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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-87607
PROSPECTUS
6,500,000 Shares
[LOGO of L90, INC.]
Common Stock
This is an initial public offering of shares of common stock of L90, Inc.
Prior to this offering, there has been no public market for our shares.
Our common stock has been approved for trading and quotation on the Nasdaq
National Market under the symbol "LNTY."
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Per Share Total
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Public offering price.................................... $15.00 $97,500,000
Underwriting discounts and commissions................... $ 1.05 $ 6,825,000
Proceeds, before expenses, to L90 ....................... $13.95 $90,675,000
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The underwriters may also purchase up to an additional 975,000 shares of
common stock from us to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on February 1, 2000.
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SG COWEN
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
WIT CAPITAL CORPORATION
January 28, 2000
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[DESCRIPTION OF ARTWORK]
Images of the different screens from L90, Inc.
INSIDE FRONT COVER
The left side of the inside front cover of the prospectus will picture
thirty screens from Web sites containing previous advertising campaigns served
by us. The right side of the inside front cover will list several of our Web
publishing clients under the title: Brand name Web sites including .... The list
will contain the following names: Ain't It Cool News, Alloy Online, Athlete
Direct, BigYellow, Campus Pipeline, CarPrices.com, click2send, Fitness Online,
Freei.net, HolidayChannel, Hollywood.com, Homestead.com, IFILM, Infonautics
Network, JobsOnline, Kanoodle.com, LiquidAudio, MaMaMedia, Regards.com,
ScoopsWrestling, Scour, SEGA.com, Shoplet.com, Small World, Sportspage.com,
StarChefs, STARWARS.COM, TargetMatch.com, whatis.com and WinSite. Additionally,
the inside front cover will list certain of our advertising clients under the
title: Over 500 advertising clients including .... This list will contain the
following names: Ameritech, Ask Jeeves, Chevrolet, Computers4SURE, Dell, eBay,
FTD, ImproveNet, Infoseek, Intel, iVillage, LAUNCH, Levi's, Mars, Microsoft,
Mothernature.com, Netscape, OnHealth, OshKosh B'Gosh, Procter & Gamble, Sony,
Sprint, Talk City, Tickets.com, Uproar, Visa, Vitamins.com, Wall Street Journal,
Wired Solutions and Women.com. The top right corner of the inside front cover
will contain a picture of our logo. The bottom right corner of the inside front
cover will contain a footnote that reads: This is a partial, but representative
list of L90's advertisers and Web sites. CarPrices.com represents 11.2% of L90's
revenue. No other web site or advertiser represents more than 10% of L90's
revenue. See the "Business" section of this Prospectus for additional clients.
INSIDE GATEFOLD (two pages)
The Gatefold describes and illustrates various of our client's Web pages
containing our advertising campaigns. The following text runs across the top of
both Gatefold pages:
Internet Advertising Solutions - L90 Internet Advertising Solutions go beyond
traditional banner advertising to take advantage of the unique capabilities of
the Internet for our advertising, direct marketing and Web publishing clients.
[L90 Logo]
First Page of Gatefold
[Picture of OshKosh B'Gosh "Genuine Girl" Web page] with the following
description:
OshKosh B'Gosh "Genuine Girl"
An interactive advertising campaign designed to promote the OshKosh B'Gosh
brand on MaMaMedia.
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[Picture of tickets.com Web page] with the following description:
"The Big Game" with Tickets.com
An advertising campaign developed to build brand awareness for Tickets.com,
generate ticket sales and develop a consumer database.
[Picture of iVillage.com Web page and Shape magazine cover alongside] with the
following description:
iVillage Cross Promotional Print/Online Campaign
A sponsorship program designed to reach a broad cross-section of women by
incorporating ad placements in online and offline media properties, including
Shape magazine, Shape Online and Fitness Online.
Second Page of Gatefold
[Picture of Shop the Seasons Web page] with the following description:
Shop the Seasons Syndicated Sponsorship
A seasonal shopping guide and direct marketing campaign that is syndicated
across our network of Web sites and features a rotating selection of gift
offers.
[Picture of Levi's rock n'roll jeans factory Web page on top of a Music
Boulevard Web page] with the following description:
Levi's Rock n' Roll Jeans Factory
An advertising solution created to roll out the Levi's e-commerce Web site to
their target audience.
[Picture of LAUNCH Free Trial Offer Web page] with the following description:
LAUNCH on CD-ROM Trial Offer
A response-driven marketing campaign to invite Web users to register for free
trial issues of LAUNCH on
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CD-ROM without leaving the Web site that they are viewing.
[Picture of Music Boulevard Web page] with the following description:
Visa on Music Boulevard
A sponsorship campaign designed to strengthen the Visa brand and increase
Visa's overall market share by positioning Visa as the preferred card for
e-commerce transactions.
INSIDE BACK COVER
The inside back cover of the prospectus contains L90's adMonitor logo in
the center of the page. In the lower right hand corner of the inside back cover
are the following words:
adMonitor Serving and Tracking Technology
L90's ad serving and tracking technology is the platform for all of our
advertising solutions.
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 5
Risk Factors........................ 9
Forward-Looking Statements.......... 19
Use of Proceeds..................... 19
Dividend Policy..................... 20
Other Information................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Financial Data............. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Business............................ 34
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Page
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Management........................... 51
Related Party Transactions........... 57
Principal Stockholders............... 60
Description of Capital Stock......... 63
Shares Eligible for Future Sale...... 67
U.S. Tax Consequences to Non-U.S.
Holders............................. 69
Underwriting......................... 73
Legal Matters........................ 75
Experts.............................. 75
Where You Can Find More Information.. 76
Index to Financial Statements........ F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
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Until February 22, 2000, which is 25 days after commencement of this
offering, all dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligations to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should carefully read the more detailed
information contained in this prospectus, including our financial statements
and related notes. Our business involves significant risks. You should
carefully consider the information under the heading "Risk Factors."
