OF OUR SECURITIES TO DECLINE. We currently have 25,000,000 shares of Common Stock authorized. As a result, we have substantial amounts of authorized but unissued capital stock. Our Second Amended and Restated Certificate of Incorporation and applicable provisions of Delaware law provide that we may issue authorized capital stock at the approval of our Board of Directors, and no stockholder vote or other form of stockholder approval is required for us to issue such capital stock. Consequently, we could issue shares of either class of our common stock in connection with future financings or acquisitions or in conjunction with equity compensation arrangements. The offering prices in connection with those future issuances could be less than the current sales prices of our securities. Any future issuances of any of our securities could cause the trading price of our securities to decline. INVESTORS MUST CONTACT A BROKER-DEALER TO TRADE OVER-THE-COUNTER BULLETIN BOARD SECURITIES. AS A RESULT, YOU MAY NOT BE ABLE TO BUY OR SELL OUR SECURITIES AT THE TIMES THAT YOU MAY WISH. Even though our securities are quoted on the Over-the-Counter Bulletin Board, the Over-the-Counter Bulletin Board may not permit our investors to sell securities when and in the manner that they wish. Because there are no automated systems for negotiating trades on the Over-the-Counter Bulletin Board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders - an order to buy or sell a specific number of shares at the current market price - it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution. COMPLIANCE WITH THE RULES ESTABLISHED BY THE SEC PURSUANT TO SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 WILL BE COMPLEX. FAILURE TO COMPLY IN A TIMELY MANNER COULD ADVERSELY AFFECT INVESTOR CONFIDENCE AND OUR STOCK PRICE. Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require us to perform an annual assessment of our internal controls over financial reporting, certify the 8 effectiveness of those controls and secure an attestation of our assessment by our independent registered public accountants. Currently, this requirement will first apply to us during the preparation and filing of our annual report for fiscal year 2007. The standards that must be met for management to assess the internal controls over financial reporting as now in effect are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal controls over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of the assessment by our independent registered public accountants. If we cannot perform the assessment or certify that our internal controls over financial reporting are effective, or our independent registered public accountants are unable to provide an unqualified attestation on such assessment, investor confidence and share value may be negatively impacted. IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED. The assessment required pursuant to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 may uncover weaknesses in our internal controls over financial reporting and conditions that need to be addressed, the disclosure of which may have an adverse impact on investor confidence and the price of our common stock. Failure to establish and maintain appropriate internal controls over financial reporting, or any failure of those controls once established, could adversely impact our business, financial condition or results of operations or raise concerns for investors. Any actual or perceived weaknesses and conditions in our internal controls over financial reporting that need to be addressed may have an adverse impact on the price of our common stock. 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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. Although we believe that the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. USE OF PROCEEDS This prospectus relates to the resale of shares of our Common Stock which will be owned by certain investors upon the exercise of common stock purchase warrants or upon the conversion of convertible term notes. We will not receive any of the proceeds from the resale of the shares of either class of common stock owned by the selling security holders. DIVIDEND POLICY We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends or distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business and to fund future growth. You should not purchase any of our securities on the expectation of future dividends. SELLING SECURITY HOLDERS This prospectus relates to the resale from time to time of shares issued upon conversion of a series of convertible term notes and warrants that we issued in connection with a private offering completed on August 15, 2005. All of the notes are converted, and the warrants are exercisable into Common Stock, par value $0.01 per share. 9 The following table sets forth, as of July 15, 2006, the number of shares being held of record or beneficially by the selling security holders. All of the data presented is based upon information currently available to us. This prospectus relates to the resale of up to 5,975,000 shares of our Common Stock by Dutchess. The table below sets forth the shares that we are registering pursuant to the Registration Statement to which this prospectus is a part: STOCKHOLDER NUMBER OF SHARES ----------- ---------------- Dutchess 5,975,000(1)(2) (1) For the purpose of determining the number of shares subject to registration with the Securities and Exchange Commission, we have assumed the conversion of notes payable into 200,000 shares of Common Stock with a conversion price of $5.00 and 750,000 shares of Common Stock with a conversion price of $1.00, exercise of a common stock purchase warrant for 750,000 with a strike price of $5.00 a common stock purchase warrant for 375,000 with a strike price of $1.00, and that we will issue not more than 3,500,000 shares pursuant to the exercise of our put right under the Investment Agreement, although the number of shares that we may actually issue pursuant to that put right may be more than or less than 3,500,000, depending on the trading price of our Common Stock. (2) We currently have no intent to exercise the put right in a manner that would result in our issuance of more than 3,500,000 shares, but if we were to exercise the put right in that manner, we would be required to file a subsequent registration statement with the Securities and Exchange Commission and for that registration statement to be deemed effective prior to the issuance of any such additional shares. 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 $10.0 million in shares of our Common Stock for a purchase price equal to 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board of our 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 Common Stock's trading volume and other factors described in this prospectus. 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. _________________________ * Less than one percent of outstanding shares of class. PLAN OF DISTRIBUTION DUTCHESS. On December 29,2005 we issued a Debenture to Dutchess, a venture capital fund, and received proceeds of $1,500,000. The Debenture is due on December 30, 2010 and pays twelve per cent (12%) interest. Interest and principal are payable at such times and under such conditions are outlined in the Debenture. The remaining balance of $1,000,000 of this Debenture is convertible into 200,000 shares of our Common Stock at $5.00 per share. On July 21, 2006 we issued a Debenture to Dutchess, and received proceeds of $750,000. The Debenture is due on July 21, 2011 and pays twelve per cent (12%) interest. Interest and principal are payable at such times and under such conditions are outlined in the Debenture. The Debenture is convertible into 750,000 shares of our Common Stock at $1.00 per share. The holder may not convert if it would cause the holder to own more than 4.99% of the outstanding Common Stock of the Company. The Company is registering 950,000 shares of its Common Stock covered by this Prospectus for issuance to Dutchess pursuant to these conversion rights. Events of Default include violations of the Indenture Agreement and other related agreements which remain uncured for over five (5) days. In case of an Event of Default, the holder can exercise its right to increase the face amount of the Debenture by ten percent (10%) as an initial penalty and by an additional 10% for each additional Event of Default. In addition, the holder may elect to increase the face amount by two and one-half percent (2.5%) per month (pro-rata for partial periods) paid as a penalty for liquated damages. Liquated damages will be compounded daily. The Holder may also elect to switch the 10 conversion price of the Debenture to the lesser of a) $5.00 or b) seventy percent (70%) of the lowest closing bid price of the Common Stock during the fifteen (15) trading days prior to conversion. As part of the Debenture arrangement we also issued Warrants to Dutchess to purchase 1,125,000 shares of our Common Stock. The 1,125,000 Warrant shares are also included in this Prospectus. 750,000 of the Warrant shares may be exercised at a price equal to the lower of the $5.00 Fixed Conversion Price as defined in the Debenture or b) the lowest closing bid price of the Common Stock between December 2, 2005 and the date when this registration statement was filed. 375,000 of the Warrant shares may be exercised at a price equal to the lower of the $1.00 Fixed Conversion Price as defined in the Debenture or b) the lowest closing bid price of the Common Stock between July 21, 2006 and the date when this registration statement was filed. The conversion price is subject to anti-dilution adjustment. The Warrant may be exercised on a cashless basis any time up to 5 years after issuance. The Warrant may not be exercised if it would cause the holder to own more than 4.99% of the outstanding Common Stock of the Company. We also issued 400,000 shares of our Common Stock to Dutchess in connection with the Debenture purchase. These also are included in this Prospectus. On December 29, 2005 we also entered into an Investment Agreement with Dutchess giving us the right to "put" newly issued shares of our Common Stock to Dutchess with a maximum purchase commitment of ten million ($10,000,000). The Agreement expires on the earlier of (a) when Dutchess has purchased an aggregate of ten million dollars in the Common Stock of the Company pursuant to this Agreement or (b) the date which is thirty-six (36) months after the date the SEC declares effective the registration statement of which this Prospectus is a part. The Company has reserved 3,500,000 shares of Common Stock for sale to Dutchess pursuant to the "put." These shares are included in this Prospectus. The "put" price is 93% of the lowest bid price on the "Over-the-Counter" Bulletin Board ( or other market where the shares are traded) during the ten (10) days immediately following the date when we gave notice to Dutchess of our intention to "put" the stock. Each "put" may not exceed a maximum of either: (a) two hundred percent (200%) of the average daily volume (U.S. market only) of the Common Stock for the ten (10) 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 notice date, or (b) two hundred fifty thousand dollars ($250,000). The Company shall promptly secure and maintain the listing of all of the "registrable securities" (as defined in a companion Registration Rights Agreement) upon the American Stock Exchange, Inc., the National Association of Securities Dealers, Inc.," Over-the-Counter" Bulletin Board or the NASDAQ National Market System or the NASDAQ SmallCap Market, whichever is the principal market on which the Common Stock is listed. and shall maintain such listing of all registrable securities from time to time issuable under the terms of the transaction documents. The Company also signed a Registration Rights Agreement by which the Company obligates itself to file and maintain a SEC registration statement covering the Common Stock issued pursuant to the Investment Agreement and to keep such registration statement effective until the earlier to occur of (i) the date on which (a) the Investor shall have sold all such Common Stock or (b) the Investor has no further right to acquire any shares of Common Stock under the Investment Agreement. 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 below, which shows the number of shares to be issued under the Investment Agreement at a price of $2.85 per share (i.e., the closing price on February 24, 2006) per share and 25% discount and 25% premium to that price. 11 SHARE ISSUANCE AT VARIOUS PRICES (DISCOUNT) PREMIUM FROM $2.85: (25)% 0% 25% PURCHASE PRICE:(1) $1.99 $2.65 $3.56 NO. OF SHARES:(2) 5,025,126 3,773,585 2,808,989 TOTAL OUTSTANDING:(3) 11,239,864 9,988,323 9,023,727 ______________________ (1) Representing 93% of the applicable lowest reported closing price. (2) Represents the number of shares of Common Stock to be issued to Dutchess at the prices set forth in the table to generate $10.0 million in gross proceeds. (3) Represents the total number of shares of Common Stock outstanding after the issuance of the shares to Dutchess, assuming no issuance of any other shares of Class A Voting Common Stock. 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 (e.g., if we were to sell shares at a time when the lowest closing bid price for our Common Stock was less than $3.07 per share). However, our management does not currently intend to cause the put right to be exercised in a manner which would cause the issuance of more than 3,500,000 shares of Class A Voting Common Stock. 12 CAPITALIZATION Prior to December 5, 2005, the Company had outstanding two classes of stock, Class A Voting Common Stock of which there were 150,000,000 shares authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were 250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of the shareholders held on November 12, 2005, the shareholders approved a plan of recapitalization whereby 1) each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock combine into a single class of voting Common Stock with 400,000,000 authorized and 185,930,146 issued, 2) effect a one-for-fifty reverse split of this new class of Common Stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized from 8,000,000 to 25,000,000. The combination of the two classes of stock was completed on December 5, 2005. The reverse split and change in authorized shares was completed on December 12, 2005. In addition, the completion of the recapitalization triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 shares of the new Common Stock. You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes beginning on page F-1 of this prospectus. MARCH 31, 2006 (in thousands) DEBT: Current portion of notes, convertible debt and capital lease obligations. $ 1,597 Capital lease obligations and notes, net of current portion 40 -------- Total Debt 1,637 -------- STOCKHOLDERS' EQUITY: Common Stock, par value $0.01 per share: 65 Additional paid-in capital 38,605 Warrants 2,947 Impaired value of securities (815) Accumulated deficit (36,264) -------- TOTAL STOCKHOLDERS' EQUITY 4,538 -------- TOTAL CAPITALIZATION $ 6,175 ======== 13 SELECTED CONSOLIDATED FINANCIAL DATA You should read the selected financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The statement of operations data set forth on the following page for the years ended December 31, 2004 and 2005 and the balance sheet data as of December 31, 2005 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data set forth on the following page for the three months ended March 31, 2005 and 2006 and the balance sheet data as of March 31, 2006 have been derived from our un-audited consolidated financial statements included elsewhere in this prospectus. These historical results are not necessarily indicative of results to be expected for any future period.
THREE MONTHS ENDED March 31, YEAR ENDED STATEMENTS OF OPERATIONS DATA: (UN-AUDITED) DECEMBER 31, 2006 2005 2005 2004 ------------- -------------- ------------ ------------ REVENUES: Information Sales -CD-Rom $ 204,465 $ 126,008 $ 480,412 $ 550,923 -Online 1,549,928 1,573,361 6,257,679 4,107,714 -Channel Partner 1,344,063 695,790 4,358,038 1,028,650 -Wireless 1,452 3,518 11,908 13,095 Engineering services - 500,000 505,000 562,200 ------------- -------------- ------------ ------------ Total revenues 3,099,908 2,898,677 11,613,037 6,262,582 ------------- -------------- ------------ ------------ COSTS AND EXPENSES: Costs of revenues: -CD-Rom 9,584 17,872 113,612 96,683 -Online and Channel Partner 857,625 832,693 4,055,417 3,652,714 -Engineering services - 123,750 123,750 124,175 -Wireless - - - 870 Selling and marketing 461,841 669,707 2,492,172 1,900,984 General and administrative 1,860,944 1,498,988 7,537,444 6,467,306 Research & Development 49,969 52,951 214,287 316,941 ------------- -------------- ------------ ------------ Total operating expenses 3,239,963 3,195,961 14,556,682 12,559,674 ------------- -------------- ------------ ------------ OPERATING LOSS (140,055) (297,284) (2,943,645) (6,297,091) OTHER INCOME (EXPENSE): Interest income - 4,237 57,256 159,461 Interest expense (286,185) (147,242) (2,705,835) (747,279) Interest expense - amort. of discounts - - - (193,131) Other income 540 552 (7,952) 30,280 Impairment of Note Receivable - - - (500,000) ------------- -------------- ------------ ------------ Net loss $ (425,700) $ (439,737) $(5,600,176) $(7,547,760) ============= ============== ============ ============ BASIC AND DILUTED NET LOSS PER SHARE $ (0.07) $ (0.13) $ (1.56) $ (2.34) SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER SHARE 5,693,789 3,400,465 3,582,049 3,230,121
AS OF AS OF BALANCE SHEET DATA: MARCH 31, 2006 DECEMBER 31, 2005 (UNAUDITED) -------------- ----------------- Cash and cash equivalents $ 236,277 $ 610,736 Total current assets 5,417,899 5,960,203 Total assets 8,021,817 8,744,332 Total current liabilities 3,444,272 5,066,667 Total stockholders' equity 4,537,798 3,614,829 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS TOGETHER WITH "SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS BECAUSE OF CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE PRESENTED BELOW. OVERVIEW The LocatePLUS Group is a business-to-business and business-to-government provider of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , that enables users to search certain motor vehicle records and driver's license information in multiple states through a dynamic search engine, using complete or partial information. Since March 1, 2000, we have maintained a database that is accessible through the Internet, known as LocatePLUS. Our LocatePLUS product contains searchable and cross-referenced public information on individuals throughout the United States, including individuals' names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers' license information and motor vehicle records. Since September 2003, our wholly-owned subsidiary, Certifion, has offered personal information for self-certification purposes through its Entersect product. We distribute our content both directly (through the Internet in the case of our LocatePLUS product and through the mail in the case of our Worldwide Information CD-ROM) and through "channel partner" arrangements, by which third-party database providers obtain access to our databases in consideration for a royalty (such as job search and on-line dating sites, in the case of our Entersect product). On September 1, 2003, through our newly formed wholly-owned subsidiary Certifion Corporation, we acquired all the assets of Project Entersect Corporation in consideration for $62,662. The acquisition was accounted for as a purchase and is recorded and reflected with our operations from the time of purchase. The subsidiary operates under the trade name Entersect. Entersect provides a self-identification and validation service for online job posting and dating sites. On October 17, 2003, through our newly formed wholly-owned subsidiary, Dataphant, Inc., we acquired Voice Power Technologies, Inc., a Texas-based provider of data technology. In connection with this acquisition, Voice Power Technologies, Inc. merged with and into Dataphant, Inc. As consideration for the merger, shareholders of Voice Power Technologies, Inc. received an aggregate of 2,500,000 shares of LocatePLUS Class B Non-voting Common Stock. Through this acquisition, we now have information concerning virtually all landline phone numbers in the United States and approximately 25% of United States cell phone numbers. This data has been integrated into our current product lines. On January 6, 2004, LocatePLUS Holdings Corporation formed Metrigenics, Inc, a wholly-owned subsidiary. From time to time, we also provide engineering services in connection with the implementation and rollout of our channel partnership arrangements. Although our products generally consist primarily of publicly available - and therefore non-proprietary - information, we integrate data in our products in a proprietary manner that allows users to access data rapidly and efficiently. In addition, our LocatePLUS product utilizes proprietary methodologies to link data from different sources associated with a given individual to a single background report, even though the sources of data with respect to a given individual may be incomplete or contain only partial information with respect to that individual. We have also sought patent protection with respect to aspects of our marking and search technology (referred to as our "Bull's Eye" feature) and aspects of our CareerScan and TrustmeID products. During the quarter ended June 30, 2003 we launched our new patent-pending Bull's-Eye technology, which is currently integrated into a LocatePLUS product. Bull's-Eye is the first search tool in our industry that allows 15 users to correctly identify a person's current address based upon certain currently available information. Typically, when a search is performed on an individual using competing technologies, a number of addresses are pulled from a database of public records. Bull's-Eye enhances or improves the search process by cross-referencing current public utility and telephone records with historical data to more accurately identify a person's current address. We have also sought patent protection with respect to aspects of our CareerScan and TrustmeID products. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that our preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Our accounting policies that are the most important to the portrayal of our financial condition and results, and which require the highest degree of management judgment relate to revenue recognition and the provision for uncollectible accounts receivable. We estimate the likelihood of customer payment based principally on a customer's credit history and our general credit experience. To the extent our estimates differ materially from actual results, the timing and amount of revenues recognized or bad debt expense recorded may be materially misstated during a reporting period. Revenue associated with our Worldwide Information product is recognized upon delivery to the customer of a CD-ROM, provided that no significant obligations remain, evidence of the arrangement exists, the fee is fixed or determinable and collectibility is reasonably assured. Information in our Worldwide Information product is updated and released either quarterly or twice a year. In the case of our LocatePLUS product, we charge a fee to customers, which varies based upon the type and quantity of information requested. Capitalizing on the synergies gained through the Companies acquisitions, in 2004, Worldwide was able to utilize the technology acquired through Voicepower Technologies, when it merged into Dataphant, to develop the industry's first ever searchable non-published and cell phone CD-ROM. This product became Worldwide's fastest growing CD-ROM product to date. In addition, Worldwide, using the search capabilities built into the CD-ROM search engine, has expanded beyond CD-ROMs. Worldwide recently entered into an exclusive partnership with the State of New Hampshire's Department of Safety to implement its technology on the state's Intranet. Sonia Bejjani, Company co-founder and President of Worldwide, was profiled in "Women to Watch in 2005" by Women's Business Boston, January 2005 issue. Revenue from our LocatePLUS product is recognized when there is either an agreed upon royalty fee or the requested information is downloaded, there is evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. We charge our fees to customers' credit cards (approximately 60% of our current LocatePLUS customer base) or invoice customers for such fees on a monthly basis (approximately 40% of our LocatePLUS customer base). During 2005, our LocatePLUS online customer base exceeded 20,000 customers. Within that customer base, the subscriptions for ChoicePlan billing plans, which are billing plans for committed revenue per customer ranging from $25 per month to $5,000 per month, increased to 1,200 customers. In addition, we made a significant change to our billing practice in 2004, with the implementation of a new minimum usage fee. We expect this change will increase annual billings by at least $1M per year. Revenue from our Entersect product is recognized when certifications are purchased online (and paid for via credit card) or the requested information is downloaded, there is evidence of an arrangement, the fee is fixed or determinable, and collectibility is reasonably assured. Revenue from Dataphant is generated exclusively through inter-company sales to our other wholly owned subsidiaries and eliminated on consolidation. Our costs of revenue consist primarily of our costs to obtain data and software maintenance expenses, which consist primarily of payroll and related expenses for information technology personnel, Internet access and hosting charges, and expenses relating to Web content and design. We obtain our data from multiple sources and we have entered into various license agreements with the related data providers. For the twelve months ended December 31, 16 2005 and 2004 we recorded $4,055,417 and $3,652,714, respectively and in the three months ended March 31, 2006 and 2005, we recorded $857,625 and $832,693 respectively, in costs related to these agreements. In the event that any of our primary sources of data became unavailable to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as there are currently a number of providers of such data. Our selling and marketing expenses consist of salaries and commissions paid to sales representatives for the products that we offer, as well as direct mail advertising campaigns and magazine and Internet-banner advertisements. General and administrative expenses consist of payroll and related expenses for non-sales, non-research and development and executive and administrative personnel, facilities expenses, insurance, professional services, travel and other miscellaneous expenses. Interest income consists of earnings on our cash and cash equivalents, short-term investments and notes receivable. Interest expense is primarily attributable to various notes issued through March 31, 3006. As of March 31, 3006, we had notes payable (current and long-term) totaling $1,460,328. We have incurred significant net losses since our inception. We incurred net losses of approximately $7.5 million in 2004 and $5.6 million in 2005 and 426,000 during the three months ended March 31, 2006. Our accumulated deficit as of March 31, 2006 was approximately $36 million. We raised approximately $4 million 2004 and approximately $9.6 million in 2005 from the issuance of debt and sales of our equity. During August 2003, we issued a put to one investor through an equity agreement, which provides us, subject to certain limitations, the right to sell, at our discretion, up to $5 million in shares of our Class A Voting Common Stock to the investor at a purchase price equal to 95% of the lowest closing bid price for the Company's Class A Voting Common Stock during a ten-day pricing period. The number of shares that we may sell to that investor is limited by the trading volume of our Class A Voting Common Stock and certain customary closing conditions. The Company sold 17,042,761 shares for a total $5 million in net proceeds from the investor through December 31, 2005. There was no remaining amount available under the put at December 31, 2005. On June 17, 2004 we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private placement of a convertible term note issued by the Company in the principal amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase warrant (the "Warrant"). On November 30, 2004, this note was amended to increase the principal amount to $4,000,000 and an additional warrant. In July, 2005, the company raised approximately $9 million through the issuance of convertible debt of which $4 million was used to pay the balance on this note in full In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On November 14, 2005, at the annual meeting of the shareholders, the recapitalization was approved by a majority of the outstanding shares of both classes of stock. On December 12, 2005, we completed a plan of recapitalization which triggered the mandatory conversion of these notes into 1,793,000 of the new common stock. On December 29, 2005, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. On July 21, 2006, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $750,000 by issuing a note payable convertible into 750,000 shares of Common Stock at $1.00 per share and 200,000 founders shares and Common Stock purchase warrant for 375,000 shares with an exercise price of $1.00 per share. On December 29, 2005, we also entered into an agreement where we may, at our discretion, periodically "put" or require Dutchess to purchase shares of our Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares will not exceed $10.0 million. For each share of Common Stock purchased under the Investment Agreement, Dutchess will pay 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board (or other principal market on which our Common Stock is traded) during the ten day period 17 immediately following the date on which we give notice to Dutchess of our intention to put such stock. 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 and satisfaction of certain other customary closing conditions. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005 REVENUES. Revenues from our Worldwide InformationTM CD-ROM product increased to $204,465 for the three months ended March 31, 2006 from $126,008 for the three months ended March 31, 2005, or an increase of 62%. The increase is primarily attributable to the difference in timing of certain product deliveries. Revenues are recognized when product is shipped. Revenues from our Internet-based products decreased $23,433 to $1,549,928 for the three months ended March 31, 2006, as compared to $1,573,361 for the three months ended March 31, 2005, a decrease of 1%. The primary reason for this decrease was the reduction in sales with high customer acquisition cost in our Entersect products. In these products, sales decreased approximately $70,000 over 2005, but also translated into a saving in sales expense of approximatly $90,000 for the same period. Revenue from channel partners increased to $1,344,063 from $695,790, an increase of 93%. The increase is attributable to gaining greater acceptance by partners for streaming XML as well as the addition of one major channel (a distribution method for our data). Revenues from our wireless product, LocatePLUS AnyWhere , were $1,452 during the three months ended March 31, 2006 as compared to $3,518 during the three months ended March 31, 2005. COSTS OF REVENUES. For the three months ended March 31, 2006, costs of revenues for Worldwide InformationTM were $9,584 as compared to $17,872 for the three months ended March 31, 2005, a decrease of 46%. For the three months ended March 31, 2006, our costs of revenues associated with LocatePLUS online and channel were $857,625 as compared to $832,693 for the three months ended March 31, 2005, an increase of 3%. Data costs are expected to stabilize at approximately $3.5 million annually. SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the three months ended March 31, 2006 were $461,841 as compared to $669,707 for the three months ended March 31, 2005, a decrease of 31%. The primary reason for the reduction is due to the elimination of marketing activities that generated less revenue than the cost to acquire that revenue. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the three months ended March 31, 2006 were $1,860,944 as compared to $1,498,988 for the three months ended March 31, 2005, an increase of 24%. This increase is primarily attributable to one time employee bonus expense. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the three months ended March 31, 2006 were $49,969 as compared to $52,951 for the three months ended March 31, 2005, a decrease of 5%. These expenses are expected to remain stable unless testing proves successful in the Metrigenics subsidiary. INTEREST INCOME. No interest income was recorded for the three months ended March 31, 2006. For the three months ended March 31, 2005, we recorded interest income of $4,237. INTEREST EXPENSE. Interest expense increased to $286,185 for the three months ended March 31, 2006, from $147,242 for the three months ended March 31, 2005. This increase is attributable to additional financing fees. YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 REVENUES. Revenue from our Worldwide InformationTM CD-ROM product decreased to $480,412 for the year ended December 31, 2005 from $550,923 for the year ended December 31, 2004. This decrease is attributable to decrease in the number of states of which we offer this product for. Revenue from our LocatePLUS and Entersect online products, increased to $6,257,679 for the year ended December 31, 2005 as compared to $4,107,714 for the year ended December 31, 2004, an increase of 52.3%. Approximately $701,000 of this increase, or 32.6%, was due to the implementation of a minimum usage fee charged to LocatePLUS' online customers effective November 2004, which had the effect of increasing usage. Management believes that the contribution of the minimum fee to overall revenue will decrease in the future as users increase usage in excess of the minimum. Additionally, approximately $842,971 of the increase, or 39.2% was due to an increase in customers using the Entersect product. The remaining $605,994 increase, or 28.2% was due to the increase in LocatePLUS' customers. 18 Revenue from our channel partners increased to $4,358,038 for the year ended December 31, 2005 as compared to $1,028,650 for the year ended December 31, 2004 an increase of 324%. The increase is attributed to the addition of new channel partners and additional sales to existing channel partners. As part of deploying channel partner agreements, we occasionally provide engineering services. In 2005 we recognized $505,000 in engineering revenue as compared to $562,200 recognized in 2004 a decrease of 10%. These services are not recurring and are dependent on customer needs. We recognized wireless revenue of $11,908 in 2005 as compared to $13,095 in 2004. We expect online, wireless, and channel revenue to increase and CD-ROM revenue to be stable during the next twelve months. COSTS OF REVENUES. For the year ended December 31, 2005, our costs of revenue for Worldwide InformationTM were $133,612 as compared to $96,683 for the year ended December 31, 2004. Data cost are relatively fixed even as revenue from the product increases, no marked increase in costs is realized. For the year ended December 31, 2005, our costs of revenue associated with LocatePLUS and channel partner sales were $4,055,417, as compared to $3,652,714 for the year ended December 31, 2004, an increase of 11%. This increase is primarily attributable to costs associated with the acquisition of new data sets. Costs of revenues are expected to stabilize at about $3.5 million annually, as that amount represents the cost for the required data sets. As revenue increases, costs of revenue are not expected to increase proportionately. Costs of engineering services were allocated based on time spent for engineering services. Costs of wireless revenues are primarily the cost of wireless connectivity and the amortized cost of devices sold to end users. SELLING AND MARKETING EXPENSES. Selling and marketing expenses for the year ended December 31, 2005 were $2,492,172, as compared to $1,900,984 for the year ended December 31, 2004, an increase of approximately 31%. This increase in expenses is attributable primarily to an increase in our marketing activities for our Entersect product, additional direct marketing performed in 2005, and an increase in our sales force. We expect selling and marketing expense to increase over the next twelve months as we focus greater efforts on increasing revenue. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended December 31, 2005 were $7,537,444 as compared to $6,467,306 for the year ended December 31, 2004, an increase of 16.5%. Included in this is investor relations activities accounting for $1,344,236, of which $488,558 was non-cash stock based compensation. Investor relation expenses are not core to the operation of the company and had we not incurred these expenses, general and administrative expenses would have decreased to $6,189,696. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the year ended December 31, 2005 were $214,287 as compared to $316,941 for the year ended December 31, 2004, a decrease of 32%. These expenses are a result of investigation of new biometric data products through the creation of Metrigenics. We anticipate these expenses will stabilize for the foreseeable future. INTEREST INCOME. Interest income decreased to $57,256 for the year ended December 31, 2005, from $159,461 for the year ended December 31, 2004. This decrease is attributable to interest earned on certain notes issued to us in 2003, of which $214,999 of principal remained outstanding as of December 31, 2005. INTEREST EXPENSE. Interest expense increased to $2,705,835 for the year ended December 31, 2005, from $940,410 for the year ended December 31, 2004, an increase of 188%. This increase is attributable to the payoff of certain notes payable issued in 2004 and the interest expense associated with additional financing during 2005. OTHER INCOME. Other income decreased to $(7,952) for the year ended December 31, 2005, from $30,280 for the year ended December 31, 2004. This decrease is attributable to the loss on a fixed asset at time of sale. LIQUIDITY AND CAPITAL RESOURCES From our incorporation in 1996 through December 31, 2005, we raised approximately $40 million through a series of private placements and public offerings of equity and convertible debt to fund marketing and sales efforts and develop our products and services. As of March 31, 2006, our cash and cash equivalents totaled $236,277. During August 2003, we issued a put to one investor through an equity agreement, which provides us, subject to certain limitations, the right to sell, at our discretion, up to $5 million in shares of our Class A Voting Common Stock to the investor at a purchase price equal to 95% of the lowest closing bid price for the Company's Class A 19 Voting Common Stock during a ten-day pricing period. The number of shares that we may sell to that investor is limited by the trading volume of our Class A Voting Common Stock and certain customary closing conditions. The Company sold 17,042,761 shares for a total $5 million in net proceeds from the investor through December 31, 2005. There was no remaining amount available under the put at December 31, 2005. On June 17, 2004 we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private placement of a convertible term note issued by the Company in the principal amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase warrant (the "Warrant"). On November 30, 2004, this note was amended to increase the principal amount to $4,000,000 and an additional warrant. In July, 2005, the company raised approximately $9 million through the issuance of convertible debt of which $4 million was used to pay the balance on this note in full In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On November 14, 2005, at the annual meeting of the shareholders, the recapitalization was approved by a majority of the outstanding shares of both classes of stock. On December 12, 2005, we completed a plan of recapitalization which triggered the mandatory conversion of these notes into 1,793,000 shares of the new Common Stock. On December 29, 2005, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. On July 21, 2006, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $750,000 by issuing a note payable convertible into 750,000 shares of Common Stock at $1.00 per share and 200,000 founders shares and Common Stock purchase warrant for 375,000 shares with an exercise price of $1.00 per share. On December 29, 2005, we also entered into an agreement where we may, at our discretion, periodically "put" or require Dutchess to purchase shares of our Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares will not exceed $10.0 million. For each share of Common Stock purchased under the Investment Agreement, Dutchess will pay 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board (or other principal market on which our Common Stock is traded) during the ten day period immediately following the date on which we give notice to Dutchess of our intention to put such stock. 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 and satisfaction of certain other customary closing conditions. COMMITMENTS AND CONTINGENCIES OPERATING LEASES We lease office space and equipment under various operating lease agreements which terminate on various dates through 2008. Future minimum payments under our non-cancelable operating leases total $469,162. CAPITAL LEASES Through March 31, 2006, we entered into certain long-term equipment lease agreements. These agreements are classified as capital leases and expire in 2007. Future minimum lease payments under our non-cancelable capital leases total $194,615. LICENSE AGREEMENTS We have entered into various data acquisition agreements under which we are required to make minimum payments totaling $1,605,000 through 2010. The following represents the contractual obligation and commercial commitments as of December 31, 2005. 20 Payments Due by Period LESS THAN 1-3 3-5 MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS Long-Term Debt including current $2,736,152 $2,720,006 $ 5,568 $ 10,578 $ - Capital Leases 256,692 207,156 49,536 - - Operating Leases 600,104 523,767 76,337 - - License Agreements - - - - - ----------- ---------- -------- -------- ------ Total $3,592,948 $3,450,929 $131,441 $ 10,578 $ - =========== ========== ======== ======== ====== CERTAIN RELATED PARTY TRANSACTIONS LOANS FROM DIRECTORS In December 2002, we issued a one-year term note for $250,000 with ten year, fully vested detachable warrants to Robert Kite. As a condition of his investment, Mr. Kite required that he be appointed to the Board of Directors of the Company. The note bears interest at the rate of 10% per annum and is payable in one lump sum at maturity. The detachable warrants provide for the purchase of 250,000 shares of our Class B Non-Voting Common Stock with an exercise price of $0.22 per share. This note was repaid January 2004. NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY On March 28, 2003, and pursuant to our Non-employee Directors' Stock Option Policy, we granted warrants to purchase an aggregate of 105,000 shares of Class B Non-voting Common Stock, with an exercise price of $0.15, to three of our Directors (Robert Kite, John Houlihan, and Thomas Garlock). On November 3, 2003, and pursuant to our Non-employee Directors' Stock Option Policy, we granted options to purchase an aggregate of 500,000 shares of Class B Non-voting Common Stock, with an exercise price of $0.20, and paid an aggregate of $50,000 to five of our Directors (Messrs. Kite, Houlihan and Garlock, Gerard Scalley and Thomas Murphy). In May 2004, and pursuant to our Non-employee Directors' Stock Option Policy, we granted options to purchase an aggregate of 5,000,000 shares of Class A Voting Common Stock, with an exercise price of $1.50 to five of our Directors (Messrs. Kite, Houlihan and Garlock, Gerard Scalley and Thomas Murphy). USE OF OUR ASSETS Certain of our executives are allowed use of company owned or leased vehicles for both business and personal purposes. The owned vehicles have been capitalized as assets of the Company, totaling $102,954 as of December 31, 2005. NOTES RECEIVABLE FROM RELATED PARTIES During 2000, we issued cash loans of $400,000 and received, in exchange, promissory notes from two of our officers, Mr. Jon Latorella and Robert A. Goddard. Although the notes were due January 3, 2010, their terms provided that, if, as of January 3, 2003, the officers were still employed by us, then the obligations and debt evidenced by the notes were to be canceled without further action, and we are to pay to the officers, no later than February 29, 2004, an amount in cash sufficient to fulfill the officers' tax liabilities attributable to the cancellation of the notes. As such, we have been expensing the principal of the notes on a monthly basis and in 2004 and 2003, recognized $0 and $9,722 of amortization expense respectively on notes receivable from related parties. Additionally, we have accrued approximately $0 in 2004 and $6,701 in 2003 relating to an estimate of their tax liability expected to be reimbursed by us. As of January 3, 2003, both Mr. Latorella and Mr. Goddard were employed by us and, accordingly, the notes were cancelled as of that date. Mr. Goddard ceased employment with the Company on March 31, 2003. Both were paid their tax equalization payments in 2004. As of 2004, no further obligations exist under these notes. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial 21 Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments ("SFAS 155"), which eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows. In March 2006, the FASB issued Statement of Financial Accounting Standard 156 - Accounting for Servicing of Financial Assets ("SFAS 156"), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair value accounting for non-monetary exchanges of similar productive assets and replaces it with a general exception to fair value accounting for non-monetary exchanges that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The statement is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this statement to have a material impact on its financial statements. OFF-BALANCE-SHEET ARRANGEMENTS The Company has no off-balance-sheet arrangements currently in effect or in effect during the year ended December 31, 2005, including but not limited to any guarantee contracts that has the characteristics defined in paragraph 3 of FASB Interpretation No. 45 (November 2002), as amended; any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement, any obligation that could be accounted for as a derivative instrument, or any obligation arising out of a variable interest (as referenced in FASB Interpretation No. 46, as amended). 