We are a leading provider of comprehensive Internet-based advertising and
direct marketing solutions for advertisers and Web publishers. We design and
implement advertising campaigns for our advertising clients and place their ads
on our network of Web sites. We provide our Web publishing clients with a
fully-outsourced solution which includes the sale of advertising space on their
Web sites, as well as the technology required to deliver advertisements to
their Web sites.
Our advertising clients want Web users to take actions such as visiting their
Web sites or making an online purchase when they view advertisements. Our Web
publishing clients seek to improve the sale of advertising space, or ad
inventory, on their Web sites. Our design and development teams help our
clients meet their objectives by creating advertising campaigns that
incorporate sponsorships. Sponsorships are advertisements that employ advanced
marketing techniques such as integrating advertisements into the text or
graphical content of a Web page. In contrast, traditional banner advertisements
are typically found at the top of a Web page and frequently contain content
that is unrelated to that of the Web page. Because our sponsorship-focused
solutions are specifically designed to promote interactivity between the Web
user and our advertisers, we believe that our advertising campaigns are more
effective than traditional banner advertisements in attracting a Web user's
attention and encouraging action. In addition, we have developed adMonitor, our
ad delivery, or ad serving and tracking technology that is used to deliver
advertisements to our network of Web site partners. adMonitor enables our
advertising and Web publishing clients to implement sophisticated advertising
campaigns quickly and to selectively target ads to Web users based upon
specific interests and characteristics. adMonitor also enables our clients to
track, measure and manage the effectiveness of their ad campaigns.
We believe that our solutions enable:
. Advertisers to effectively target their ads to Web users, improve
response rates to their advertisements and achieve a higher return on ad
spending; and
. Web publishers to realize increased ad sales, improved pricing for their
ad inventory and more efficient ad inventory management.
We believe that the growth of the Internet is driving advertisers to devote
an increasing portion of their overall advertising and marketing budgets to
online advertising and direct marketing. Forrester Research estimates that
worldwide Internet advertising spending will be approximately $3.3 billion in
1999 and will increase to approximately $33.1 billion by 2004. In addition, the
Direct Marketing Association estimates that worldwide expenditures for online
direct marketing campaigns will grow from $603 million in 1998 to approximately
$5.3 billion in 2003. As the acceptance and usage of online advertising
continues to grow, online advertisers must find ways to differentiate
themselves in a crowded marketplace. Increasingly, advertisers are seeking
advertising campaigns that go beyond traditional banner ads by incorporating
enhanced features such as sponsorships in order to gain a competitive edge.
eStats estimates that sponsorship advertising will grow from approximately 40%
of total online advertising in 1998 to approximately 58% in 2001. We believe
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that our focus on creating sponsorship-driven advertising campaigns, our in-
depth industry knowledge and our adMonitor technology enable us to provide our
clients with solutions that meet their complex and evolving needs.
Our objective is to be the leading provider of comprehensive online
advertising and direct marketing solutions. The following are key elements of
our strategy:
. Capture a greater share of online advertising budgets;
. Grow our sales and marketing organization;
. Selectively expand our network of Web publishers;
. Enhance and expand our adMonitor technology;
. Further develop and deploy our library of creative marketing solutions;
and
. Expand our direct marketing capabilities.
Our business began in January 1997 as a proprietorship of one of our
founders, John C. Bohan. We changed our form of operations in May 1997 to a
California limited liability company known as John Bohan & Associates, LLC. We
initially conducted business under the name AdNet Strategies, and in January
1998, we incorporated under the name AdNet Strategies, Inc. in California and
elected S-corporation status. In December 1998, we changed our name to Latitude
90, Inc. and became a C-corporation. We reincorporated in Delaware as L90, Inc.
in September 1999. Our principal executive offices are located at 2020 Santa
Monica Boulevard, Suite 400, Santa Monica, California 90404. Our telephone
number at that location is (310) 315-1199. Our Web address is www.L90.com.
Information contained on our Web site does not constitute part of this
prospectus. References in this prospectus to "the Company," "L90," "we," "our,"
and "us" refer to L90, Inc. and its predecessor businesses and entities.
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The Offering
The following information excludes 2,752,327 shares of common stock issuable
upon the exercise of stock options and warrants outstanding as of September 30,
1999, with a weighted average exercise price of $2.76 per share.
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<C> <S>
Common Stock we are offering........................ 6,500,000 shares
Common Stock to be outstanding after this offering.. 19,811,457 shares
Use of Proceeds..................................... We intend to use the net
proceeds of this offering
for general corporate
purposes. See "Use of
Proceeds" for more
information on the use of
proceeds.
</TABLE>
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Summary Financial Data
(in thousands, except per share data)
The following summary financial data is derived and qualified in its entirety
by our financial statements. You should read this summary financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements.
The following tables assume no exercise of any stock options or warrants
outstanding as of September 30, 1999, except the pro forma data, which assume
the cashless exercise of warrants to acquire 1,341,968 shares of common stock.
As of September 30, 1999, there were options and warrants outstanding to
purchase a total of 4,734,284 shares of common stock with a weighted average
exercise price of $3.63 per share. The balance sheet data, on a pro forma as
adjusted basis, reflect the sale in this offering of 6,500,000 shares of our
common stock at the initial public offering price of $15.00 per share, less the
underwriting discounts and commissions and estimated offering expenses.