22 BUSINESS OVERVIEW LocatePLUS Holdings Corporation, through itself and its wholly-owned subsidiaries LocatePLUS Corporation, Worldwide Information, Inc., Certifion Corporation, Dataphant, Inc., and Metrigenics, Inc., (collectively, the "LocatePLUS Group"), are business-to-business, business-to-government and business-to-consumer providers of public information via our proprietary data integration solutions. Since 1996, we have sold a CD-ROM-based product, which we refer to as Worldwide Information , which enables users to search certain motor vehicle records and driver's license information in multiple states. Since March 1, 2000, we have maintained a database that is accessible through the Internet, known as LocatePLUS. Our LocatePLUS product contains searchable and cross-referenced public information on individuals throughout the United States, including individuals' names, addresses, dates of birth, Social Security numbers, prior residences, and, in certain circumstances, real estate holdings, recorded bankruptcies, liens, judgments, drivers' license information and motor vehicle records. On September 1, 2003, our newly formed wholly-owned subsidiary, Certifion Corporation, acquired all of the assets of Project Entersect Corporation a provider of data technology. Certifion provides self-screening for both resume and online dating services and has filed for patent protection for both of these services. In October 2003, our newly formed wholly-owned subsidiary, Dataphant, Inc. acquired Voice Power Technology through a merger. Through this merger, Dataphant now has information on virtually every land-based phone number in the United States and approximately 30% of the cell phone numbers in the United States. On January 6, 2004, the Company formed a new wholly-owned subsidiary, Metrigenics, Inc., with operations located in placeStateNew York state. Metrigenics was formed to develop new ways to integrate biometrics with data. Metrigenics has finished first stage testing on matching DNA to facial characteristics and expects to have first stage products within twelve months. INDUSTRY BACKGROUND We are a public information provider. Users of our information have historically included law enforcement, other government agencies, law firms, investigation companies, private investigators and insurance companies. Information is used by those entities for various activities ranging from legal discovery to the detection of fraud and the prevention of crime and terrorism. Additional users, such as large businesses, have increasingly availed themselves of our information services in connection with their identity validation and other business decisions. Non-traditional users, such as individuals using job search and on-line dating service sites, have also begun to avail themselves of background information in response to concerns about identity theft. The majority of the data in the database is publicly available and it is only through our proprietary matching and searching technology that creates significant value to the data. Examples of such public data include: - names and addresses - property ownership - aliases - bankruptcies - nationwide court records - certain criminal records The sources of these types of public data, however, are often fragmented and geographically dispersed. In addition, the reliability of this information and the data provided by various sources may not be consistent. In this environment, users that wish to use public information are faced with the time-consuming, costly and difficult task of gathering data from numerous locations and sources, verifying the information acquired and organizing it into a useful format. While services and technologies have developed to enable remote access to certain information sources, there have historically been few comprehensive access points for information available about individuals. Traditional sources of information, including credit reporting services and other database services, make available only limited types of information for specific purposes, such as verifying credit worthiness. Such services may also be limited by applicable law to specified uses and users. Almost none of those sources are integrated in a manner that allows easy and rapid access to data. BUSINESS STRATEGY Our business plan is to provide an entire suite of information products and services for professionals in law enforcement agencies, law firms, insurance underwriting, fraud investigation, private equity funds, private 23 investigation and financial institutions. We believe that we will be able to compete with comparable services based upon the pricing of our services and based upon certain technical advantages incorporated in our systems. We have proprietary matching and searching capabilities that give us an advantage over our competitors. In addition, we acquired the technology to gather virtually all the landline phone numbers and 30% of cell phone numbers through our VPT merger which no known competitors have. To date, our products have primarily focused on the United States market. With the recent formation of Metrigenics, a research and development company, we are expanding into products with worldwide applicability. Metrigenics is working on the development of matching DNA with facial characteristics. With the success of early trials, it is expected that first stage products could be seen as early as twelve months. OUR TARGET MARKET AND SCREENING OF USERS Our products have historically been marketed and sold to federal, state and local government agencies (including law enforcement agencies), private investigators, human resource professionals and the legal profession. Our products have been used in: - crime and terrorism investigation (e.g., in conjunction with federal and state investigations in the aftermath of the September 11th terrorist attacks and the subsequent anthrax incidents); - detection of fraud; - "skip tracing" (i.e., the location of debtors and individuals in violation of parole or bail restrictions); - background checks; - legal due diligence; and - Identity self certification - Private security - Risk-management. Certifion offers data for self-certification purposes in connection with job search and Internet dating services and has provided an addition channel in which to distribute the same data developed by LocatePLUS. Our LocatePLUS and Worldwide Information products are generally marketed and sold only to pre-screened business and government end users. Before obtaining access to our LocatePLUS database or our Worldwide Information product, we generally require commercial customers to provide background information about their business need for data and about themselves, such as business licenses, bar admission cards or private investigator licenses. Individuals involved in law enforcement must provide similar evidence of their authority. To prevent the misuse of our data, we have adopted a three-tier security schema for our LocatePLUS Group products. We believe that we lead the market in protecting access to our data. With recent challenges in the industry relating to data access, we have been ahead of the curve in adopting a schema that restricts the most sensitive data. Our groups are classified in the following manner. LEVEL INDUSTRY USERS SAMPLE DATASETS AVAILABLE TO USERS Names, Addresses and Phone Numbers I General Business Past Residences, Neighbors and Affiliates Real Property Private Investigators Level I Data, plus: Insurance Liens and Judgments II Attorneys/Law Firms Drivers' Records Government Certain Motor Vehicle Records Corporate Security Level I and II Data, plus: III Law Enforcement Comprehensive Criminal Records Restricted Motor Vehicle Records Certain Credit Reporting Data As we move forward, we expect to further define user groups and data available to those groups and to launch a new version of our search engine by the end of 2005 that allows us to apply these definitions. 24 LOCATEPLUS We launched our LocatePLUS Internet site in March 2000. Our LocatePLUS database contains searchable and cross-referenced public information on individuals throughout the United States. Information is presented in a dynamic, hyper-linked fashion, permitting users to rapidly identify and obtain personal information relating to individuals and their associated residences, possible acquaintances, and a variety of other types of data. Our LocatePLUS database consists of approximately five billion individual data entries. According to our estimates, we have data entries relating to approximately 205 million adult individuals in the United States (or approximately 98% of the adult population of the United States, based on the 2000 United States Census). Datasets currently integrated in our LocatePLUS product include nationwide records relating to: - names and addresses - real estate records - aliases - prior residences - dates of birth - recorded bankruptcies - Social Security numbers - liens - driver's license information - motor vehicle records - residential address information - certain death records (including dates of residence) - certain criminal arrest, conviction - phone numbers and incarceration records - vessel registrations We intend to continue integration of datasets into our LocatePLUS product, including: - certain hunting and fishing licenses - certain professional licenses - certain facial image files - certain fingerprint files - certain gun licenses - Federal Aviation Administration records We can currently give no assurance as to the timing of integration of such datasets, however, or whether these new datasets will be integrated with our LocatePLUS product at all. We believe that one of the significant advantages of our LocatePLUS product, in comparison with many products with which we compete, is the ability of LocatePLUS to "tie" data associated with a given individual to produce a single report. Our LocatePLUS system uses a proprietary methodology to associate data in a manner that generally results in a matching of data entries across diverse data sources, allowing users to obtain a single, comprehensive data report about an individual, even when there is no single element that ties data entries together (such as a Social Security number). This comprehensive data report is itself linked to other data potentially relevant to a business or government agency researching an individual, such as names and addresses of possible acquaintances, relatives and neighbors of that individual. Another of the advantages that LocatePLUS Group is its unlisted and cell phone listings which we believe no other competitor has. LOCATEPLUS ANYWHERE We also offer a version of our LocatePLUS product that is accessible through wireless personal digital assistants and e-mail capable pagers, which we refer to as LocatePLUS AnyWhere. LocatePLUS AnyWhere was commercially launched in mid-December 2002. This product is being marketed primarily to law enforcement. The product is sold on a subscription fee basis, permitting unlimited access to our LocatePLUS database for a flat monthly fee provided that that the user agrees to a fixed term commitment. As of December 31, 2005, we had realized only nominal revenue from this product. WORLDWIDE INFORMATION Since 1996, we have produced CD-ROM products that enable users to quickly search motor vehicle records in multiple states through a dynamic search engine, known as Worldwide Information . Our Worldwide 25 Information product enables users to search certain motor vehicle records and drivers' license information in multiple states through a dynamic search engine. Unlike many competing products, our Worldwide Information product enables users to rapidly identify vehicles or drivers using complete or partial search criteria. We believe that this ability to search partial data is a valuable tool in circumstances in which incomplete information is available, as is often the case in criminal investigations. Unlike data provided by Internet-based services, searches on our CD-ROM product are confidential and unavailable to any person other than the user of our CD-ROM product. We believe that the confidential nature of this CD-ROM product makes it particularly attractive to law enforcement agencies, which must often conduct criminal investigations in strict secrecy. As of December 31, 2005, there were approximately 3,500 pre-screened purchasers of our Worldwide Information CD-ROM product. ENTERSECT On September 1, 2003, our newly formed wholly-owned subsidiary, Certifion Corporation, acquired all of the assets of Project Entersect Corporation a provider of data technology. Certifion operates under the trade name of "Entersect," and it provides self-screening for both resume and online dating services. DATAPHANT In October 2003, Voice Power Technology merged into our newly formed wholly-owned subsidiary, Dataphant, Inc. Through this merger, Dataphant now has information on virtually every land-based phone number in the United States and approximately 30% of the cell phone numbers in the United States. We believe that we are the only company that has this information. The Dataphant data has been integrated into both LocatePLUS and Worldwide Information products. Currently the only distribution of this data is through the other subsidiaries. METRIGENICS On January 6, 2004, the Company formed a new wholly-owned subsidiary, Metrigenics, Inc., with operations located in placeStateNew York state. Metrigenics was formed to develop new ways to integrate biometrics with data. Metrigenics has finished first stage testing on matching DNA to facial characteristics and expects to have first stage products within twelve months. SOURCES OF OUR DATA Our operations depend upon information derived from a wide variety of automated and manual sources. External sources of data include public records information companies, governmental authorities and on-line search systems. We license or otherwise obtain our data from five primary sources, as well as over twenty other ancillary sources (including both private and government sources). In the event that any of our primary sources of data were no longer available to us, we believe that we would be able to integrate alternate sources of data without significant disruption to our business or operations, as we believe there are currently a number of equivalent providers of such data. REGULATORY RESTRICTIONS ON OUR BUSINESS Both federal and state law regulates the sale of data. Recently, consumer advocates and federal regulators have voiced concerns regarding public access to, or commercial use of, personal information. As a result, increased pressure has been placed upon federal and state legislators to regulate the dissemination or commercial use of personal information. One such legislative enactment that has had an effect on our business was the Financial Services Modernization Act of 2000, also known as the "Gramm-Leach-Bliley Act". Among other things, this law restricts the collection, use, and transfer of certain data that includes "credit header" information, which had historically functioned as the backbone of our data resources. Implementation of this law's restrictions by the Federal Trade Commission significantly limited the availability of certain data for our database, but we have subsequently developed datasets that function independently of "credit header" information. Although we have not engaged counsel to review this matter or the conduct of our operations generally, we believe that our operations are currently unaffected by the Gramm-Leach-Bliley Act or any law specifically applicable to the dissemination of data concerning individuals. More recently, congress has been addressing the access to public data such as ours. Any further restriction on our 26 use of personal information, however, could limit the usefulness and have a material adverse affect on operations, our products, including our LocatePLUS product, and our operations. Federal and state law prohibits us from selling information about minors. Our products have been designed to prevent the dissemination of such data. DISTRIBUTION OF OUR PRODUCTS We distribute our content both directly (though the Internet in the case of our LocatePLUS product and through the mail in the case of our Worldwide Information CD-ROM) and through "channel partner" arrangements, by which third parties access our databases in consideration for a royalty. We also, from time to time, provide certain consulting services to third party database providers on the integration and assimilation of public data. To date, our efforts to license data have resulted in several channel partnerships. For the year ending December 31, 2005, we have recognized revenue of $4,358,038 on these agreements. COMPETITION Current competitors for our LocatePLUS and Entersect include ChoicePoint, Confi-chek.com, and Lexis-Nexis. Many of the companies that currently compete with this product, as well as other companies with whom we may compete in the future, are national or international in scope and have greater resources than we do. Those resources could enable those companies to initiate price cuts or take other measures in an effort to gain market share in our target markets. Our Worldwide Information product primarily competes with the registries of motor vehicles of various states that sell their data to screened users. These state agencies generally provide data in "raw form" without the search capabilities that we provide in our Worldwide Information product. EMPLOYEES As of July 28, the LocatePLUS Group had 80 employees. We believe that our relations with our employees are good. DESCRIPTION OF PROPERTY LocatePLUS Holdings Corporation and LocatePLUS Corporation, are presently headquartered in placeCityBeverly, StateMassachusetts, where we lease approximately 32,000 square feet. The lease on that facility expires on February 28, 2007, and our annual lease obligation is approximately $458,000. Worldwide Information, Inc., is presently located in placeCityByfield, StateMassachusetts, where it leases approximately 2,700 square feet. The lease on the Byfield facility expired on March 1, 2003, and we are currently a tenant-at-will in this facility. Our annual lease payments on that facility in 2005 were approximately $27,000. We are currently negotiating to extend this lease to December 2006. Dataphant, Inc., is located in placeCityAustin, StateTexas, where it leases approximately 3,000 square feet pursuant to a month-to-month lease (which includes the use of office equipment, with current monthly rent of $3,680). Certifion Corporation, (which does business under the name "Entersect"), is located in Santa Ana, California, where it leases approximately 1,900 square feet pursuant to a month-to-month lease with current monthly rent of $3,028. Metrigenics Inc., has access to University office and lab space with no lease or rental commitment. We believe that our facilities are sufficient for our projected needs. INTELLECTUAL PROPERTY Publicly available data concerning individuals is generally non-proprietary. As a result, our intellectual property consists largely of certain trade secrets and know-how associated with the integration of databases and our ability to link diverse datasets. We rely on a combination of confidentiality agreements, restrictions on access to our proprietary systems, and contractual provisions (such as in our user agreements) to protect our intellectual property. 27 We have registered LOCATEPLUS.COM as a trademark with the United States Patent and Trademark Office. We maintain LOCATEPLUS, WORLDWIDE INFORMATION , ENTERSECT , CareerScan , and TrustmeID as unregistered trademarks relating to our products. We may, from time to time, claim certain other rights under trademark law, however, we currently have no other marks registered or pending with the United States Patent and Trademark Office or the equivalent agency of any other country. In 2003, we filed for patent protection covering certain aspects of two of our products. We have filed for patent protection covering certain aspects of our unique search product, "Bull's Eye," that electronically matches database information with current public phone and utility information to identify current information. We also filed, through our Certifion subsidiary, for patent protection covering certain aspects of our self-validation products Career Screen and TrustmeID . CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On December 13, 2004, the audit committee of LocatePLUS Holdings Corporation (the "Company") received a letter of resignation dated December 10, 2004, from the Company's independent accountants, Carlin, Charron, and Rosen, LLP. (CCR). Except as described in the following sentence, the reports of CCR on the financial statements of the Company for either of the past two fiscal years did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The report of CCR on the financial statements of the Company for the fiscal year ended December 31, 2003 was modified to express substantial doubt regarding the Company's ability to continue as a going concern. In addition, during the Company's two most recent fiscal years and through December 13, 2004, there was no disagreement with CCR on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of CCR, would have caused CCR to make reference to the subject of that disagreement in its reports on the Company's financial statements for those fiscal periods. The letter of CCR, attached as Exhibit 16.1 to the 8-K filed with thh Securities and Exchange Commission on December 17, 2004, was the initial contact from CCR regarding the concerns addressed therein. Since that time, the Company's audit committee of the board of directors has addressed all issues raised in the CCR letter. Pursuant to Item 304(a)(3) of Regulation S-K, the Company provided CCR with a copy of this disclosure and requested that CCR as promptly as possible furnish a letter addressed to the Commission stating whether or not CCR agrees with the statements of the Company set forth in the December 17, 2004, 8-K. A letter from CCR with respect to this matter was filed with the Securities and Exchange Commission on Form 8-K on January 21, 2005. On February 8, 2005, Livingston & Haynes, P.C. ("Livingston") was engaged as the Company's new independent accountants. During the two most recent fiscal years and the interim period preceding the engagement of Livingston, the Company had not consulted with Livingston regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and either a written report or oral advice was provided to the Company by Livingston that Livingston concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing, or financial reporting issue; or (ii) any matter that was either the subject of a "disagreement" or a reportable event, as those terms are used in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B. LEGAL PROCEEDINGS The Company is from time to time subject to legal proceedings and claims which arise in the normal course of its business. Management believes the outcome of any pending or known matters will not have a materially adverse effect on the Company's financial position or results of operations. * * * 28 EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth specific information regarding our executive officers and directors as of December 31, 2005. EXECUTIVE OFFICERS AND DIRECTORS AGE POSITIONS -------------------------------- --- ----------------------------------- Jon R. Latorella 42 Chairman of the Board, President and Chief ExecutiveOfficer Sonia P. Bejjani 37 Director; President-Worldwide Information, Inc. James C. Fields 38 Vice President of Finance, Treasurer Secretary, and Acting Chief Financial Officer Thomas E. Murphy 46 Director Ralph Caruso 56 Director David Skerrett 56 Director John P. Houlihan 59 Director Chris Romeo 43 Director Mike Ryan 47 Director Peter Zekos 44 Director CURRENT DIRECTORS AND OFFICERS SONIA P. BEJJANI, 36, co-founded our business in 1991 and has been a member of our Board of Directors and employed by us in various capacities since we commenced our activities. During the five years ending August 1, 2001, Ms. Bejjani was our Vice President - Sales and Customer Service. Since August 1, 2001, Ms. Bejjani has been the President of Worldwide Information, Inc., our wholly-owned subsidiary. Ms. Bejjani has been elected in 2005 to serve a three year term. RALPH CARUSO 56, is the founder and President of Caruso Companies, a conglomerate involved in many facets of industrial construction that has been in business for over 25 years. Mr. Caruso has been elected in 2005 to serve a one year term. DAVID SKERRETT, 52, has been Vice President of the Middlesex Corporation for 23 years. Middlesex Corporation is in the top 400 heavy civil construction companies in the nation with $140 million in revenue. Mr. Skerrett holds a Bachelor of Engineering from College of Technology. Mr. Skerrett has been elected in 2005 to serve a one year term. JOHN P. HOULIHAN, 58, 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 and has been elected in 2005 to serve a one year term. JON R. LATORELLA, 42, co-founded our business in 1991 and has been our Chief Executive Officer since we commenced our activities. Mr. Latorella is also the Chairman of our Board of Directors. Before founding our business, Mr. Latorella served as a consultant to various local and state law enforcement agencies. Mr. Latorella holds a Bachelor of Science/Bachelor of Arts from the University of Massachusetts, which he received in 1994. Mr. Latorella has been elected in 2005 to serve a three year term. CHRIS ROMEO, 43, is an attorney that has had a private practice since 1992 and holds a Bachelors Degree from Wesleyan University and received a Doctorate of Jurisprudence from the New England School of Law in 1987. Mr. Romeo will be a new member to the Board of Directors and has been elected in 2005 to serve