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Period from
Inception
(January 5, Nine Months Ended
1997) through Year Ended September 30,
December 31, December 31, -------------------
1997 1998 1998 1999
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(unaudited)
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Statement of Operations Data:
Revenue....................... $1,160 $2,189 $1,465 $ 3,973
Operating income (loss)....... 307 (306) (49) (4,462)
Net income (loss) attributable
to common stockholders....... $ 310 $ (313) $ (42) $(5,758)
====== ====== ====== =======
Pro forma basic and diluted
net loss per share........... $(0.04) $ (0.44)
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Weighted average shares
outstanding used in pro forma
basic and diluted per share
calculation.................. 8,333 13,118
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<CAPTION>
September 30, 1999
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Pro Forma
Actual As Adjusted
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Balance Sheet Data:
Cash and cash equivalents................................. $11,556 $101,031
Current assets............................................ 14,895 104,370
Total assets.............................................. 15,611 105,086
Long-term capital lease obligations, net of current
portion.................................................. 286 286
Total stockholders' equity ............................... 10,512 99,987
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<CAPTION>
Period from
Inception
(January 5, Nine Months Ended
1997) through Year Ended September 30,
December 31, December 31, ------------------
1997 1998 1998 1999
------------- ------------ ----------- ------
(unaudited)
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Supplemental Data:
System revenue(1)................. $4,210 $8,024 $5,440 $9,232
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(1) System revenue represents the full value of gross billings for ads sold
under either commission-based contracts or service fee-based contracts.
Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure
of advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one
company to another.
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RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones we may face. Additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occurs, our
business, results of operations and financial condition would likely suffer. In
such case, the trading price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
Our revenues and prospects are difficult to forecast because we have only been
operating our business since January 1997
We began our business in January 1997 and have a brief operating history.
Therefore, we lack sufficient historical financial and operating data on which
to adequately forecast future operating results. You should consider our
prospects in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets such as online
advertising.
These risks include our ability to:
. manage our growth effectively;
. anticipate and adapt to the rapid changes in the Internet;
. continue to develop and upgrade our technology;
. respond to competitive developments in our market; and
. continue to identify, attract, retain and motivate qualified personnel.
If we are unsuccessful in addressing these risks, our revenues may not grow
in accordance with our business model and may fall short of expectations of
market analysts and investors, which could negatively affect the price of our
stock. Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for more information on our operating history and
results of operations.
We have a history of losses and expect to incur substantial losses in the
future
We incurred net losses of approximately $4.5 million for the nine months
ended September 30, 1999 and $290,000 for the year ended December 31, 1998. We
expect to continue to incur substantial net losses for the foreseeable future
due to a high level of planned operating expenditures. We are making these
expenditures in anticipation of higher revenue, but we cannot assure you that
we will realize higher revenue. If we do not succeed in substantially
increasing our revenue, our losses may continue indefinitely and would likely
increase. In addition, we cannot assure you that we will return to
profitability. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information on our operating
history and results of operations.
Intellectual property infringement claims, including a November 1999 lawsuit
against us by DoubleClick, could prevent or hinder our ability to deliver
advertisements over the Internet
We face the risk that other parties' intellectual property positions will
impair our ability to deliver advertisements over the Internet. On November 12,
1999, DoubleClick filed a patent
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infringement lawsuit against us in the United States District Court for the
Eastern District of Virginia. The suit alleges that we are infringing, and
inducing and contributing to the infringement by third parties of, a patent
held by DoubleClick related to methods and networks for delivering, targeting
and measuring advertising over the Internet. DoubleClick is seeking treble
damages in an unspecified amount, a preliminary and permanent injunction from
further alleged infringement and attorneys' fees and costs. This litigation can
be expected to result in significant expenses to us and the diversion of
management time and other resources, the extent of which cannot be quantified
with any reasonable accuracy given the early stage of this litigation. In
addition, some of our contracts with Web publishers require us to indemnify the
Web publishers for losses they incur arising from any infringement by our ad
serving technology of a third party's intellectual property rights. If
DoubleClick is successful in its claims against us, we may be hindered or even
prevented from competing in the Internet advertising market and our operations
would be severely harmed. The DoubleClick suit could result in limitations on
how we implement our products and services, delays and costs associated with
redesigning our products and services and payments of license fees and other
monies. An injunction obtained by DoubleClick could eliminate our ability to
deliver advertisements over the Internet. If DoubleClick is successful in its
claims against us, we cannot assure you that we would be able to enter into a
licensing agreement with DoubleClick on commercially reasonable terms, if at
all. In that case, we would be required to alter our technology in a way that
would not infringe the DoubleClick patent, and we cannot assure you that these
alterations would be successful. Furthermore, other third parties, such as 24/7
Media, may have, or may in the future be granted, patents that cover our
technology or other aspects of our business. We may be limited in our ability
to use our technology or conduct our business without licenses from these third
parties, which may not be available on commercially reasonable terms, if at
all.
Our quarterly operating results may fluctuate, which may make it difficult to
forecast our future performance and may result in volatility in our stock price
Although we intend to increase our spending and investment to support our
planned growth, our revenue, and some of our costs, will be much less
predictable. This unpredictability will likely result in significant
fluctuations in our quarterly results. Therefore, you should not rely on
quarter-to-quarter comparisons of results of operations as an indication of our
future performance. Because of our limited operating history and the emerging
nature of our industry, we anticipate that securities analysts may have
difficulty in accurately forecasting our results. If our operating results are
below market expectations, the price of our common stock will likely decline.
The following are among the factors that could cause significant fluctuations
in our operating results:
. market acceptance of the Internet as an advertising medium;
. delay or cancellation of advertising contracts;
. expiration or termination of contracts with Web publishers;
. introduction of new or enhanced services by us or our competitors;
. system outages, delays in obtaining new equipment or problems with
upgrades;
. disruption or impairment of the Internet;
. changes in our pricing policies or those of our competitors;
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. seasonality in the demand for advertising;
. changes in government regulation of the Internet; and
. general economic and market conditions, as well as economic and market
conditions specific to the Internet.
If we do not effectively manage our growth and expansion, our ability to
provide services could suffer
Our success depends in part on our ability to manage our growth and
expansion. We have grown to 113 full-time and three part-time employees as of
December 31, 1999 from 33 full-time and three part-time employees as of
December 31, 1998. We plan to continue to expand our sales, marketing,
technology and administrative organizations. This anticipated future expansion
may place a significant strain on our managerial, operational and financial
resources. In addition, we will need to continue to improve our financial and
managerial controls, enhance our reporting systems and procedures and expand,
train and manage our work force.
If we are unable to attract and retain sales and client service personnel, or
if we are unable to adequately train our sales personnel in a timely manner,
our business and future revenue growth could suffer
Our future success depends on our ability to identify, recruit, train,
integrate and retain qualified sales and marketing, managerial and technical
personnel. We anticipate the need to hire a significant number of personnel to
achieve our growth objectives. Competition for these personnel is intense. The
inability to attract, integrate and retain the necessary sales, marketing,
technical and administrative personnel could harm our ability to generate
revenue.
If our ad delivery and tracking technology is not effective, our relationships
with our advertising clients may be harmed
Because our adMonitor technology is relatively new, we cannot assure you that
the use of our adMonitor services will remain effective in serving, targeting
and tracking advertisements or other marketing and promotional activities. Our
revenue would be adversely affected if advertisers do not perceive that the use
of our adMonitor services will improve the effectiveness of their marketing
campaigns.
A small number of Web publishers accounts for a substantial percentage of our
advertising revenue and our failure to develop and substain long-term
relationships with Web publishers, or the reduction in traffic of a current Web
publisher in our network, could limit our ability to generate revenue
For the nine months ended September 30, 1999, our top five Web publishers
accounted for approximately 40.4% of our revenue, and our top three Web
publishers accounted for approximately 27.6% of our revenue. CarPrices.com
accounted for 11.2% of our revenue. No other Web publisher accounted for more
than 10% of our revenue.
For the year ended December 31, 1998 our top five Web publishers accounted
for approximately 66.7% of our revenue, and our top three Web publishers
accounted for approximately 57.3% of our revenue. Our contracts with Web
publishers, including these top Web publishers, are generally one year in
duration and can be terminated by either party with as little as 30 days
notice. We cannot assure you that any of our Web publishers will continue their
relationships with us. Additionally, we
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may lose Web publishers as a result of acquisitions or as a result of the
discontinuation of operations of any of our Web publishers. For example,
Four11, Inc. terminated its contract with us after it was acquired by Yahoo!.
Furthermore, we cannot assure you that we would be able to replace a departed
or acquired Web publisher with another Web publisher with comparable traffic
patterns and demographics, if at all. Therefore, our failure to develop and
sustain long-term relationships with Web publishers or the reduction in traffic
of a current Web publisher in our network could limit our ability to generate
advertising revenue.
A limited number of advertisers accounts for a significant percentage of our
revenue and a loss of one or more of these advertisers could cause our results
of operations to suffer
For the nine months ended September 30, 1999, revenue from our five largest
advertisers accounted for 21.3% of our revenue. No single advertiser accounted
for over 10.0% of our revenue for the nine months ended September 30, 1999 or
for the year ended December 31, 1998. However, our largest advertiser accounted
for 17% of our revenue for the year ended December 31, 1997. Advertisers
typically purchase advertising under short-term purchase order agreements. We
cannot assure you that our top advertisers or our other advertisers will
continue their relationships with us. The loss of one or more of the
advertisers that represent a significant portion of our revenue could cause our
results of operations to suffer. In addition, many of our contracts with Web
publishers require us to bear the risk of non-payment of advertising fees from
advertisers. Accordingly, the non-payment or late payment of amounts due to us
from a significant advertiser could cause our financial condition to suffer.
For the nine months ended September 30, 1999, our bad debt expense related to
uncollected advertising fees was $301,000.
Since we expect to derive substantially all of our revenue in the foreseeable
future from online advertising, our ability to generate revenue may suffer if
the Internet is not increasingly accepted as an effective advertising medium
If the online advertising market does not develop further, or develops more
slowly than expected, we may not generate enough advertising revenue to return
to profitability. Since we expect to derive substantially all of our revenue in
the foreseeable future from online advertising, our future success is highly
dependent on the increased use of the Internet as an advertising medium. Online
advertising is relatively new and rapidly evolving, and its effectiveness,
compared to traditional media, is uncertain. Widespread use of online
advertising depends upon businesses accepting a new way of marketing their
products and services. Businesses may view online advertising as undesirable or
less effective for promoting their products and services relative to
traditional advertising media. In addition, the widespread adoption of
technologies that permit Internet users to block advertisements on Web sites
could inhibit the growth of the Internet as an advertising medium.
Since our business depends in part on market acceptance of electronic commerce,
if electronic commerce does not grow, or grows slower than we expect, our
ability to generate revenue may suffer
Our success depends in part on market acceptance of electronic commerce. A
number of factors outside of our control could prevent this acceptance,
including the following:
. the necessary network infrastructure for substantial growth in usage of
the Internet may not develop adequately;
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. insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
. negative publicity and consumer concern surrounding the security of
transactions could impede the growth of electronic commerce.
If electronic commerce does not grow, or grows slower than we expect, due to
any of the above factors, or any other factor, our ability to generate revenue
could suffer.
Failure of our technology and computing systems could harm our relationships
with our clients and cause our results of operations to suffer
The continuing and uninterrupted performance of our servers and networking
hardware and software infrastructure is critical to our business. Periodically,
we have experienced minor systems interruptions, including Internet
disruptions, which we believe may occur periodically in the future. Any system
failure that causes interruptions in our ability to service our customers,
including failures that affect our ability to deliver advertisements without
significant delay to the viewer, could reduce customer satisfaction and, if
sustained or repeated, could cause our results of operations to suffer.
Further, an increase in the volume of advertising delivered through our servers
could strain the capacity of our hardware and software, which could lead to
slower response times or system failures. If we do not effectively address any
capacity constraints, customer satisfaction could be harmed and our business
would likely suffer.