a two year term. MIKE RYAN, 47, is an attorney that has had a private practice since 1992 and holds a Bachelors Degree from Merrimack College and received a Doctorate of Jurisprudence from the New England School of Law in 1987. Mr. Ryan will be a new member to the Board of Directors and has been elected in 2005 to serve a two year term. PETER ZEKOS, 44, is founder and President of Excel Staffing, Inc., founded in 1999, an executive search and 29 temporary staffing company located in Worcester, Massachusetts. Mr. Zekos holds a Bachelors of Science in Business Administration from Clark University in Worcester, Massachusetts which he received in 1984. Mr. Zekos joined our Board of Directors in 2005 and has been elected in 2005 to serve a three year term. THOMAS E. MURPHY was employed by Oftring & Company, Inc., a registered broker-dealer located in Worcester, Massachusetts, from 1989 to 2004, where he held the title of Senior Vice President. Mr. Murphy holds a Bachelors of the Arts in Investments from placePlaceNameBabson PlaceTypeCollege, 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 Each of the directors holds such his or her office until his or her successor is duly chosen and qualified, or until his or her earlier resignation or removal. The Company is not aware of any family relationships between any of the officers and any of the Company's directors. Each of the officers holds such office until his or her successor shall have been duly chosen and shall have been qualified, or until his earlier resignation or removal. We do not have any employment agreements with any of our employees. AUDIT COMMITTEE The Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of our independent auditors, reviews the scope of the audit services provided by our independent accountants, and reviews our accounting practices and internal accounting controls. The board of directors is currently in the process of identifying and appointing a financial expert to the Audit committee. COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors reviews and recommends to the Board of Directors the salaries, benefits and stock option grants of all employees, consultants, directors and other individuals compensated by us. The Compensation Committee also administers our equity compensation plan and other employee benefits plans that we may adopt from time to time. The members of the Compensation Committee areto be elected when the board meets in January. CODE OF ETHICS The Company adopted a Code of Ethics at a meeting of the Board of Directors held on May 19, 2004. EXECUTIVE COMPENSATION Prior to December 5, 2005, the Company had outstanding two classes of stock, Class A Voting Common Stock of which there were 150,000,000 shares authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were 250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of the shareholders held on November 12, 2005, the shareholders approved a plan of recapitalization whereby 1) each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock combine into a single class of voting Common Stock with 400,000,000 authorized and 185,930,146 issued, 2) effect a one-for-fifty reverse split of this new class of Common Stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized from 8,000,000 to 25,000,000. The combination of the two classes of stock was completed on December 5, 2005. The reverse split and change in authorized shares was completed on December 12, 2005. In addition, the completion of the recapitalization triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new Common Stock. SUMMARY COMPENSATION TABLE The following table sets forth, for 2005, 2004 and 2003, 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, 2005, 2004 and 2003 exceeded $100,000 (the "Named Executive Officers"). 30
SECURITIES UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND ($) ($) (#) ($) PRINCIPAL POSITION YEAR ------------------------ ---- -------- -------- ----------- ------------- JON R. LATORELLA 2005 232,727 - - 15,000(2) President and 2004 193,955 100,000 70,000(1) 15,000(2) Chief Executive Officer 2003 58,209 - 187,000(1) 13,200(2) JAMES C. FIELDS(3) 2005 142,893 - - 13,200(7) Acting Chief Financial 2004 134,967 - 20,000(4) 10,000(7) Officer, Treasurer and 2003 112,901 - 25,000(4) - Secretary ROBERT A. GODDARD(5) 2003 61,539 - 5,000 - Former Chief Financial Officer, Treasurer and Secretary
(1) On May 19, 2004 Mr. Latorella was granted incentive stock options to purchase 70,000 Class A Voting Common Stock with an average exercise price of $70.05 per share on a post recapitalization basis. On December 18, 2003, Mr. Latorella was granted incentive stock options to purchase 85,000 and 100,000 Class A Voting Common Stock and on November 3, 2003, 2,000 Class B Non-Voting Common Stock with exercise prices of $12.50, $50.00, and $10.00 per share respectively on a post recapitalization basis. (2) Mr. Latorella and his family are allowed use of company vehicles, the value of which is approximately $1,100 per month to Mr. Latorella. (3) Mr. Fields commenced his employment with us in 2001. Mr. Fields became an executive officer with the Company on March 31, 2003. (4) On May 19, 2004, Mr. Fields was granted incentive stock options to purchase 20,000 shares of Class A Voting Common Stock with an exercise of $19.50 per share on a post recapitalization basis, and in 2003, 1,250,000 shares of Class A Voting Common Stock with an average exercise price of $10.50 per share on a post recapitalization basis. (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 20,000 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 5,000 shares of Class A Voting Common Stock with an exercise price of $0.15 per share. (7) Beginning in April 2004, Mr. Fields was allowed the use of a company-leased vehicle, the value of which is approximately $1,100 per month. OPTION/SAR GRANTS IN LAST FISCAL YEAR
- Number Of Secu- Percent of Total - rities Underlying Options/SARs - Options/SARs Granted To Exercise Of - Granted Employees In Base Price Expiration Name (#) Fiscal Year ($/Sh) Date ------------------- ------------------ ---------------- ------------ ---------- Jon R. Latorella - - - - President and Chief Executive Officer James C. Fields - - - - Acting Chief Financial Officer
31 EQUITY COMPENSATION PLANS 1999 STOCK OPTION PLAN On November 16, 1999, our Shareholders ratified and adopted an Incentive and Non-Qualified Stock Option Plan, which we refer to as the "1999 Stock Option Plan". The 1999 Stock Option Plan set aside 300,000 shares of our Common Stock adjusting for the December 2005 1 for 50 reverse split for issuance pursuant to the exercise of incentive and non-qualified stock options to be awarded to our employees, officers and directors at the recommendation of the equity compensation plan's administrator and subject to the approval of our Board of Directors. We strongly believe in the concept of each employee having some form of equity participation as an incentive toward excellence in individual performance and our further success. In June 2000, our 1999 Stock Option Plan was amended and restated to provide greater flexibility to the equity compensation plan's administrator in the granting of various forms of equity compensation. Adjusting for the effects of the reverse split, as of July 15, 2006, 189,126 stock options were outstanding under the equity compensation plan. The weighted average exercise price of all options granted under the equity compensation plan was $7.75 per. The 1999 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. 2003 STOCK OPTION PLAN On May 29, 2003, our Shareholders ratified and adopted an Incentive and Non-Qualified Stock Option Plan, which we refer to as the "2003 Stock Option Plan." The 2003 Stock Option Plan set aside 25,000,000 shares of our Class A Voting Common Stock and 25,000,000 shares of our Class B Non-Voting Common Stock for issuance pursuant to the exercise of incentive and non-qualified stock options to be awarded to our employees, officers and directors at the recommendation of the equity compensation plan's administrator and subject to the approval of our Board of Directors. Adjusting for the December 2005 combination and reverse split, the plan may issue up to 1,000,000 of Common Stock. We strongly believe in the concept of each employee having some form of equity participation as an incentive toward excellence in individual performance and our further success. As of July 15, 2006, 514,000 stock options were outstanding under the equity compensation plan. The weighted average exercise price of all options granted under the equity compensation plan was $23.60 per share. The 2003 Stock Option Plan is administered by the Compensation Committee of the Board of Directors. PLANS NOT APPROVED BY SECURITY HOLDERS 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. 32 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table reflects equity compensation granted or issued by us as of the March 31, 2006, to employees and non-employees (such as directors, consultants, advisors, vendors, customers, suppliers and lenders) in exchange for consideration in the form of goods or services.
- NUMBER OF WEIGHTED- NUMBER OF - SECURITIES TO AVERAGE SECURITIES - BE ISSUED EXERCISE REMAINING - UPON EXERCISE PRICE OF AVAILABLE FOR - OF OUTSTANDING OUTSTANDING FUTURE ISSUANCE - OPTIONS, OPTIONS, UNDER EQUITY - WARRANTS WARRANTS COMPENSATION PLAN CATEGORY AND RIGHTS AND RIGHTS PLANS(1) --------------------- -------------- ------------ ---------------- EQUITY COMPENSATION PLANS APPROVED BY --------------------- -------------- ------------ ---------------- Common Stock 700,126 $ 19.45 491,071 --------------------- -------------- ------------ ---------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS: --------------------- -------------- ------------ ---------------- Common Stock 2,400,077 $ 8.35 N/A --------------------- -------------- ------------ ---------------- TOTAL: Common Stock 3,100,203 $ 10.86 491,071 --------------------- -------------- ------------ ----------------
________________________________ (1) Excludes securities reflected in column titled "Number of securities to be issued upon exercise of outstanding options, warrants and rights." 401(K) PLAN We sponsor a defined contribution plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers substantially all of our employees. We may make discretionary matching contributions up to 1% of annual employee contributions. Employees are eligible to participate in the 401(k) Plan after one year of service. Our matching contributions vest ratably over a five-year period. We pay the administrative expenses of this plan. NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY On February 1, 2002 we adopted a Non-employee Director Stock Option Policy. Under the Non-employee Director Stock Option Policy, we will make annual grants (beginning on the date of adoption of the policy or the first day that a director is elected to our Board of Directors, if later) to our non-employee directors of warrants to purchase 35,000 shares of our Class B Non-Voting Common Stock as compensation for service on our Board of Directors (and any committees). These grants are made in lieu of any other compensation to our non-employee directors. Each of these warrants will be immediately exercisable and will have an exercise price that is equal to the fair market value of our Class B Non-Voting Common Stock as of the date of grant. No separate compensation is provided to directors for service on either of our two committees. We reimburse our directors for out-of-pocket costs associated with their activities on the Board of Directors. Directors who are also employees of LocatePLUS Holdings Corporation or any of its subsidiaries (currently, Mr. Latorella and Ms. Bejjani) are not paid any compensation for their service as directors. Pursuant to the Non-employee Directors Stock Option Policy: - On March 28, 2003, Messrs. Garlock, Houlihan, and Kite were each issued a warrant to purchase 35,000 shares of our Class B Non-Voting Common Stock for $0.15 per share. - In 2004, Messrs. Garlock, Houlihan, Kite, Murphy, and Scalley were each issued an option to purchase 1,000,000 shares of our Class A Voting Common Stock for $1.50 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. 33 ADVISORY BOARD On December 2, 1999, our Board of Directors authorized the formation of an Advisory Board, consisting of up to eight members, to provide ongoing advice and consultation to the Board of Directors to enhance the development and operation of our LocatePLUS product. The Advisory Board members (none of whom are employees or directors) are selected by the Board of Directors based on each candidate's experience, accomplishments and national recognition in the fields encompassed by our target markets. Compensation for members of our advisory board consists of expense reimbursement and a one-time grant of fully vested non-qualified stock options or immediately exercisable warrants to purchase thirty five thousand shares of Class B Non-Voting Common Stock. The Advisory Board meets informally from time to time with management. The current members of the Advisory Board are: DALE C. JENKINS, JR. On December 2, 1999, we appointed Dale C. Jenkins, Jr., as the first member of our Advisory Board. In 1999 Mr. Jenkins was appointed to the position of Special Assistant for Law Enforcement and Public Safety to the Chancellor of Higher Education of the Commonwealth of Massachusetts. Mr. Jenkins was also appointed to the Advisory Board of the U.S. Commission on Civil Rights and the Massachusetts Governor's Crime Watch Committee and was a consultant to the U.S. Department of Justice. In addition, Mr. Jenkins directed the Lead Advanced Security Team for Presidents Ronald Reagan and George H. W. Bush and acted as Deputy Director of Inaugural Security for then President-Elect George H. W. Bush. On November 17, 1999, our Board of Directors granted a ten-year option to Mr. Jenkins to purchase 25,000 shares of our Class A Voting Common Stock with an exercise price of $0.20 per share as compensation for his services on the Advisory Board. JAMES A. CORRY On July 20, 2000 our Board of Directors appointed James A. Corry as the second member of our Advisory Board. Since July 2001, Mr. Corry has been the Chief Operating Officer of Abel Telecom, Inc., based in Scottsdale, Arizona. Prior to that, Mr. Corry was a criminal investigation and security expert for the United States Secret Service. During his more than twenty years with that agency, Mr. Corry worked on security issues globally, conducting criminal and fraud investigations and managing the security of political personnel, including President George H. W. Bush. On June 1, 2001, the Board of Directors issued to Mr. Corry a ten-year option to purchase 25,000 shares of our Class A Voting Common Stock with an exercise price of $0.20 per share as compensation for his services on the Advisory Board. WILLIAM H. SHAHEEN On October 1, 2001 our Board of Directors appointed William H. Shaheen to our Advisory Board. Mr. Shaheen is currently the Managing Partner of the law firm of Shaheen and Cohen, with offices in Concord and Dover, New Hampshire. Mr. Shaheen served as U.S. Attorney for the District of New Hampshire from 1976 to 1981. In 1981, he was appointed a New Hampshire District Court Judge in Durham, New Hampshire. Mr. Shaheen resigned his judgeship in 1997 upon the election of his wife as Governor of the State of New Hampshire. On October 12, 2001 in consideration for his services on the Advisory Board, Mr. Shaheen received a ten-year warrant to purchase 25,000 shares of our Class B Non-Voting Common Stock, with an exercise price of $0.20 per share. DAVID G. DUCHESNEAU On October 1, 2001 our Board of Directors also appointed David G. Duchesneau to our Advisory Board. From 1991 to the present, Mr. Duchesneau has been General Manager of Standa, Inc., a full service private investigative agency and consulting firm. From 1971 to 1991, Mr. Duchesneau was the Commander and Senior Officer of the Organized Crime Unit and Fugitive Apprehensive Unit of the New Hampshire State Police. On October 12, 2001 Mr. Duchesneau was issued a ten-year warrant to purchase 25,000 shares of our Class B Non-Voting Common Stock, with an exercise price of $0.20 per share in consideration for his services on the Advisory Board. CHARLES LYONS On November 20, 2001 our Board of Director appointed Charles Lyons to the Advisory Board. Mr. Lyons is the Superintendent Director of the Shawsheen Valley Technical School District located in Billerica, Massachusetts. 34 He is also the Chairman of the Arlington, Massachusetts Board of Selectmen. On that date, our Board of Directors granted a ten-year warrant to Mr. Lyons to purchase 12,500 shares of our Class B Non-Voting Common Stock with an exercise price of $0.20 per share as compensation for his services on the Advisory Board. ORGANIZATION WITHIN THE PAST FIVE YEARS We were incorporated in Massachusetts in 1996 as Worldwide Information, Inc. In July 1999, we reincorporated in Delaware to take advantage of certain favorable corporate excise tax rates relative to Massachusetts as well as Delaware's well-established corporate law. As part of that re-incorporation, we changed our name to LocatePLUS.com, Inc. On August 1, 2001, we changed our name from LocatePLUS.com, Inc. to LocatePLUS Holdings Corporation as part of a corporate restructuring. In conjunction with that corporate restructuring, we created two wholly-owned subsidiaries, LocatePLUS Corporation, a Delaware corporation, and Worldwide Information, Inc., a Delaware corporation. We capitalized LocatePLUS Corporation with all of our Internet-based LocatePLUS business, in consideration for all of its outstanding equity. We capitalized Worldwide Information, Inc. with all of our CD-ROM-based Worldwide Information business, in consideration for all of its outstanding equity. We created these subsidiaries for two primary reasons: - We wished to isolate any potential liabilities in one of our products in a manner that would reduce the impact of any such liabilities on our other product line. There are no claims pending relating to errors or omissions in either of our two product lines, nor does management currently anticipate any such claims. However, as disclosed above, claims associated with defects in our databases may arise from time to time. - We wished to administratively separate the operations associated with our LocatePLUS product from our Worldwide Information 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. Subsequently, we acquired all of the securities of Entersect Corporation and Dataphant, Inc. and formed Metrigenics, Inc. We presently hold all of the equity of each of these five subsidiaries, and we account for each subsidiary on a consolidated basis. LocatePLUS Holdings Corporation provides certain administrative and executive functions on behalf of each of its subsidiaries, such as management of payroll and other accounts payable. No options, warrants or similar rights to acquire equity in any subsidiary currently exists, nor do we anticipate any such rights being created in the future. We have no present intention of selling or otherwise disposing of any subsidiary. * * * 35 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On June 17, 2002, the Board of Directors adopted our Interested Parties Transaction Policy, pursuant to which the Company will not enter into any agreement, arrangement or understanding with any director, officer, or 5% or greater stockholder of unless (i) the terms of such agreement, arrangement or understanding are consistent with the terms of equivalent agreements or arrangements that the Company could obtain from third parties; and (ii) the agreement, arrangement or understanding is fair to the Company. JON R. LATORELLA Mr. Latorella is our President and Chief Executive Officer and is Chairman of our Board of Directors. INCENTIVE STOCK OPTION In 2004, Mr. Latorella was granted fully vested incentive stock options to purchase 1,000,000 and 2,500,000 Class A Voting common with exercise prices of $1.50 and $0.39 per share respectively. USE OF COMPANY CARS. Mr. Latorella and his family are allowed use of two company cars, the value of which is approximately $1,500 per month. JAMES C. FIELDS Mr. Fields is our Acting Chief Financial Officer. STOCK OPTION On December 18, 2003, was issued incentive stock options to purchase 10,000 shares of our Class A Voting Common Stock with an exercise price of $12.50 per share on a post recapitalization basis. In 2004, Mr. Fields was issued incentive stock options to purchase 20,000 shares of our Class A Voting Common Stock with an exercise price of $19.50 per share on a post recapitalization basis. USE OF COMPANY CARS. Mr. Fields is allowed use of a company car, the value of which is approximately $1,100 per month. THOMAS GARLOCK Mr. Garlock is a former member of our Board of Directors. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004, Mr. Garlock was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. JOHN HOULIHAN Mr. Houlihan is a member of our Board of Directors. NON-EMPLOYEE DIRECTORS STOCK OPTION POLICY In 2004 Mr. Houlihan was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. 36 GERARD SCALLEY Mr. Scalley is a former member of our Board of Directors. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004 Mr. Scalley was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share on a post recapitalization basis pursuant to our Non-employee Directors Stock Option and Compensation Policy. ROBERT KITE Mr. Kite is former member of our Board of Directors. Mr. Kite was appointed to the Board in December 2002. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004 Mr. Kite was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share pursuant to our Non-employee Directors Stock Option and Compensation Policy. THOMAS MURPHY Mr. Murphy is a former member of our Board of Directors. Mr. Murphy joined the Board on March 28, 2003. NON-EMPLOYEE DIRECTORS STOCK OPTION AND COMPENSATION POLICY In 2004 Mr. Murphy was issued an option to purchase 20,000 shares of our Class A Voting Common Stock for $75.00 per share on a post recapitalization basis pursuant to our Non-employee Directors Stock Option and Compensation Policy. * * * 37 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Prior to December 5, 2005, the Company had outstanding two classes of stock, Class A Voting Common Stock of which there were 150,000,000 shares authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were 250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of the shareholders held on November 12, 2005, the shareholders approved a plan of recapitalization whereby 1) each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock combine into a single class of voting common stock with 400,000,000 authorized and 185,930,146 issued, 2) effect a one-for-fifty reverse split of this new class of common stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized from 8,000,000 to 25,000,000. The combination of the two classes of stock was completed on December 5, 2005. The reverse split and change in authorized shares was completed on December 12, 2005. In addition, the completion of the recapitalization triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new Common Stock. We had three securities that began trading on the Over-the-Counter Bulletin Board on December 12, 2002: - shares of our Class A Voting Common Stock are quoted under the symbol "LPLHA"; - shares of our Class B Non-Voting Common Stock are quoted under the symbol "LPLHB"; and - our public warrants (redeemable warrants to purchase one share of our Class A Voting Common Stock with an exercise price of $0.50 per share) are quoted under the symbol "LPLHW". Post the plan of recapitalization, on December 12, 2005, we had two securities trading on the Over-the-Counter Bulletin Board as follows: - shares of our Common Stock, quoted under the symbol "LPHC"; and - our public warrants (redeemable with 50 warrants to purchase one share of our Common Stock at an exercise price of $25.00 per share) are quoted under the symbol "LPHCW". The following tables set forth the high and low closing sales prices per share (and per public warrant), for our Class A Voting Common Stock, Class B Non-Voting Common Stock and public warrants for each quarter during fiscal years 2003, 2004, and 2005, as reported by the Over-the-Counter Bulletin Board.