Failure of the Web infrastructure to support the growth of the electronic
marketplace could limit the growth of our business
The Internet may not in the future be a viable commercial marketplace because
of inadequate development of the necessary infrastructure, slow development of
complementary products, including high speed modems, delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity or increased government regulation. To the extent that the
Internet continues to experience significant growth in the number of users and
the level of use, we cannot assure you that the Internet infrastructure will
continue to be able to support the demands placed on it by its users. If the
necessary infrastructure or complementary products are not developed, our
business may not grow and would likely suffer.
Our failure to adequately respond to rapid changes in technology and the
Internet could harm our ability to generate revenue
The market for online products and services is subject to rapid change and
characterized by evolving industry standards and frequent introductions of new
technological developments. These new standards and technological developments
could make our existing or future products or services obsolete. Keeping pace
with the introduction of new standards and technological developments could
result in significant additional costs or prove to be difficult or impossible
for us. Any failure to keep pace with the introduction of new standards and
technological developments on a cost-effective basis could result in increased
costs and harm our ability to generate revenue.
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Many competitors have substantial competitive advantages that may make it more
difficult for us to retain our existing advertisers and Web publishers and to
attract new advertisers and Web publishers
The markets for online advertising, direct marketing and ad delivery, or ad
serving, and tracking technology are intensely competitive. We compete with
television, radio, cable and print for a share of advertisers' total
advertising budgets. We also compete with large Web publishers and Web search
engine companies, such as America Online, Excite@Home, Infoseek and Yahoo!, for
the online advertising budgets of advertisers. In addition, we compete with
various Internet advertising networks, such as 24/7 Media, DoubleClick and
Flycast Communications. In marketing our adMonitor products and services to Web
publishers and advertisers, we also compete with providers of ad delivery, or
ad serving, technology, database management and related services, including
AdForce, DoubleClick and Engage Technologies. Many of our current and potential
competitors enjoy competitive advantages over us, including significantly
greater financial, technical and marketing resources. They may also enjoy
significantly greater brand recognition and substantially larger bases of Web
site clients and advertisers. As a result, our competitors may be able to
respond more quickly than we can to new or emerging technologies and changes in
client requirements. Our competitors may also have a significantly greater
ability to undertake more extensive marketing campaigns, adopt more aggressive
pricing policies and make more attractive offers to potential employees,
strategic partners, advertisers and Web publishers. Further, we cannot assure
you that our competitors will not develop online products and services that are
equal to or superior to our products and services or that achieve greater
market acceptance than our products and services. If we are unable to compete
successfully against existing or potential competitors, our revenue and margins
may decline. Please see "Business -- Competition" for more information on our
competitors.
Our failure to successfully acquire and integrate new technologies and
businesses could cause our results of operations to suffer
We focus on creating sponsorship-oriented advertising campaigns that take
full advantage of the unique capabilities of the Internet. The Internet is a
quickly changing environment, requiring companies to constantly improve their
technology and develop or acquire new technology. We intend to acquire and make
investments in complementary businesses, products, services or technologies. We
cannot assure you that we will be able to identify suitable acquisition or
investment candidates. Even if we do identify suitable candidates, we cannot
assure you that we will be able to make any potential acquisition or investment
on commercially acceptable terms. Moreover, we may have difficulty integrating
any acquired businesses, products, services or technologies into our
operations. These difficulties could disrupt our business, distract our
management and employees and increase our expenses. In addition, we may incur
debt or issue equity securities to fund any future acquisitions. The issuance
of equity securities could be dilutive to existing stockholders.
If we are unable to safeguard the security and privacy of our information, our
results of operations may suffer
Our technical infrastructure is potentially vulnerable to physical or
electronic computer break-ins, viruses and similar disruptive problems.
Weaknesses or vulnerabilities in the Internet, a user's personal computer or in
our services could compromise the confidential nature of information
transmitted over the Internet. These factors could require us to devote
significant financial and human resources to protect against future breaches
and alleviate or mitigate problems caused by security breaches. Security
breaches could result in financial loss, litigation and other liabilities, any
of which could cause our results of operations to suffer.
14
<PAGE>
Government regulation may affect our ability to gather, generate or use
information for profiles and may hinder our ability to conduct business
The legal and regulatory environment governing the Internet and the use of
information about Web users is uncertain and may change. Web sites typically
place small files of information, commonly known as cookies, on a Web user's
hard drive, generally without the user's knowledge or consent. Although it is
possible to modify a Web user's Internet browser software to prevent the
placement of cookies, few users currently choose to do so. Our adMonitor
tracking technology currently uses cookies to collect data about a Web user's
movement through the Internet. Some Internet commentators and privacy advocates
have suggested limiting or eliminating the use of cookies and restricting the
collection of personal data through the use of cookies. United States
legislators in the past have introduced a number of bills aimed at regulating
the collection and use of personal data from Internet users and additional
similar bills are being considered during the current congressional session.
The European Union has recently adopted a directive addressing data privacy
that may result in limitations on the collection and the use of specific
personal information regarding Internet users. In addition, Germany and other
European Union member countries have imposed their own laws protecting data
that can become personally identifiable through subsequent processing. Other
countries have enacted, or are considering, limitations on the use of personal
data as well. The effectiveness of our technology could be impaired by any
limitation in the use of cookies or the collection of personal data, and
consequently, our business and results of operations could be harmed.
A number of laws and regulations have been, and in the future may be, adopted
covering issues such as pricing, acceptable content, taxation and quality of
products and services on the Internet. This legislation could inhibit the
growth in the use of the Internet and decrease the acceptance of the Internet
as a communications and commercial medium. In addition, due to the global
accessibility of the Internet, it is possible that multiple federal, state or
foreign jurisdictions might inconsistently regulate our activities and our
customers. Any of these developments could limit our ability to do business and
to generate revenue.
Any failure by us to protect our intellectual property could harm our business
and competitive position
We generally protect our intellectual property through a combination of
trademark, trade secret and copyright laws, confidentiality agreements with our
employees and third parties, and license agreements with consultants, vendors
and clients. We have filed applications for several trademarks in the United
States. We cannot assure you that any of our trademark applications will be
approved. Even if these applications are approved, the trademarks may be
successfully challenged by others or invalidated. In addition, despite our
efforts to protect our intellectual property, unauthorized parties may attempt
to copy aspects of our services or to obtain and use information that we regard
as proprietary. We may not have adequate remedies for any breach of
confidentiality agreements, and our trade secrets may otherwise become known or
independently developed by competitors. Please see "Business -- Intellectual
Property Rights" for more information on our intellectual property.
We may be liable for content available or posted on the Web sites of our
publishers
We may be liable to third parties for content in the advertising we serve if
the music, artwork, text or other content involved violates the copyright,
trademark or other intellectual property rights of such third parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
result in costly litigation or divert management's attention.
15
<PAGE>
The loss of key employees would likely impair the growth of our business
Our performance and future success is substantially dependent on the
continued service of our executive officers and other key employees, all of
whom are employed on an at-will basis. In particular, our success depends on
the client relationships, management skills and industry and technical
knowledge of our CEO and president, John C. Bohan, and our chief technology
officer, Frank A. Addante. Given our early stage of development, we are
dependent on our ability to retain and motivate highly qualified personnel,
especially our management, technical and business development executives and
other key employees. The loss of the services of one or more of our executive
officers or other key employees would likely impair the growth of our business.
Please see "Management" for more information about our executive officers and
key employees.
Potential Year 2000 risks may harm our ability to generate revenue and our
results of operations
We may have substantial exposure to the Year 2000 problem, both with our own
systems and with systems we do not control. The Year 2000 problem is the result
of many computer systems and software programs having been designed to use two
digits rather than four to define the applicable year. Date-sensitive hardware
and software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations.
With respect to our internal systems, we have been working with our
technology personnel during the research and development stage of such systems
and during the ordinary course of our business to identify any exposure to the
Year 2000 problem. Any Year 2000 problem discovered may require us to upgrade
our systems at a substantial cost. We also rely on third party vendors to
provide network services, maintain our databases and support and operate our
systems. All third-party vendors of material hardware or software have provided
statements assuring Year 2000 compliance. However, failures or interruptions of
any of the systems of these third parties because of the Year 2000 problem
could seriously affect our ability to generate revenue and damage our business
and results of operations. Furthermore, we cannot assure you that we will be
successful in our efforts to identify and remedy all Year 2000 problems that
may affect our systems.
Our business is dependent upon the availability of our publishers' Web sites.
We have committed significant resources to the process of identifying any
potential Year 2000 problems at the Web sites of our publishers and, to date,
have discovered none. However, we cannot assure you that Year 2000 problems
will not materialize at any of these sites. Moreover, our publishers' Web sites
rely on a wide array of hardware and software, as well as numerous Internet
service providers, in order to reach the Internet and maintain their Web sites.
Failures or interruptions of any of the systems associated with our Web
publishers due to Year 2000 problems could result in temporary, but
significant, damage to our business and reduce our revenue. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000" for detailed information on our state of
readiness, costs, potential risks and contingency plans regarding the Year 2000
problem.
The substantial number of shares that will be eligible for sale in the near
future may cause the market price of our common stock to decline
A substantial number of shares of common stock will be available for sale in
the public market following this offering, which could adversely affect the
market price of our common stock. This
16
<PAGE>
includes up to 2,145,489 shares of common stock registered concurrently with
this offering which may be offered by two of our current stockholders, but are
subject to at least a 180-day lock-up from the date of this prospectus. See
"Shares Eligible for Future Sale" for a more detailed description of the
eligibility of shares of our common stock for future sale.
We will have broad discretion with respect to the use of proceeds from this
offering and if the proceeds are not applied effectively, our results of
operations could suffer
As of the date of this prospectus, we cannot specify any of the particular
uses of the net proceeds we will receive from this offering. Our management
will have significant flexibility in applying the net proceeds of this
offering. If our management does not apply these funds effectively, our results
of operations could suffer. Please see "Use of Proceeds" for more information
on the use of proceeds from this offering.
Our executive officers and directors will exercise significant control over our
company following this offering including the ability to control the election
of our board of directors and the outcome of corporate actions requiring
stockholder approval
Following the offering, we anticipate that our executive officers and
directors, in the aggregate, will beneficially own or control approximately
64.2% of the outstanding shares of common stock and 61.2% of the outstanding
shares of common stock if the underwriters' over-allotment option is exercised
in full. Our officers, directors and their affiliates will have the ability to
control the election of our board of directors and the outcome of corporate
actions requiring stockholder approval, including merger and other changes of
corporate control, going private transactions and other extraordinary
transactions and terms thereof. Please see "Principal Stockholders" for
information on beneficial ownership of our common stock by our executive
officers and directors.
We may need additional capital in the future to operate our business and we may
experience difficulty in obtaining this additional capital
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. We may need to raise additional funds in the
future, which may include the net proceeds from this offering, to fund our
operations, to enhance or expand the range of products and services we offer or
to respond to competitive pressures or perceived opportunities. We cannot
assure you that additional financing will be available on terms favorable to
us, or at all. If adequate funds are not available or not available when
required or on acceptable terms, the growth of our business and results of
operations may suffer.
We are subject to anti-takeover provisions, which may make it difficult for a
third party to acquire us
A number of recent acquisitions and consolidations have occurred in our
industry. For example, DoubleClick acquired NetGravity in October 1999, and
CMGI, Inc., which recently acquired Flycast Communications and Adforce, has
agreed to sell Flycast Communications and Adsmart to its majority-owned
operating company, Engage Technologies, Inc. We are subject to anti-takeover
provisions that may make it difficult for a third party to acquire us. We are
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an
17
<PAGE>
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock. Please see "Description of Capital Stock" for
additional information on anti-takeover provisions to which we are subject.