2003 2004 THREE MONTHS ENDED THREE MONTHS ENDED ---------------------------------------------- ---------------------------------------------- MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- LPLHA.OB 0.40 0.14 0.42 0.12 0.38 0.28 0.34 0.24 0.63 0.29 0.58 0.37 0.39 0.25 0.37 0.25 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- LPLHB.OB 0.29 0.10 0.29 0.10 0.35 0.20 0.25 0.13 0.41 0.20 0.44 0.32 0.38 0.22 0.32 0.21 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- LPLHW.OB 0.10 0.00 0.12 0.00 0.13 0.03 0.09 0.05 0.26 0.07 0.19 0.09 0.13 0.04 0.12 0.05 -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
2005 2006 THREE MONTHS ENDED ---------------------------------------------------- ---------- MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 ------------ ------------ ------------ ---------- ---------- HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- LPLHA.OB 0.315 0.172 0.217 0.125 0.15 0.072 N/A N/A N/A N/A -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- LPLHB.OB 0.265 0.172 0.21 0.12 0.155 0.081 N/A N/A N/A N/A -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- LPLHW.OB 0.08 0.04 0.055 0.03 0.055 0.007 N/A N/A N/A N/A -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- LPHC N/A N/A N/A N/A N/A N/A 9.47 2.75 3.50 1.43 -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- LPHCW N/A N/A N/A N/A N/A N/A .058 .01 .023 .012 -------- ----- ----- ----- ----- ----- ----- ---- ---- ---- ----
HOLDERS As of December 31, 2005 there were: 38 - approximately 480 holders of record of our Common Stock, - approximately 150 holders of record of our public warrants. DIVIDENDS We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the future. We are under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends or distributions is at the discretion of our Board of Directors and will depend, among other things, on our future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. We plan to retain any earnings for use in the operation of our business and to fund future growth. PRINCIPAL STOCKHOLDERS As of the close of business on December 31, 2005, there were 5,693,789 shares of Common Stock issued and outstanding. There were also unexercised options and warrants issued to purchase 3,103,203 shares of Common Stock (including both vested and unvested options) outstanding on that date. The following table sets forth certain information known to us with respect to the beneficial ownership of our Common Stock as of the close of business on December 31, 2005, by: -Each of our directors; -Each of our executive officers; -Each person known to us to beneficially own more than 5% of either class of our common stock; and -All of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock underlying options or warrants held by that person that are currently exercisable or will become exercisable within 60 days of December 31, 2005 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. BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE BENEFICIALLY OWNED OF CLASS ---------------- ------------------ -------- Directors JON R. LATORELLA 983,735(1) 15.88% SONIA P. BEJJANI 92,508(2) 1.60% RALPH CARUSO 22,944 * DAVID SKERRETT 1,995(3) * JOHN P. HOULIHAN 80,595(4) 1.41% PETER ZEKOS 20,700(5) * CHRIS ROMEO - - MIKE RYAN - - THOMAS MURPHY 30,650(6) * Officers JAMES C. FIELDS 65,000(7) 1.13% 5% or More Shareholders SPECIAL SITUATION FUNDS 1,410,000(8) 23.14% SRB GREENWAY CAPITAL 282,000(9) 4.88% All directors and ------------ ------ executive officers as a group (10 persons) 2,990,127(10) 43.52% ___________________________ * Less than one percent of outstanding shares. (1) Includes 499,475 shares issuable upon exercise of a fully vested stock options, with a weighted average exercise price of $17.45 per share. 39 (2) Includes 90,000 shares issuable upon exercise of a fully vested stock options, with an average exercise price of $26.16 per share. (3) Consists of 225 held in IRA and 1,770 in trusts for which he is the custodian. (4) Includes 1,500 shares held by the Houlihan Trust, over which Mr. Houlihan has voting and dispositional authority. Also includes 24,900 shares of issuable upon exercise of certain immediately exercisable warrants with an exercise price of $62.07 per share. (5) Includes 700 shares issuable upon exercise of a fully vested stock options, with an average exercise price of $15.00 per share. (6) Includes 21,950 shares of issuable upon exercise of certain immediately exercisable warrants with an exercise price of $69.63 per share (7) Includes the vested portion of stock incentive stock options to purchase up to 65,000 shares with a weighted average exercise price of $11.65 per share. (8) Includes 505,000 shares and 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by Special Situations Fund III, L.P. and 505,000 shares 200,000 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by Special Situations Private Equity Fund, L.P. (9) Includes 166,206 shares and 65,824 shares issuable upon the exercise of warrants with an exercise price of $0.15 per share held by SRB Greenway Capital, (QP), L.P., 21,856 shares and 8,656 shares issuable upon the exercise of warrants with an exercise price of $0.15 per share held by SRB Greenway Capital, L.P., and 13,938 shares and 5,520 shares issuable upon the exercise of warrants with an exercise price of $7.50 per share held by SRB Greenway Offshore Operating Fund, L.P. (10) ncludes1,167,575 shares issuable upon the exercise of warrants * * * 40 DESCRIPTION OF CAPITAL STOCK The authorized capital of LocatePLUS Holdings Corporation consists of: - 25,000,000 shares of Common Stock. The following description of our capital stock does not purport to be complete and is governed by and qualified by our Second Amended and Restated Certificate of Incorporation (which we refer to as our "Charter"), included as an exhibit to this filing, and By-laws, which are included as an exhibit to the Corporation's Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on March 28, 2002 (Registration No. 333-85154). COMMON STOCK Prior to December 5, 2005, the Company had outstanding two classes of stock, Class A Voting Common Stock of which there were 150,000,000 shares authorized with 111,424,416 issued, and Class B Non-Voting Common Stock of which there were 250,000,000 shares authorized with 74,505,730 issued. At the annual meeting of the shareholders held on November 12, 2005, the shareholders approved a plan of recapitalization whereby 1) each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock combine into a single class of voting common stock with 400,000,000 authorized and 185,930,146 issued, 2) effect a one-for-fifty reverse split of this new class of common stock resulting in a 8,000,000 authorized and 3,718,603 issued, and 3) increase the authorized from 8,000,000 to 25,000,000. The combination of the two classes of stock was completed on December 5, 2005. The reverse split and change in authorized shares was completed on December 12, 2005. In addition, the completion of the recapitalization triggered the mandatory conversion of certain notes payable in the amount of $8,965,000 into 1,793,000 of the new common stock. As of July 15, 2006, there were 6,883,289 shares of Common Stock issued and outstanding. The holders of our common stock are entitled to receive ratably dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities. Our common stock does not have any preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. COMMON STOCK Shares of Common Stock are entitled to one vote per share held of record on all matters submitted to a vote of stockholders. Holders of Common Stock do not have cumulative voting rights. CLASS A REDEEMABLE WARRANTS GENERAL Each Common Stock Redeemable Warrant, or "public warrant," entitles the holder of 50 public warrants to purchase one share of our Common Stock for $25.00 per share. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the Common Stock Redeemable Warrant certificate and as summarized below. Subject to certain limitations which are described below, our Common Stock Redeemable Warrants with an original expiration of October 12, 2005 may now be exercised at any time until April 12, 2007, which is their expiration date. Those of our Common Stock Redeemable Warrants which have not previously been exercised will expire on April 12, 2007, at the close of business (5:00 p.m. Boston time). A Common Stock Redeemable Warrant holder will not be deemed to be a holder of the underlying shares of our Common Stock for any purpose until the Common Stock Redeemable Warrant has been properly exercised. EXERCISE A Common Stock Redeemable Warrant holder may exercise our Common Stock Redeemable Warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of Common Stock underlying our Common Stock Redeemable Warrants are qualified or registered for sale under the securities laws of the state in which the holder resides (or an exemption from registration is available). We will use commercially reasonable efforts to maintain the registration of the Common Stock underlying the warrants until 41 April 12, 2007, and to qualify for sale the shares of Common Stock in each U.S. jurisdiction in which our Common Stock Redeemable Warrant holders reside, although we can give no guarantee that such registration will be permitted under applicable state law. Our Common Stock Redeemable Warrants may be exercised by delivering to our Transfer Agent the applicable Public Warrant certificate on or prior to the expiration date, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of Common Stock Redeemable Warrants being exercised plus payment of any taxes required by the holder's jurisdiction. Fractional shares of Common Stock will not be issued upon exercise of our Common Stock Redeemable Warrants. ADJUSTMENTS OF EXERCISE PRICE If we effect any stock split or stock combination with respect to our 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 Common Stock Redeemable Warrant. REDEMPTION We may repurchase the Common Stock Redeemable Warrants for $0.001 per warrant upon 30 days' notice to the holders of the Class A Redeemable Warrants in the event that the closing bid on the Over-the-Counter Bulletin Board for our Class A Voting Common Stock is at or above $62.50 per share for five consecutive days. RESTRICTED WARRANTS As of July 15, 2006, we had issued restricted warrants to purchase an aggregate of 2,510,077 shares of our Common Stock, for which the weighted average exercise price of these warrants is $7.41 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 889 shares of our Common Stock at the election of the holder. The note originally matured on September 9, 2001. On July 22, 2002, the holder of the note agreed with us to convert the note into a demand note providing for quarterly payments of interest on the note until the principal of the note is repaid or converted. The current outstanding balance of this Note is $10,000. On July 8, 2005 we entered into a Securities Purchase Agreement with certain institutional and accredited investors and, in a private placement exempt from the registration requirements of the Securities Act of 1933, we issued a series of convertible term notes with an aggregate principal amount of $8,000,000 due November 5, 2005, if not converted prior to such date. As part of that offering, we also issued warrants to purchase up to 32,000,000 shares of our capital stock. As part of the same offering, on August 15, 2005 we issued additional notes with an aggregate principal amount of $965,000 and terms identical to the notes issued on July 8, 2005, as well as warrants to purchase up to 3,860,000 shares of our capital stock. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. As there are currently no unissued shares of our Class A Voting Common Stock that are not otherwise reserved for issuance, we anticipate that these notes and warrants will be exercisable for shares of either our Class B Non-Voting Common Stock or the newly created class of common stock, if approved. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current 42 exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. The completion of the recapitalization triggered the mandatory conversion of these notes into 1,793,000 of Common Stock. We also entered into a Registration Rights Agreement whereby, among other things, we agreed to file a registration statement, of which this prospectus is a part, with the SEC, to register the resale of the shares of our capital stock that we will issue upon exercise, if any, of the warrants and conversion of the notes. We have agreed to keep the registration statement effective until all of the shares registered by this prospectus are sold or can be sold without registration and without restriction as to the number of shares that may be sold. On December 29, 2005, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. On July 21, 2006, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $750,000 by issuing a note payable convertible into 750,000 shares of Common Stock at $1.00 per share and 200,000 founders shares and Common Stock purchase warrant for 375,000 shares with an exercise price of $1.00 per share. On December 29, 2005, we also entered into an agreement where we may, at our discretion, periodically "put" or require Dutchess to purchase shares of our Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares will not exceed $10.0 million. For each share of Common Stock purchased under the Investment Agreement, Dutchess will pay 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board (or other principal market on which our Common Stock is traded) during the ten day period immediately following the date on which we give notice to Dutchess of our intention to put such stock. 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 and satisfaction of certain other customary closing conditions. LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION Our Charter provides that members of our Board of Directors will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director except for liability: - for any breach of the director's duty of loyalty to the corporation or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the General Corporation Law of the State of Delaware (relating to distributions by insolvent corporations); or - for any transaction from which the director derived an improper personal benefit. Our Charter also provides that if the General Corporation Law of the State of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of members of our Board of Directors will be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Our Charter and By-laws also provide that we may indemnify our directors and officers to the fullest extent permitted by Delaware law. A right of indemnification shall continue as to a person who has ceased to be a director or officer and will inure to the benefit of the heirs and personal representatives of such a person. The indemnification provided by our Charter and By-laws will not be deemed exclusive of any other rights that may be provided now or in the future under any provision currently in effect or hereafter adopted by our Charter, By-laws, by any agreement, by vote of our stockholders, by resolution of our directors, by provision of law or otherwise. We have also secured directors' and officers' liability insurance on behalf of our directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons in accordance with the provisions contained in our Charter and By-laws, Delaware law or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses 43 incurred or paid by a director, officer or controlling person in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act of 1933 and we will follow the court's determination. SHARES ELIGIBLE FOR FUTURE SALE The following outlines our capital stock as of July 15, 2006: Shares Common Stock outstanding 6,883,289 (1) ______________ (1) Assuming no exercise or conversion of warrants and options to purchase 3,210,053 shares of Common Stock outstanding as of July 15, 2006. As of July 15, 2006, our affiliates held 1,813,852 shares of our Common Stock. In general, under Rule 144, as currently in effect after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned shares of our common stock for at least one year, including any person who is deemed to be our affiliate, will be entitled to sell, within any three-month period, a number of shares that does not exceed: - 1% of the number of shares of such class of common stock then outstanding, which will equal approximately 68,833 shares. Sales under Rule 144 are also governed by other requirements regarding the manner of sale, notice filing and the availability of current public information about us. Under Rule 144(k), however, a person who is not, and for the three months prior to the sale of such shares has not been, an affiliate of the Company will be free to sell "restricted securities" (e.g., shares issued in a private placement) which have been held for at least two years without regard to the limitations described above. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our securities is Transfer Online, Inc. Transfer Online's address is 227 SW Pine Street, Suite 300, Portland, Oregon 97204. LEGAL MATTERS The validity of the securities offered by this prospectus will be passed upon for us by Geoffrey T. Chalmers, Esq. EXPERTS The financial statements for the year ended December 31, 2005 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to our ability to continue as a going concern as described in Note 1 to the financial statements) of Livingston and Haynes, LP., independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act of 1933 for the shares of Common Stock in the offering, of which this prospectus is a part. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our securities, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. 44 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. * * * 45 LOCATEPLUS HOLDINGS CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report. . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheet as of December 31, 2005 and March 31, 2006 (unaudited). . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the years ended December 31, 2005 and 2004, and for the three months ended March 31, 2006 and 2005 (unaudited). . . . . . . . F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004, and for the three months ended March 31, 2006 and 2005 (unaudited). . . . . . . . F-6 Notes to Consolidated Financial Statements. . . . . . . . . . . . F-7 F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of LocatePLUS Holdings Corporation Beverly, Massachusetts We have audited the accompanying consolidated balance sheet of LocatePLUS Holdings Corporation as of December 31, 2005, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LocatePLUS Holdings Corporation and its subsidiaries as of December 31, 2005, and the results of its consolidated operations and its consolidated cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the financial statements, the Company has an accumulated deficit at December 31, 2005 and has suffered substantial net losses in each of the last two years, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are disclosed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/LIVINGSTON & HAYNES, P.C. Livingston & Haynes, P.C. Wellesley, Massachusetts March 22, 2006 The accompanying financial statements as of March 31, 2006 for the three months ended March 31, 2006 and 2005, have not been audited as disclosed in Note 1. May 30, 2006 F-2
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS MARCH 31, 2006 DECEMBER 31, (UNAUDITED) 2005 ASSETS Current assets: Cash and cash equivalents $ 236,277 $ 610,736 Accounts receivable, less allowance for doubtful accounts of 152,315 and 172,263 at March 31, 2006 and December 31, 2005 respectively 4,003,249 4,432,854 Prepaid expenses and other current assets 1,000,773 739,013 Notes receivable 177,600 177,600 ------------- -------------- Total current assets 5,417,899 5,960,203 ------------- -------------- Property and equipment, net 2,410,188 2,603,483 Other assets 193,730 180,646 ------------- -------------- Total assets $ 8,021,817 $ 8,744,332 ============= ============== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable 1,674,949 1,858,486 Accrued expenses 87,178 222,633 Deferred revenue 85,613 78,387 Current portion of capital lease obligation 150,912 187,155 Current Notes Payable 210,155 2,720,006 Current Convertible notes payable 1,235,465 - ------------- -------------- Total current liabilities 3,444,272 5,066,667 ------------- -------------- Capital lease obligation, net of current portion 25,039 46,691 Notes payable 14,708 16,145 Convertible notes payable - - ------------- -------------- Total liabilities 3,484,019 5,129,503 ------------- -------------- Commitments and contingencies -- Common Stock, $0.01 par value; 25,000,000 shares authorized; 6,483,289 and 5,693,789 shares issued and outstanding at Ma rch 31, 2006 and Dec ember 31, 2005 respectively 64,834 56,938 Additional paid-in capital 38,605,143 37,421,622 Warrants 2,946,642 2,805,892 Common stock subscription receivable - - Impaired value of securities (815,000) (831,500) Accumulated deficit (36,263,821) (35,838,123) ------------- -------------- Total stockholders' equity 4,537,798 3,614,829 ------------- -------------- Total liabilities and stockholders' equity $ 8,021,817 $ 8,744,332 ============= ==============
See independent auditors' report and notes to consolidated financial statements. F-3