There has been no prior market for our common stock and our stock price may
experience extreme price and volume fluctuations
Prior to this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market will develop or be sustained
or that the market price of our common stock will not decline. Even if an
active trading market does develop, the market price of our common stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as:
. actual or anticipated variations in our revenue;
. earnings and cash flow;
. announcements of new service offerings;
. technological innovations;
. competitive developments with respect to patents, copyrights or
proprietary rights;
. changes in financial estimates by securities analysts;
. conditions and trends in the Internet and electronic commerce
industries;
. adoption of new accounting standards affecting our industry; and
. general market conditions.
Further, following initial public offerings, the market prices for stocks of
Internet-related and online companies often reach levels that bear no
relationship to the operating performance of these companies. These market
prices are generally not sustainable and could vary widely. The market prices
of the securities of Internet-related and online companies have been especially
volatile. If our common stock trades to high levels following this offering, it
could eventually experience a significant decline.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "may," "will," "should,"
"potential," "continue," "expects," "anticipates," "estimates," "intends,"
"plans," "believes" and any similar expressions are intended to identify
forward- looking statements. These forward-looking statements involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of other factors,
as more fully described in the "Risk Factors" section and elsewhere in this
prospectus.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 6,500,000 shares of
common stock in the offering will be approximately $89.5 million, based upon
the initial public offering price of $15.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $103.1 million.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets and to increase our visibility in the retail
marketplace. The net proceeds will be used for general corporate purposes. We
cannot specify with certainty the particular uses for the net proceeds. The
amounts and timing of our actual expenditures will depend on numerous factors,
including the status of our technology development efforts, sales and marketing
activities, the amount of cash generated or used by our operations and
competition. We may find it necessary or advisable to use portions of the
proceeds for other purposes, and we will have broad discretion in the
application of the net proceeds. We have no current intentions to acquire any
businesses, products, services or technologies. Pending these uses, the
proceeds will be invested in short-term, investment grade, interest-bearing
securities.
19
<PAGE>
DIVIDEND POLICY
Other than a total of $50,000 that we distributed to our common stockholders
during the year ended December 31, 1998, we have not declared or paid cash
dividends on our common stock since our incorporation. Holders of our Series A
preferred stock are entitled to receive cumulative dividends that accrue at an
annual rate of $40.00 per share. Holders of our Series B preferred stock are
entitled to receive cumulative dividends that accrue at an annual rate of $0.14
per share. Holders of Series C preferred stock are entitled to receive
cumulative dividends that accrue at an annual rate of $0.18 per share. These
dividends are expected to be paid in cash at the closing of this offering upon
conversion of the Series A, Series B, and Series C preferred stock into common
stock. The aggregate amount of these dividend payments is expected to be
approximately $400,000. We otherwise currently intend to retain any future
earnings for use in our business and do not anticipate paying any additional
cash dividends in the foreseeable future.
OTHER INFORMATION
Unless otherwise indicated, all information in this prospectus:
. reflects a 2-for-3 reverse stock split to be effected prior to the
consummation of this offering;
. reflects the automatic conversion of all 2,000 shares of Series A
preferred stock, 4,107,044 shares of Series B preferred stock and
1,307,190 shares of Series C preferred stock into 5,276,156 shares of
common stock upon completion of this offering;
. reflects the cashless exercise of warrants to acquire 1,341,968 shares
of common stock with a weighted average exercise price of $4.84 per
share (assuming a fair market value of our common stock at the time of
exercise equal to the initial public offering price of $15.00 per
share);
. excludes options and warrants outstanding as of September 30, 1999, to
purchase 2,752,327 shares of common stock with a weighted average
exercise price of $2.76 per share; and
. assumes no exercise of the underwriters' over-allotment option.
Omnicom Group Inc. has expressed to us its preliminary interest in acquiring
up to 166,666 shares of our common stock in this offering at the initial
public offering price of $15.00 per share. As of January 26, 2000, Communicade,
Inc., a wholly-owned subsidiary of Omnicom, owned 228,758 shares of Series C
preferred stock (which is convertible into 152,506 shares of common stock) and
a warrant to purchase 235,910 shares of common stock. Mr. Bruce Redditt, one of
our directors, is an Executive Vice President of Omnicom. Omnicom is not
obligated to purchase any of our common stock, and there is no assurance that a
sale of our common stock to Omnicom will occur. If Omnicom were desirous of
purchasing shares in this offering, up to 166,666 shares would be made
available to them.
Prior to the commencement of this offering, we issued a warrant to one of our
advertising customers to acquire 50,000 shares of common stock at an exercise
price equal to $15.00 per share. The warrant is exercisable on a date more than
one year after the date of its issuance, and is expected to result in a charge
to our earnings of approximately $180,000.00.
20
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of September 30, 1999:
. on an actual basis, after giving effect to a 2-for-3 reverse stock split
to be effected prior to the consummation of this offering;
. on a pro forma basis to give effect to:
. the automatic conversion upon the closing of this offering of all
outstanding shares of preferred stock into 5,276,156 shares of
common stock;
. the issuance upon the closing of this offering of an aggregate of
1,341,968 shares of our common stock upon the cashless exercise of
warrants at a weighted average exercise price of $4.84 per share
(assuming a fair market value of our common stock at the time of
exercise equal to the initial public offering price of $15.00 per
share); and
. on a pro forma as adjusted basis to give effect to the sale of, and the
application of the net proceeds from, 6,500,000 shares of common stock
in this offering at the initial public offering price of $15.00 per
share.