LOCATEPLUS HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED MARCH 31, DECEMBER 31, 2006 2005 2005 2004 Revenues Information sales - CD-Rom $ 204,465 $ 126,008 $ 480,412 $ 550,923 Information sales - online 1,549,928 1,573,361 6,257,679 4,107,714 Information sales - channel 1,344,063 695,790 4,358,038 1,028,650 Information sales - wireless 1,452 3,518 11,908 13,095 Engineering services - 500,000 505,000 562,200 --------------- -------------- ------------- ------------- Total revenues 3,099,908 2,898,677 11,613,037 6,262,582 --------------- -------------- ------------- ------------- Costs and expenses: Costs of revenues CD-Rom 9,584 17,872 133,612 96,683 Online and channel 857,625 832,693 4,055,417 3,652,714 Wireless - - - 870 Engineering - 123,750 123,750 124,175 Selling and marketing 461,841 669,707 2,492,172 1,900,984 General and administrative 1,860,944 1,498,988 7,537,444 6,467,306 Research and Development 49,969 52,951 214,287 316,941 --------------- -------------- ------------- ------------- Total operating expenses 3,239,963 3,195,961 14,556,682 12,559,673 --------------- -------------- ------------- ------------- Operating loss (140,055) (297,284) (2,943,645) ( 6,297,091) Other income (expense): Interest income - 4,237 57,256 159,461 Interest expense (286,185) (147,242) (2,705,835) (747,279) Interest expense - amortization of discounts - - - (193,131) Other income 540 552 (7,952) 30,280 Write-off accrued license fees - - - - Impairment of Note Receivable - (500,000) --------------- -------------- ------------- ------------- Net loss $ (425,700) $ (439,737) $( 5,600,176) $( 7,547,760) =============== ============== ============= ============= Basic and diluted net loss per share $ (0.07) $ (0.13) $ (1.56) $ (2.34) Shares used in computing basic and diluted net loss per share 5,693,789 3,400,465 3,582,049 3,230,121
See independent auditors' report and notes to consolidated financial statements. F-4
LOCATEPLUS HOLDINGS CORPORATIONS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) CLASS A CLASS B ADDITIONAL WARRANTS COMMON STOCK COMMON STOCK COMMON STOCK PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL Balance at December 31, 2003 . . . - - 76,076,691 $ 760,767 72,898,596 $ 728,986 $ 20,967,471 $2,237,448 Issuance of shares. . . 2,791,532 27,915 502,460 Issuance of shares. . . 8,600,841 86,008 3,228,850 Exercise of options @ $0.15 . . . . 250,000 2,500 35,000 Exercise of options . . 3,604,350 36,044 107,327 Net Issuance options /warrants exercised . . 964,821 9,648 260,582 2,606 (12,254) Warrants exercised. . . 1,000 10 10,000 100 2,589 Issuance of common stock in exchange for services. . . . . . 4,601,743 46,017 560,065 173,339 Net loss for the year ended December 31, 2004 --------- ------- ------------- ------------ ------------ ---------- ------------- ---------- Balance at December 31, 2004 . . . - - 96,890,978 968,909 73,169,178 731,692 25,391,508 2,410,787 Issuance of shares. . . - - 16,121,047 161,211 1,336,552 13,366 1,641,979 Combine Class B common into Class A . . 74,505,730 745,058 (74,505,730) (745,058) Effect 1 for 50 reverse split . . . . . 3,900,789 $39,008 (187,517,755) (1,875,178) 1,836,170 Conversion of Notes Payable . . . . . . . . 1,793,000 17,930 8,551,965 395,105 Services performed for Stock . . . . . . . Impairment on Assets. . Net loss for the year ended December 31, 2005 . . . --------- ------- ------------- ------------ ------------ ---------- ------------- ---------- Balance at December 31, 2005 . . . 5,693,789 56,938 - - - - 37,421,622 2,805,892 ========= ======= ============= ============ ============ ========== ============= ========== LOCATEPLUS HOLDINGS CORPORATIONS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) STOCK - - TOTAL SUBSCRIPTION IMPAIRMENT ON ACCUM STOCKHOLDERS' RECEIVABLE ASSETS DEFICIT EQUITY (DEFICIT) Balance at December 31, 2003 . . . $ $(22,690,187) $ 2,004,485 Issuance of shares. . . 530,375 Issuance of shares. . . 3,314,858 Exercise of options @ $0.15 . . . . 37,500 Exercise of options . . 143,371 Net Issuance options /warrants exercised . . - Warrants exercised. . . 2,699 Issuance of common stock in exchange for services. . . . . . (488,558) 290,863 Net loss for the year ended December 31, 2004 (7,547,760) (7,547,760) -------------- ------------- ------------- ----------------- Balance at December 31, 2004 . . . (488,558) (30,237,947) (1,223,609) Issuance of shares. . . 1,816,556 Combine Class B common into Class A . . - Effect 1 for 50 reverse split . . . . . - Conversion of Notes Payable . . . . . . . . 8,965,000 Services performed for Stock . . . . . . . 488,558 488,558 Impairment on Assets. . (831,500) (831,500) Net loss for the year ended December 31, 2005 . . . (5,600,176) (5,600,171) -------------- ------------- ------------- ----------------- Balance at December 31, 2005 - (831,500) (35,838,123) 3,614,829 ============== ============= ============= =================
See Independent Auditors' Report and Notes to Consolidated Financial Statements. F-5
LOCATEPLUS HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED MARCH 31, DECEMBER 31, (unaudited) 2006 2005 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($425,700) ($439,737) ($5,600,176) ($7,547,760) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 272,294 264,775 1,026,805 943,473 Provision for doubtful accounts 19,948 13,835 (7,768) 69,573 Interest expense related to warrants issued with debt 92,758 28,159 199,375 193,131 Amortization of intangible assets 3,416 39,354 133,454 158,551 Impairment of Note Receivable - - - 500,000 Expense recorded for fair value of stock, options, and warrants issued for services 89,650 55,000 958,643 290,864 Stock Based Compensation 25,226 - - - Changes in assets and liabilities: Accounts receivable 409,657 (1,043,426) (3,468,376) ( 457,472) Prepaid expenses and other assets (261,759) 17,211 (430,949) 345,099 Other Assets - (2,397) 149,777 ( 476,909) Accounts payable (183,538) (388,449) (174,071) 809,756 Accrued expenses (135,453) (2,557) (9,536) (206,283) Deferred revenue 7,226 17,956 20,143 ( 42,105) ----------- --------------- -------------- ------------- Net cash used in operating activities (86,275) (1,440,276) (7,202,677) ( 5,420,082) ----------- --------------- -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal repayment of purchased note receivable - 40,000 453,070 422,500 Advance on note receivable - (49,433) (175,211) ( 119,638) Purchases of property and equipment (79,000) (52,893) (629,636) ( 647,517) Proceeds from sale of property and equipment - - ----------- --------------- -------------- ------------- Net cash provided by investing activities (79,000) (62,326) (351,777) (344,655) ----------- --------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (651,290) (82,901) (4,331,363) (1,013,911) Proceeds from issuance of debt 500,000 412,265 10,640,653 4,250,000 Financing fees on issuance of debt - - - (312,000) Payments of obligations under capital lease (57,894) (196,586) (595,446) (1,246,893) Proceeds from issuance of common stock and collection of stock subscriptions receivable, net of issuance costs - 283,338 1,264,407 3,751,558 ----------- --------------- -------------- ------------- Net cash provided by financing activities (209,184) 416,116 6,978,251 5,428,754 ----------- --------------- -------------- ------------- Net (decrease) increase in cash and cash equivalents (374,459) (1,086,486) ( 576,203) (335,983) Cash and cash equivalents, beginning of period 610,736 1,186,939 1,186,939 1,522,922 ----------- --------------- -------------- ------------- Cash and cash equivalents, end of period $ 236,277 $ 100,453 610,736 1,186,939 =========== =============== ============== ============= Supplemental disclosures of cash flows information: Cash paid for interest $ 2,284,726 $ 691,429 Supplemental disclosure of non-cash investing and financing activities: Acquisition of property and equipment under capital leases - $ 805,431 Relative fair value of detachable warrants issued in conjunction with convertible debt $ 395,105 268,866 Issuance of common stock for subscription receivable 488,558 Fair value of warrants issued in conjunction with services 261,308
See independent auditors' report and notes to consolidated financial statements. F-6 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION LocatePLUS Holdings Corporation (the "Company") was initially incorporated in Massachusetts in 1996 as Worldwide Information, Inc. In July 1999, the Company reincorporated in Delaware and changed its name to LocatePLUS.com, Inc. On August 1, 2001, the Company changed its name from LocatePLUS.com, Inc. to LocatePLUS Holdings Corporation as part of a corporate restructuring. Also, as part of the restructuring, the Company created two wholly-owned subsidiaries, LocatePLUS Corporation and Worldwide Information, Inc. The restructuring was completed by commonly-controlled entities and, accordingly, was accounted for based on historical cost. In September 2003, the Company, through its newly formed wholly owned subsidiary Certifion Corporation, acquired all of the assets of Project Entersect Corporation. The acquisition was accounted for as a purchase and is recorded with the Company's operations from the date of purchase through December 31, 2003. In October 2003, the Company merged Voice Power Technology into its newly formed wholly owned subsidiary Dataphant, Inc. There were no assets acquired in this acquisition and the Company issued 2,500,000 shares of its Class B Non-Voting common stock to the stock holders of Voice Power Technology in consideration for a two year non-competition agreement with these stock holders. All intercompany accounts and transactions have been eliminated in consolidation. The Company provides access to public information such as bankruptcies, real estate transactions, motor vehicles, and drivers' licenses to commercial, private sector and law enforcement entities in the United States. In 1999 and prior periods, this information was delivered to customers on compact disks. In March 2000, the Company began providing information through the Internet and in 2002 began providing information through the use of handheld wireless devices. UN-AUDITED INTERIM FINANCIAL STATEMENTS The accompanying interim consolidated condensed financial statements are un-audited and have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements include the accounts of LocatePlus Holdings Corporation and its subsidiaries. Certain information and footnote disclosures normally included in LocatePlus Holdings Corporation's annual consolidated financial statements have been condensed or omitted in accordance with Securities and Exchange Commission ("SEC") rules for interim financial statements. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the financial position as of March 31, 2006 and the results of operations and cash flows for the three months then ended. There were no material unusual charges or credits to operations during the recently completed fiscal quarter. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005, contained herein. LIQUIDITY AND OPERATIONS The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred significant net losses in each of the last two years as well as during the three months ended March 31, 2006. In addition, the Company has incurred an accumulated F-7 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) deficit of approximately $36 million through March 31, 2006. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. These financial statements don not include any adjustments that might result from the outcome of this uncertainty. The Company raised approximately $8 million, $4 million, and $2.4 million of equity during 2005, 2004, and 2003 respectively. The ultimate success of the Company is still dependent upon its ability to secure additional financing to meet its working capital and ongoing project development needs. During August 2003, the Company issued a put to one investor through an equity agreement, which provides that the Company, subject to certain limitations, has the right to sell, at its discretion, up to $5 million in shares of the Company's Common Stock to the investor at a purchase price equal to 95% of the lowest closing bid price for the Company's Common Stock during a ten-day pricing period. The number of shares that the Company may sell to that investor is limited by the trading volume of the Company's Common Stock and certain customary closing conditions. The Company sold 369,535 shares, after adjusting for a 1 for 50 reverse split on December 12, 2205, for a total $5.0 Million in net proceeds from the investor through December 31, 2005. During December 2005, the Company issued a put to one investor through an equity agreement, which provides that the Company, subject to certain limitations, has the right to sell, at its discretion, up to $10 million in shares of the Company's Common Stock to the investor at a purchase price equal to 93% of the lowest closing bid price for the Company's Common Stock during a ten-day pricing period. The number of shares that the Company may sell to that investor is limited by the trading volume of the Company's Common Stock and certain customary closing conditions. No shares have yet been sold under this agreement Management's plans include increasing sales, expanding infrastructure, and hiring additional staff. To accomplish this will require additional financing. Management plans to explore both debt and equity options, which the board of directors is willing to pursue. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all money market funds, bank certificates of deposit, and short term investments with original maturities of three months or less at the date of purchase to be cash equivalents. CONCENTRATION OF CREDIT RISK Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, accounts receivable and notes receivable. The risk with respect to cash and cash equivalents is minimized by the Company's policies in which such investments are placed only with highly rated financial institutions and in instruments with relatively short maturities. The financial stability of these financial institutions is constantly reviewed by senior management. The notes receivable are placed with unrelated companies that are also reviewed by management. Consequently, the carrying value of cash and cash equivalents, and notes receivable approximates their fair value based on the short-term maturities of these instruments. The risk with respect to accounts receivable is minimized by the large number of customers comprising the Company's customer base, none of which are individually significant and by their dispersion across many geographical regions. The Company generally does not require collateral, but evaluations of customers' credit and financial condition are performed periodically. F-8 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method at rates sufficient to write off the cost of the assets over their estimated useful lives. INTANGIBLE ASSETS Costs of acquiring businesses, such as customer lists and non-compete agreements, are being amortized on a straight-line basis over 2-3 years, while deferred financing costs are being amortized over the term of the related debt. INCOME TAXES The Company accounts for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The majority of the Company's deferred tax asset has been established for the expected future benefit of net operating tax loss and credit carryforwards. A valuation reserve against net deferred tax assets is required if, based upon available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. REVENUE RECOGNITION The Company provides access to public information such as bankruptcies, real estate transactions and motor vehicles and drivers' licenses. The Company provides this information as an online service through its website, wirelessly to handheld wireless devices, via XML over the Internet to Channel Partners, or through licenses of the information on compact disks. The Company updates the information contained in compact disks (CDRoms) either quarterly or semi-annually. Revenue is recognized upon delivery to the customer of a compact disk, provided that no significant obligations remain, evidence of the arrangement exists, the fees are fixed or determinable, and collectibility is reasonably assured. In October 2002, the Company changed its method of selling compact disks. Prior to October, compact disks were sold with an upfront purchase of an annual supply of compact disks, with the purchase price allocated equally based on the number of compact disks to which the customer was entitled. Deferred revenue principally related to undelivered compact disks. Subsequent to October 2002, compact disks are sold individually. Customers may choose to have the disks automatically shipped and billed. Online customers are charged fees which vary based on the type of information requested. Revenue is recognized when the information requested is downloaded, there is evidence of an arrangement, the fees are fixed or determinable, and collectibility is reasonably assured. Wireless customers using LocatePlus Anywhere are charged a monthly subscription fee billed in arrears. Revenue is recognized on a monthly basis when there is evidence of an arrangement, the fees are fixed or determinable, and collectibility is reasonably assured. Channel partners are charged royalty fees, which vary based on the type of information requested. Revenue is recognized when the information requested is downloaded, there is evidence of an arrangement, the fees are fixed or determinable, and collectibility is reasonably assured. Engineering services in 2004 and 2003 relate to integration services provided to a third party database provider with whom the Company has an arrangement whereby the Company provides the third party access to the Company's database. Revenue is recognized over the term of the F-9 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 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. ADVERTISING The Company charges advertising costs to operations when incurred. Advertising expense was $576,715 in 2005 and $308,500 in 2004. EARNINGS PER SHARE Basic earnings per share is based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume the issuance of potential common shares that have an anti-dilutive effect. Diluted per share computations are not presented since the effect would be anti-dilutive. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to fair value accounting for nonmonetary exchanges of similar productive assets and replaces it with a general exception to fair value accounting for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this statement to have a material impact on its financial statements. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No. 123R requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these F-10 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) instruments under the intrinsic value method prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. The requirements of SFAS No. 123R are effective for fiscal periods beginning after December 15, 2005. If the company had applied the provisions of SFAS No. 123R to the financial statements for the period ending December 31, 2005, net income would have been reduced by approximately $1.3 million. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods. In October 2004, the FASB ratified the EITF consensus on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination. This consensus describes the accounting for the settlement of preexisting relationships and the re-acquisition of certain rights in a business combination. This consensus was effective for the fourth quarter of 2004 and was adopted by the Company in that quarter. This adoption did not have a material effect on the Company's results of operations, cash flows or financial position, but may impact future transactions. 3. STOCK COMPENSATION PLANS Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company applied the disclosure only provisions of the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition Disclosure" (SFAS 148") for employee stock option awards for the twelve months ended December 31, 2005 and 2004. Had compensation cost for the Company's stock option plan been determined in accordance with the fair value-based method prescribed under SFAS 123, the Company's net loss and basic and diluted net loss per share would have approximated the pro forma amounts indicated below. YEAR ENDED DECEMBER 31 ---------------------------- 2005 2004 -------------- ------------ Net loss - reported $ (5,600,176) $(7,547,760) Amortization of stock compensation expense (1,289,122) (1,367,513) ------------- ------------ Pro forma net loss $ (6,889,298) $(8,915,273) ============= ============ Pro forma net loss per share - basic and diluted $(1.92) $(2.76) The weighted average fair value of options granted during 2004 and $1.50 adjusting for the recapitalization. The Company recognizes forfeitures as they occur. For purposes of this disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods. In 2004, the fair value of stock options used to compute pro forma net loss and net loss per share disclosures was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0%; expected volatility of 34%; average risk-free interest rate of 4.03%; and an expected option holding period of 6 years. In 2005, the fair value of stock options used to compute pro forma net loss and net loss per share disclosures was estimated on the date of grant using the Black-Scholes option-pricing model with F-11 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) the following weighted average assumptions: dividend yield of 0%; expected volatility of 30%; average risk-free interest rate of 4.37%; and an expected option holding period of 6 years. Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), "Share Based Payment" ("SFAS No. 123(R)") using the modified prospective transition method. No stock-based compensation expense was recognized in the income statement for the three-month period ended March 31, 2005, as all options granted under the Company's stock-based employee compensation plans had an exercise price equal to the market value of the underlying common stock on the date of grant. As permitted by SFAS No. 123, stock-based compensation was included as a pro forma disclosure in the notes to the Company's financial statements for the three month period ended March 31, 2005. Under that transition method, compensation cost recognized in the three months ended March 31, 2006 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated, as provided for under the modified-prospective method. Total stock-based compensation expense recognized in the income statement for the three months ended March 31, 2006 was $25,226. Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options ("excess tax benefits") to be classified and reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon adoption. For the Three Months Ended March 31, 2005 Net loss as reported $ (439,737) Add: Total stock-based compensation included in net income as reported - Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (430,241) ------------ Pro forma net loss $ (869,978) ============ Pro forma net loss per share: Basic and Diluted $ (0.26) Disclosures for the period ended March 31, 2006 are not presented because the amounts are recognized in the financial statements in connection with the adoption of SFAS 123R. SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton ("BSM") option valuation model, which incorporates various assumptions including volatility, expected life, and interest rates. The assumptions used for the three-month periods ended March 31, 2006 and March 31, 2005 and the resulting estimates of weighted-average fair value per share of options granted during those periods are as follows: F-12 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) FOR THE THREE MONTHS ENDED MARCH 31 2006 2005 --------- -------- Expected life 6 years 6 years Volatility 31% 34% Risk free interest rate 4.86 % 4.03% Dividend yields - - Weighted-average fair value of options granted during the period - 15.00 The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For 2006, expected stock price volatility is based on a combination of historical volatility of the Company's stock and the one-year implied volatility of its traded options, for the related vesting periods. Prior to the adoption of SFAS 123R, expected stock price volatility was estimated using only historical volatility of the Company's stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. 4. ACCOUNTS RECEIVABLE, TRADE Trade accounts receivable are presented net of an allowance for doubtful collections of $172,263 at December 31, 2005. In determining this allowance, objective evidence that a single receivable is uncollectible as well as a historical pattern of collections of accounts receivable that indicate that the entire face amount of a portfolio of accounts receivable may not be collectible is considered at each balance sheet date. 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets primarily consist of approximately $303,934 in prepaid insurance and data, $115,000 in fees for financing that are being amortized over the length of the term, and $46,000 in interest receivable on notes receivable. 6. NOTES RECEIVABLE The Company holds a demand promissory note receivable from an unrelated leasing company, with interest at 11%. One million dollars was advanced to the leasing company near the end of 2002 as proceeds from the Company's initial public offering were collected. There is no business relationship between the Company and this leasing company or any officers or directors of either company. The remaining principal balance at March 31, 2006 was $358,508. At December 31, 2004, substantial doubt existed on collectability of these balances. An allowance of $500,000 was recorded against the outstanding balance and accrued interest. Net of that allowance, the carrying value of that note is approximately $177,000. Unsecured note receivable with an unrelated entity. There is an oral agreement to advance up to $250,000 on this note. There is no business relationship between the Company and this entity or any officers or directors of either company, except that the Company is currently performing some administrative and bookkeeping services for the unrelated entity in exchange for approximately $1,000 per month. The Company has advanced as much as $250,000 to this unrelated entity in the form of cash and services. At December 31, 2005 there was no outstanding balance on this account. F-13 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 7. PROPERTY AND EQUIPMENT Property and equipment at December 31, 2005, consists of the following: Equipment $ 4,518,977 Vehicles 102,954 Software 751,649 Furniture and fixtures 389,783 Leasehold improvements 618,093 ----------- $ 6,381,456 Less accumulated depreciation and amortization 3,777,973 ----------- Property and equipment, net $ 2,603,483 =========== The carrying value of assets under capital leases was $952,661, net of amortization of $1,017,338, as of December 31, 2005. Depreciation and amortization expense was $1,160,259 and $943,473 for the years ended December 31, 2005 and 2004, respectively, which includes amortization expense on the equipment under capital lease of $ 398,043 and $353,835 for the years ended December 31, 2005 and 2004, respectively. 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following at December 31, 2005: Accrued interest receivable $ 45,961 Prepaid expenses 427,735 Deferred financing costs 115,000 Other 150,317 --------- Total $ 739,013 ========= 9. OTHER ASSETS Other assets consist of the following at March 31, 2006 and December 31, 2005: MARCH 31, 2006 DEC. 31, 2005 --------- --------- Restricted trading securities $ 60,000 $ 43,500 Customer lists and non-compete agreement net of amortization 40,766 44,182 Deferred financing costs - - Security deposits 92,964 92,964 --------- --------- Total $ 193,730 $ 180,646 ========= ========= Restricted trading securities consist of 200,000 restricted shares of common stock in Data Evolution Holdings, Inc. (DEH), which trades over the counter under the symbol DTEV. These shares were acquired as part of an agreement to provide service and data to DEH. The service and data was at valued at $875,000. At the time the service and data was valued, November 22, 2004, the trailing 10 day average closing price of DTEV was $5.96 per share, or $1,192,000. Due to the fact that these shares were restricted, a mutually agreed upon 25% liquidity discount was F-14 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) applied to the value, or $894,000, as such 200,000 shares were exchanged for the service. At March 31, 2006, the 10-day trailing average closing price was $0.40 per share, or the value of the shares was $80,000. An impairment to the current value has been recorded to adjust the security carrying value to the original 25% discount. The company recorded an impairment of $815,000 and the adjusted carrying value is now $60,000. 10. ACCRUED EXPENSES Accrued expenses consist of the following at December 31, 2005: Payroll and related taxes $ 86,635 Accounting, legal and professional fees 82,500 Other 53,498 --------- Total $ 222,633 ========= 11. NOTES PAYABLE Convertible promissory note, due on demand, that bears interest at the rate of 12% per annum. The note is convertible into 44,444 shares of Class A Voting Common Stock at the note holder's option. The note requires quarterly payment of interest until the principal is repaid or converted. During 2003, the Company received $2.3 million, by issuing subordinated promissory notes bearing simple interest ranging from 10% and 12% per annum. The balance of this debt at December 31, 2005, is $1,714,000. The remaining debt is due in 2006. In conjunction with the issuance of these notes, the Company issued warrants to purchase 2,500,000 shares of Class B Non-Voting Common stock with a weighted average exercise price of $0.14. The Company allocated the investment proceeds between the notes and warrants based on their relative fair values. The relative fair value of the warrants was determined to be $218,482, which was recorded as debt discount, a reduction of the carrying amount of the notes. This amount is being amortized to interest expense over the term of the debt. The unamortized balance of this debt discount is $124,899 at December 31, 2003 ($4,491 long-term). The fair value of the warrants was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 29% volatility, 3.6% average risk-free interest rate, a ten-year life and an underlying Class B Non-Voting Common Stock value of $0.14 per share. On June 17, 2004 the Company entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private placement of a convertible term note issued by the Company in the principal amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase warrant (the "Warrant"). On November 30, 2004, this note was amended to increase the principal amount to $4,000,000 and add an additional warrant. The terms, as amended, allow for this note to covert into 6,666,667 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.30 per share and 5,000,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.40 per share. One Warrant provides for the purchase of up to 1,320,000 shares of Class A Common Stock at a price of $0.45 each, subject to customary adjustments, until June 17, 2009, and the additional Warrant provides for the purchase of up to 650,000 shares of Class A Common Stock at a price of $0.35 each, subject to customary adjustments, until November 30, 2009. On March 31, 2005, the Company amended its convertible term note issued by the Company to Laurus Master Fund, Ltd., a Cayman Islands company. The terms, as amended, allow for this note to convert into 6,250,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.16 per share, 3,333,333 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.30 per share and 5,000,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.40 per share. In July, 2005, the company raised $9 million through the issuance of convertible debt. The net F-15 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) proceeds were used to pay down existing debt of $4 million and the remaining balance will be used to fund operations. As of July 8, 2005, the balance on this note was paid in full. In connection with an offering that closed on August 15, 2005 we entered into a Purchase Agreement with certain institutional and accredited investors relating to the private placement of convertible term notes issued by the Company in the principal amount of $8,965,000 and warrants to purchase up to 41,189,000 shares of our capital stock. Of the proceeds from this offering, approximately $4.1 million was used to retire current secured convertible notes, and the remainder will be used for general working capital. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. As there are currently no un-issued shares of our Class A Voting Common Stock that are not otherwise reserved for issuance, we anticipate that these notes and warrants will be exercisable for shares of either our Class B Non-Voting Common Stock or the newly created class of common stock, if approved. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. In conjunction with this offering, we also entered into related Registration Rights and Voting Agreements. On November 14, 2005, at the annual meeting of the shareholders, the recapitalization was approved by a majority of the outstanding shares of both classes of stock. Effective December 2005 that debt was converted to common stock. 12. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and equipment under various non-cancelable operating lease agreements which terminate on various dates through 2007. Rent expense amounted to $563,180 and $476,292 during 2005 and 2004, respectively. Future minimum payments under non-cancelable operating leases are as follows: YEAR ENDING DECEMBER 31, 2006 $ 542,684 2007 92,255 2008 6,306 --------- Total $ 641,245 ========= CAPITAL LEASES The Company acquired equipment under long-term capital leases. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases. The following is a schedule by years of future minimum lease payments under the capital leases, together with the net present value of the minimum lease payments at December 31, 2005. F-16 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) YEAR ENDING DECEMBER 31, 2006 $ 207,156 2007 49,536 ---------- 256,692 Less: amounts representing interest and executory costs 22,571 ---------- Present value of future minimum lease payments 234,121 Less: current portion of obligation under capital lease 207,156 ---------- Long-term obligation under capital lease $ 26,965 ========== LICENSE AGREEMENTS The Company obtains its data from multiple sources and has entered into various license agreements with the related data providers. In 2005 and 2004, the Company recorded $2,906,465 and $2,617,681 respectively in costs related to these agreements. In the event that any of the primary sources of data are no longer available to the Company, management believes that it would be able to integrate alternate sources of data without significant disruption to the business or operations, as there are currently a number of providers of such data. The Company is required to make minimum payments under these agreements as follows: YEAR ENDING DECEMBER 31, 2006 $ 145,000 ---------- $ 145,000 ========== The Company's operations depend upon information that includes public records. If material changes were to occur in federal or state laws regulating or prohibiting the distribution of public records, particularly credit header records, the Company's financial condition and results of operations could be materially affected. In the event that such a termination occurred, management believes it could acquire replacement data from other sources; however, such termination might have an adverse effect on the Company's operations. LEGAL PROCEEDINGS The Company is from time to time subject to legal proceedings and claims which arise in the normal course of its business. Management believes the outcome of any pending or known matters will not have a materially adverse effect on the Company's financial position or results of operations. DATA EVOLUTION HOLDINGS, INC. The Company has entered into a services agreement with Data Evolution Holdings, Inc. (DEH), which trades over the counter under the symbol DTEV. The agreement calls for the Company to purchase services from DEH that will expand our ability to distribute our product through DEH PowerSys products. The agreement calls for the Company to purchase access to PowerSys products, a feasibility study, a two-year support plan, and become a strategic alliance partner. The value of these services has not yet been determined by DEH, however, the payment of these services will be made in Company Class A Common Voting Stock that will have a four year lock up period. F-17 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 14. INCOME TAXES Deferred tax assets consist of the following at December 31: 2005 ==== Net operating loss carry forwards $12,000,000 Depreciation and amortization 350,000 Bad debt reserve 85,000 Investment loss 400,000 Capitalized research and development 1,000,000 ------------ Gross deferred tax assets 13,835,000 Valuation allowance (13,835,000) ------------ $ - ============ The Company has provided a valuation allowance for the full amount of the deferred tax assets since realization of these future benefits is not sufficiently assured. As the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expenses. At December 31, 2004, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $ 30,000,000. The federal and state net operating loss carryforwards expire through 2025. Certain substantial changes in the Company's ownership may occur. As a result, under the provisions of the Internal Revenue Code, the amount of net operating loss carryforwards available annually to offset future taxable income may be limited. The amount of this annual limitation is determined based upon the Company's value prior to the ownership changes taking place. Subsequent ownership changes could further affect the limitation in future years. 15. COMMON STOCK DESCRIPTION OF COMMON STOCK On March 23, 2001, the Company amended its articles of incorporation wherein it renamed all of the authorized 150,000,000 shares of common stock, par value $0.01 per share, Class A Voting Common Stock and authorized the issuance of 250,000,000 shares of Class B Non-voting Common Stock. Each Class A Voting Common stockholder is entitled to one vote for each share held on all matters submitted to a vote of stockholders. The holders of both classes of common stock are entitled to dividends on a pro rata basis, when and if declared by the Company's board of directors. Through December 31, 2004, no dividends have been declared or paid. On August 12, 2002, the Company commenced its initial public offering of securities (Registration No. 333-85154, effective August 12, 2002), pursuant to which the Company offered up 12,000,000 units for $0.30 per unit. Each unit consisted of one share of Class B Non-voting Common Stock and a three year redeemable warrant to purchase one share of Class A Voting Common Stock with an exercise price of $0.50 per share. F-18 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) On December 5, 2005, the Company amended its articles of incorporation wherein it combined each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock with 400,000,000 authorized. On December 12, 2005, the Company amended its articles of incorporation to effect a one-for-fifty reverse split of the common stock and to increase the authorized from the resulting split of 8,000,000 to 25,000,000. As of December 31, 2005, a total of 3,103,203 shares of Common Stock were reserved for issuance upon exercise of outstanding stock option and warrant agreements. STOCK OPTIONS AND WARRANTS During 2004, the Company issued warrants to purchase 51,400 shares of Class A Voting Common Stock at an average exercise price of $20.00 per share, adjusting for the effects of the reverse split, to third parties in exchange for services. The Company recorded a discount to Note payable or expense of $173,339 associated with these warrants. During 2005, the Company issued warrants to purchase 1,574,780 shares of Common Stock at an average exercise price of $6.31 per share to third parties in exchange for services. The Company recorded a discount to Note payable or expense of $413,321 associated with these warrants. During 2004, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 18% volatility, 3.9% average risk-free interest rate, a ten-year life and an underlying Class A Voting Common Stock average value of $20.00 per share adjusting for the effects of the reverse split. During 2005, the fair value of the options and warrants to purchase shares of Class A Voting Common Stock was based on the Black-Scholes model. The Black-Scholes calculation incorporated the following assumptions: 0% dividend yield, 20% volatility, 3.9% average risk-free interest rate, a ten-year life and an underlying Class A Voting Common Stock average value of $5.00 per share. As of December 31, 2005, there were a total of 2,400,077 options and warrants outside the Stock Plans. 16. STOCK OPTION PLANS On November 16, 1999, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan as amended (the "1999 Plan"). Under the terms of the 1999 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors. The Board of Directors administers the Plan. A maximum of 15,000,000, shares, or 300,000 after adjusting for the reverse split, of Class A Voting Common Stock has been approved for issuance under the 1999 Plan of which 5,070 post split shares are available for grant at December 31, 2005. The options are not transferable except by will or domestic relations order. On March 28, 2003, the Board of Directors approved the Incentive and Non-Qualified Stock Option Plan (the "2003 Plan") which was approved by the stockholders at the May 29, 2003 annual meeting. Under the terms of the 2003 Plan, the Company is authorized to grant incentive and nonqualified stock options to purchase shares of common stock to its employees, officers and directors, and consultants or advisors. The Board of Directors administers the 2003 Plan. A maximum of 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class A Voting Common Stock and 25,000,000 shares, or 500,000 after adjusting for the reverse split, of Class B Non-Voting Common Stock, or a combined total of 1,000,000 post split shares have been F-19 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) approved for issuance under the 2003 Plan of which 486,000 are available for grant at December 31, 2005. The options are not transferable except by will or domestic relations order. The Board of Directors determines the exercise price and vesting period of the options at the date of grant. The exercise price for incentive stock options shall not be less than 100% of the fair market value of the Company's stock on the date of grant. The option exercise period will not exceed ten years from the date of grant. The options are generally fully exercisable when issued to directors and consultants and exercisable 25% per year and continuing over four years for employees (based on continual employment). If a grantee owns stock representing more than 10% of the outstanding shares on the date such an incentive option is granted, the price shall be at least 110% of fair market value and the maximum term of the options will be five years. The following table presents activity under the Plans adjusting for the reverse split for the years ended December 31, 2005 and 2004: WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at December 31, 2003 509,515 18.54 Issued 320,920 40.00 Exercised (83,250) 3.00 Canceled (53,895) 10.50 --------- ------ Outstanding at December 31, 2004 693,290 30.96 Issued 10,200 17.00 Exercised - - Canceled (3,364) 11.00 --------- ------ Outstanding at December 31, 2005 700,126 30.86 OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE $0.00-10.00 234,351 6.20 $ 9.66 177,876 $ 9.62 $10.00-15.00 109,775 7.85 $ 12.51 109,275 $ 12.51 $15.00-75.00 356,000 8.26 $ 49.88 344,000 $ 50.95 -------- -------- 700,126 7.51 $ 30.56 631,151 $ 32.65 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED) 17. DEFINED CONTRIBUTION RETIREMENT PLAN The Company sponsors a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code, which covers substantially all employees. The Company may make discretionary matching contributions up to 1% of employee contributions. Company contributions vest ratably over a six-year period. Company matching contributions amounted to $7,133 and $6,022 in 2005 and 2004, respectively. 18. SEGMENT INFORMATION The Company has two reportable segments which management operates as distinct sales organizations; these two segments are segregated by the nature of products and services provided. The Company measures and evaluates its two reportable segments based on revenues and costs of revenues. The CD ROM segment provides information on motor vehicles and drivers' licenses, F-20 LOCATEPLUS HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 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 MONTHS ENDED FOR THE YEAR ENDED MARCH 31 DECEMBER 31, 2006 2005 2005 2004 (UNAUDITED) (UNAUDITED) Information sales: CD Rom $204,465 $ 126,008 $ 469,493 $ 550,923 Online and Channel 2,893,991 2,269,151 10,615,717 5,136,364 ---------- ---------- ----------- ---------- Total information sales $3,098,456 $2,395,159 11,085,210 5,687,287 ========== ========== =========== ========== Costs of Information sales: CD Rom 9,584 17,872 133,612 96,683 Online and Channel 857,625 832,693 4,055,417 3,652,714 ---------- ---------- ----------- ---------- Total costs of Information sales $867,209 $ 850,565 $4,189,029 $3,749,397 ========== ========== =========== ========== See Independent Auditors Report F-21 TABLE OF CONTENTS ----------------- PAGE ---- Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . 1 Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 3 Forward-Looking Statements. . . . . . . . . . . . . . . . . . . 9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 9 Dividend Policyz. . . . . . . . . . . . . . . . . . . . . . . . 9 Selling Security Holders. . . . . . . . . . . . . . . . . . . . 9 Plan of Distribution. . . . . . . . . . . . . . . . . . . . . 10 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . 13 Selected Consolidated Financial Data. . . . . . . . . . . . . 14 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . .15 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Executive Officers and Directors. . . . . . . . . . . . . . . 29 Organization Within the Past Five Years . . . . . . . . . . . .35 Certain Relationships and Related Transactions. . . . . . . . 36 Market for Common Equity. . . . . . . . . . . . . . . . . . . 38 Principal Stockholders. . . . . . . . . . . . . . . . . . . . 39 Description of Capital Stock. . . . . . . . . . . . . . . . . 41 Shares Eligible for Future Sale . . . . . . . . . . . . . . . .44 Transfer Agent and Registrar. . . . . . . . . . . . . . . . . 44 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . .44 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Additional Information. . . . . . . . . . . . . . . . . . . . 44 Index to Financial Statements . . . . . . . . . . . . . . . . F-1 * * * [GRAPHIC OMITED] Please read this prospectus carefully. It describes our business, products and services, and financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision. You should rely only on the information contained in this prospectus. The information contained in this prospectus is accurate only as of its date, regardless of the time this prospectus is delivered or that our securities are sold. 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 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 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. The Registrant estimates that the approximate expenses in connection with this Registration Statement, as amended, will be as follows: SEC registration fee $ 2,000 Legal fees and expenses 15,000 Accounting fees and expenses 5,000 Miscellaneous 8,000 --------- Total $30,000 ========= 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, options to purchase 1,176,700 shares of Common Stock have been exercised. The offer and sale of these securities were exempt from registration under the Securities Act of 1933 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 as such term is defined in Rule 501(a) of Regulation D, for $1.00 per share. The offer and sale of these securities were exempt from registration under the Securities Act of 1933 under the provisions of Rules 506 and 508 promulgated under the Securities Act of 1933, 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 as such term is defined in Rule 501(a) of Regulation D, for $1.00 per share. The offer and sale of these securities were exempt from registration under the Securities Act of 1933 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 as such term is defined in Rule 501(a) of Regulation D, The offer and sale of these securities were exempt from registration under the Securities Act of 1933 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 accredited investor as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 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 as such term is defined in Rule 501(a) of Regulation D, The offer and sale of that security were exempt from registration under the Securities Act of 1933 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 stockholders who qualified as accredited investors as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 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 consultants who qualified as accredited investors as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 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 consultants who qualified as accredited investors as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 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 as such term is defined in Rule 501(a) of Regulation D (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 of 1933 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 of 1933 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 of 1933 under the provisions of Rules 506 and 508 promulgated thereunder, as the recipient is an accredited investor as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 under the provisions of Rules 506 and 508 promulgated thereunder, as the recipients were accredited investors as such term is defined in Rule 501(a) of Regulation D, and no general solicitation was undertaken. - Through May 2003, the Registrant issued multiple 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 of 1933 under the provisions of Rule 506 promulgated thereunder, as the recipient was an accredited investor as such term is defined in Rule 501(a) of Regulation D, 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 of 1933 under the provisions of Rule 506 promulgated thereunder, as the recipient was an accredited as such term is defined in Rule 501(a) of Regulation D, 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 that is exercisable for three shares of Class A Voting Common Stock with an exercise price at $0.16 per share. A price adjustment mechanism included in the warrants provides that, if the stock price decreases, the warrants will nevertheless permit the holder to receive, upon a cashless exercise of the warrants, at least one share of Class A Voting Common Stock per warrant without any cash payment. The offer and sale of these securities was exempt from registration under the Securities Act of 1933 under the provisions of Rule 506 promulgated thereunder, as the recipient was an accredited as such term is defined in Rule 501(a) of Regulation D, and no general solicitation was undertaken. - During June 2003, the Registrant issued 2,500,000 shares of Class A Voting Common Stock to one accredited investor as such term is defined in Rule 501(a) of Regulation D, and 125,000 shares of Class B Non-Voting Common Stock to three accredited investors as such term is defined in Rule 501(a) of Regulation D. The Registrant believes that the offer and sale of these securities were exempt from registration under the Securities Act of 1933 under the provisions of Section 4(2) thereunder. - During June 2003, the Registrant issued a put to one investor, which provides that the Registrant, subject to certain limitations, may sell up to $5 million in shares of Class A Voting Common Stock. The offer and sale of these securities were exempt from registration under the Securities Act of 1933 under the provisions of Rules 506 and 508 promulgated thereunder, as the Registrant received representations from the purchaser that it was an accredited investor as such term is defined in Rule 501(a) of Regulation D, at the time of the offer and sale and no general solicitation was undertaken. To date, the Registrant has issued 7,915,427 shares of Class A Voting Common Stock pursuant to its exercise of the put, resulting in net proceeds of $2,797,914 to the Registrant. - On June 8, 2004, the Registrant issued 4,000,000 shares of Class A Votin Stock to NFC Corporation in exchange for certain investor relations services to be performed by NFC for the benefit of the Registrant. The offer and sale of these securities were exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) and Rule 506 promulgated thereunder as the Registrant received representations from the purchaser that it was an accredited investor at the time of the offer and sale and no general solicitation was undertaken. - On June 17, 2004 we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., a Cayman Islands company, relating to the private placement of a convertible term note issued by the Company in the principal amount of $3,000,000 due June 17, 2007 (the "Note"), and a common stock purchase warrant (the "Warrant"). We also entered into related security documents and a Registration Rights Agreement. The Note is convertible into 7,500,000 shares of our Class A Voting Common Stock at a fixed conversion rate of $0.40 per share and the Warrant provides for the purchase of up to 1,320,000 shares of Class A Common Stock at a price of $0.45 each, subject to customary adjustments, until June 17, 2009. On July 8, 2005 the Company used $4 million from the proceeds of an offering of convertible debt to pay in full the remaining amounts due under this note. The Warrant was unaffected by this repayment. Therefore, an aggregate of 1,320,000 shares of Class A Common Stock are issuable upon exercise of the Warrant. - On July 8, 2005 we entered into a Securities Purchase Agreement with certain institutional and accredited investors and, in a private placement exempt from the registration requirements of the Securities Act of 1933, we issued a series of convertible term notes with an aggregate principal amount of $8,000,000 due November 5, 2005, if not converted prior to such date. As part of that offering, we also issued warrants to purchase up to 32,000,000 shares of our capital stock. As part of the same offering, on August 15, 2005 we issued additional notes with an aggregate principal amount of $965,000 and terms identical to the notes issued on July 8, 2005, as well as warrants to purchase up to 3,860,000 shares of our capital stock. All of the notes are convertible, and the warrants are exercisable, first into as many shares of our Class A Voting Common Stock, par value $0.01 per share, as are available for issuance at the time of conversion or exercise, and then into shares of our Class B Non-Voting Common Stock, par value $0.01 per share. As part of our agreement with these investors, we have agreed to seek the approval from our stockholders of the recapitalization of each outstanding share of our Class A Voting Common Stock and our Class B Non-Voting Common Stock into a single class of voting common stock, as well as a one-for-fifty reverse split of this new class of common stock. If our stockholders approve these measures, the notes will automatically convert into shares of the new class of common stock, and any unexercised warrants will be exercisable for shares of that class of stock as well. Without taking into consideration interest payable on the notes, the notes are convertible into 89,650,000 shares of our common stock (regardless of class) at a current conversion rate of $0.10 per share and the warrants are exercisable for ten years from the date they were issued for up to 41,189,000 shares of our common stock (regardless of class) at a current exercise price of $0.15 per share. The conversion price of the notes and the exercise price of the warrants are each subject adjustment for a variety of events, including, for example, payment of dividends, certain mergers or asset sales, and certain securities issuances. We also entered into a Registration Rights Agreement whereby, among other things, we agreed to file a registration statement, of which this prospectus is a part, with the SEC, to register the resale of the shares of our capital stock that we will issue upon exercise, if any, of the warrants and conversion of the notes. We have agreed to keep the registration statement effective until all of the shares registered by this prospectus are sold or can be sold without registration and without restriction as to the number of shares that may be sold. On December 29, 2005, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $1,500,000 by issuing a note payable convertible into 300,000 shares of Common Stock at $5.00 per share and 200,000 founders shares and Common Stock purchase warrant for 750,000 shares with an exercise price of $5.00 per share. On July 21, 2006, we entered into an Investment Agreement with Dutchess. Pursuant to that Investment Agreement, we received proceeds of $750,000 by issuing a note payable convertible into 750,000 shares of Common Stock at $1.00 per share and 200,000 founders shares and Common Stock purchase warrant for 375,000 shares with an exercise price of $1.00 per share. On December 29, 2005 we also entered into an agreement where we may, at our discretion, periodically "put" or require Dutchess to purchase shares of our Common Stock. The aggregate amount that Dutchess is obligated to pay for our shares will not exceed $10.0 million. For each share of Common Stock purchased under the Investment Agreement, Dutchess will pay 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board (or other principal market on which our Common Stock is traded) during the ten day period immediately following the date on which we give notice to Dutchess of our intention to put such stock. 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 and satisfaction of certain other customary closing conditions. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1.1 Underwriting Agreement between LocatePLUS Holdings Corporation and Oftring & Company, Inc., dated March 15, 2002.** 1.2 Amendment to Underwriting Agreement between LocatePLUS Holdings Corporation and Oftring & Company, Inc., dated June 18, 2002.** 1.3 Second Amendment to Underwriting Agreement between LocatePLUS Holdings Corporation and Oftring & Company, Inc., dated July 22, 2002.** 3.1 Second Amended and Restated Certificate of Incorporation of LocatePLUS Holdings Corporation, as filed with the Secretary of State of the State of Delaware on March 19, 2002.** 3.2 By-Laws of LocatePLUS Holdings Corporation.** 4.1 Warrant and Unit Agreement by and between LocatePLUS Holdings Corporation and Transfer Online, Inc., dated March 22, 2002.** 4.2 Form of Warrant Certificate.** 4.3 Form of Unit Certificate.** 4.4 Form of Class A Voting Common Stock Certificate.** 4.5 Form of Class B Non-Voting Common Stock Certificate.** 4.6 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class A Voting Common Stock).** 4.7 Form of Restricted Warrant Agreement (Warrant to Purchase Shares of Class B Non-Voting Common Stock).** 4.8 Form of Convertible Subordinated Promissory Note ("Bridge Note").** 4.9 Form of Detachable Warrant Agreement ("Bridge Warrant").** 4.10 $10,000 Convertible Promissory Note, dated March 9, 2001.** 4.11 Amended form of Warrant Certificate.** 4.12 Amended and Restated Warrant and Unit Agreement by and between LocatePLUS Holdings Corporation and Transfer Online, Inc., dated June 20, 2002.** 4.13 Amendment to $10,000 Convertible Promissory Note, dated July 23, 2002.** 5.1 Opinion of Geoffrey T. Chalmers, Esq. 10.1 Master Lease Agreement between Cummings Properties, Inc. and Worldwide Information, Inc., dated November 20, 1999.** 10.2 Database License Agreement between Worldwide Information, Inc. and TransUnion Corporation, undated.(1)** 10.3 Database License Agreement between LocatePLUS.com, Inc. and Hogan Information Services Co., dated November 27, 2001.(1)** 10.4 License Agreement between Worldwide Information, Inc. and First American Real Estate Solutions, LLC, dated March 31, 1999.(1)** 10.5 Channel Partner Agreement between LocatePLUS Holdings Corporation and Intellicorp LTD, dated September 1, 2001.** 10.6 Letter Agreement between LocatePLUS Holdings Corporation and Intellicorp LTD, dated December 19, 2001.** 10.7 Secured Note, dated June 1, 2001.** 10.8 $750,000 Loan Agreement between LocatePLUS Holdings Corporation and Gemstone Investment Company, Inc., dated June 4, 2002.** 10.9 Security Agreement between LocatePLUS Holdings Corporation and Gemstone Investment Company, Inc., dated June 4, 2002.** 10.10 Pledge Agreement between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.** 10.11 Mortgage between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.** 10.12 Guaranty Agreement, between Jon R. Latorella and Gemstone Investment Company, Inc., dated June 4, 2002.** 10.13 $175,000 Ten Year Term Promissory Note, made by Jon R. Latorella, dated January 3, 2000.** 10.14 $100,000 Ten Year Term Promissory Note, made by Jon R. Latorella, dated January 3, 2000.** 10.15 $125,000 Ten Year Term Promissory Note, made by Robert A. Goddard, dated January 3, 2000.** 10.16 $750,000 Promissory Note, made by LocatePLUS Holdings Corporation, dated June 4, 2002.** 10.17 Amendment to $750,000 Promissory Note, dated August 30, 2002.** 10.18 Securities Purchase Agreement dated June 17, 2004, by and between LocatePLUS Holdings Corporation and Laurus Master Fund, Ltd.** 10.19 Convertible Term Note dated June 17, 2004, by and between LocatePLUS Holdings Corporation and Laurus Master Fund, Ltd.** 10.20 Registration Rights Agreement dated June 17, 2004, by and between LocatePLUS Holdings Corporation and Laurus Master Fund, Ltd.** 10.21 Common Stock Purchase Warrant issued to the Laurus Master Fund, Ltd. under the Securities Purchase Agreement.** 10.22 Master Security Agreement dated June 17, 2004, by LocatePLUS Holdings Corporation and its subsidiaries.** 10.23 Stock Pledge Agreement dated June 17, 2004, by and among Laurus Master Fund, Ltd., LocatePLUS Holdings Corporation and its subsidiaries.** 10.24 Subsidiary Guaranty dated June 17, 2004, by the subsidiaries of LocatePLUS Holdings Corporation.** 10.25 Investor Relations Consulting Agreement with NFC Corporation dated June 8, 2004. 10.26 Purchase Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005.** 10.27 Form of 3% Senior Convertible Note dated July 8, 2005 and August 15, 2005, by and between LocatePLUS Holdings Corporation and each of the Investors named in Exhibit 10.26.** 10.28 Registration Rights Agreement dated July 8, 2005, by and between LocatePLUS Holdings Corporation and certain Investors named therein, as amended August 12, 2005.** 10.29 Form of Common Stock Purchase Warrant issued to the Investors named in Exhibit 10.26.** 10.30 Voting Agreement dated July 8, 2005, by LocatePLUS Holdings Corporation, the Investors named therein, and Jon R. Latorella.** 10.31 Financial Advisory Agreement between LocatePLUS Holdings Corporation and Laidlaw & Company, Ltd. dated May 25, 2005.** 10.31 Financial Advisory Agreement between LocatePLUS Holdings Corporation and Laidlaw & Company, Ltd. dated May 25, 2005.** 10.32 Investment Agreement, dated December 29, 2005, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P.** 10.33 Registration Rights Agreement, dated December 29, 2005 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P.** 10.34 Debenture, dated December 29, 2005, by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P.** 10.35 Debenture Registration Rights Agreement, dated December 29, 2005 by and between LocatePLUS Holdings Corporation and Dutchess Private Equities Fund II, L.P.** 21.1 Subsidiaries of LocatePLUS Holdings Corporation.** 23.1 Consent of Geoffrey T. Chalmers, Esq. (filed with exhibit 5.1) 23.2 Consent of Livingston and Haynes P.C. 99.1 Escrow Agreement by and between American Pacific Bank, Transfer Online, Inc., Oftring & Co., Inc. and LocatePLUS Holdings Corporation, dated June 20, 2002.** 99.2 Subscription Agreement (for use in states in which the Registrant's securities are being registered by coordination or qualification).** 99.3 Subscription Agreement (for use in the placePlaceTypeCommonwealth of PlaceNameMassachusetts only).** ** Previously filed with the Commission. (1) Confidential treatment sought by the Registrant. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes to: (1) For determining any liability under the Securities Act of 1933, 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 of 1933; (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, as amended, to be signed on its behalf by the undersigned, in the Commonwealth of Massachusetts, on September 23, 2004. LOCATEPLUS HOLDINGS CORPORATION (Registrant) By /s/ Jon R. Larorella 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, as amended, 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 of 1933, this Registration Statement, as amended, was signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE ----------------------- ------------------------- ----------------- /s/ Jon R. Larorella Chairman of the Board, August 1, 2006 Jon R. Latorella Presidentand Chief Executive Officer /s/ James C. Fields Acting Chief Financial James C. Fields Officer August 1, 2006 (Chief Accounting Officer) /s/ Jon R. Larorella Director, August 1, 2006 Sonia P. Bejjani President, Worldwide by Jon Latorella as POA Information, Inc. /s/ Jon R. Larorella Peter Zekos Director August 1, 2006 by Jon Latorella as POA /s/ Jon R. Larorella Mike Ryan Director August 1, 2006 /s/ Jon R. Larorella Chris Romeo Director August 1, 2006 by Jon Latorella as POA /s/ Jon R. Larorella Ralph Caruso Director August 1, 2006 by Jon Latorella as POA /s/ Jon R. Larorella David Skerrett Director August 1, 2006 by Jon Latorella as POA