This information should be read in conjunction with our financial statements
and the notes relating to these statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands, except per
share data)
<S> <C> <C> <C>
Long-term capital lease obligations, net of
current portion................................ $ 286 $ 286 $ 286
Stockholders' equity:
Preferred stock, $0.001 par value; 15,000,000
shares authorized:
Series A preferred stock; 2,000 shares
authorized; 2,000 shares issued and
outstanding on an actual basis; 2,000 shares
issued and none outstanding on a pro forma
basis; and no shares issued or outstanding on
a pro forma as adjusted basis................ 2,077 -- --
Series B preferred stock; 5,000,000 shares
authorized; 4,107,044 shares issued and
outstanding on an actual basis; 4,107,044
shares issued and none outstanding on a pro
forma basis; and no shares issued or
outstanding on a pro forma as adjusted
basis........................................ 9,353 -- --
Series C preferred stock; 3,000,000 shares
authorized; 1,307,190 shares issued and
outstanding on an actual basis; 1,307,190
shares issued and none outstanding on a pro
forma basis; and no shares issued or
outstanding on a pro forma as adjusted
basis........................................ 4,575 -- --
Common stock, $0.001 par value; 53,333,333
shares authorized; 6,693,333 shares issued and
outstanding on an actual basis;
13,311,457 shares issued and outstanding on a
pro forma basis; and 19,811,457 shares issued
and outstanding on a pro forma as adjusted
basis.......................................... 7 13 19
Additional paid-in capital...................... 182 16,181 105,650
Notes receivable for common stock............... (44) (44) (44)
Accumulated deficit............................. (5,638) (5,638) (5,638)
------- ------- --------
Total stockholders' equity...................... 10,512 10,512 99,987
------- ------- --------
Total capitalization............................ $10,798 $10,798 $100,273
======= ======= ========
</TABLE>
The foregoing table assumes no exercise of any stock options or warrants
outstanding as of September 30, 1999, except the pro forma data, which assume
the cashless exercise of warrants to acquire 1,341,968 shares of common stock.
As of September 30, 1999, there were options and warrants outstanding to
purchase a total of 4,734,284 shares of common stock with a weighted average
exercise price of $3.63 per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, after giving
effect, upon the closing of this offering, to:
. the automatic conversion of all outstanding shares of preferred stock
into common stock; and
. the cashless exercise of warrants to acquire 1,341,968 shares of common
stock
was $10,512,406, or $0.79 per share of common stock.
Pro forma net tangible book value per share is equal to the amount of our
total tangible assets, reduced by the amount of our total liabilities, divided
by 13,311,457 shares of common stock outstanding, on a pro forma basis, as of
September 30, 1999. Assuming the sale of the 6,500,000 shares offered hereby at
the initial public offering price of $15.00 per share, and after deducting the
underwriting discounts and commissions and estimated offering expenses, and the
application of the estimated net proceeds therefrom, our pro forma net tangible
book value as of September 30, 1999 would have been $99,987,406 or $7.51 per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $6.72 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $7.49 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $15.00
Pro forma net tangible book value per share as of September
30, 1999................................................... $0.79
Pro forma increase attributable to new investors............ 6.72
-----
Pro forma net tangible book value per share after the
offering..................................................... 7.51
------
Pro forma dilution per share to new investors................. $ 7.59
======
</TABLE>
The following table summarizes the total number of shares of common stock
purchased from us, the total consideration paid to us and the average price per
share paid by existing stockholders and by new investors before deduction of
estimated discounts and commissions and estimated offering expenses payable by
us, on a pro forma basis as of September 30, 1999, after giving effect to:
. the automatic conversion of all outstanding shares of preferred stock
into common stock; and
. the cashless exercise of warrants to acquire 1,341,970 shares of common
stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 13,311,457 67% $ 14,633,304 13% $ 1.10
New investors................. 6,500,000 33 97,500,000 87% 15.00
---------- --- ------------ ---
Total....................... 19,811,457 100% $112,133,304 100%
========== === ============ ===
</TABLE>
The foregoing tables assume no exercise of any stock options or warrants
outstanding as of September 30, 1999, except the pro forma data, which assume
the cashless exercise of warrants to acquire 1,341,968 shares of common stock.
After the closing of this offering, no shares of preferred stock will be issued
or outstanding. There will be 19,811,457 shares of common stock outstanding
after the offering. As of September 30, 1999, there were options and warrants
outstanding to purchase a total of 4,734,284 shares of common stock with a
weighted average exercise price of $3.63 share.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The statement of operations data and the balance sheet data
are derived from our Financial Statements that are included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Period from
Inception Nine Months Ended
(January 5, 1997) September 30,
through Year Ended -------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ------------------- ----------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $1,160 $2,189 $1,465 $ 3,973
Operating expenses:
Cost of revenue....... -- -- -- 1,335
Sales and marketing... 550 1,362 875 2,988
Research and
development.......... -- 138 61 1,405
General and
administrative....... 303 995 578 2,707
------ ------ ------ -------
Total operating
expenses............... 853 2,495 1,514 8,435
------ ------ ------ -------
Operating income
(loss)................. 307 (306) (49) (4,462)
Interest income
(expense), net......... 3 17 7 (52)
------ ------ ------ -------
Net income (loss) before
provision for income
taxes.................. 310 (289) (42) (4,514)
Provision for income
taxes.................. -- 1 -- --
------ ------ ------ -------
Net income (loss)....... $ 310 $ (290) $ (42) $(4,514)
====== ====== ====== =======
Cumulative dividends on
participating preferred
stock.................. -- (23) -- (1,244)
------ ------ ------ -------
Net income (loss)
attributable to common
stockholders........... $ 310 $ (313) $ (42) $(5,758)
====== ====== ====== =======
Pro forma basic and
diluted net loss
per share(2)........... $(0.04) $ (0.44)
====== =======
Weighted average shares
outstanding used in pro
forma basic and diluted
per share
calculation(2)......... 8,333 13,118
====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------ -------------- -------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $235 $2,112 $11,556
Working capital....................... 470 1,996 10,082
Total assets.......................... 970 3,936 15,611
Convertible preferred stock........... -- 2,000 16,006
Total stockholders' equity............ 495 2,133 10,512
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception Nine Months Ended
(January 5, 1997) September 30,
through Year Ended ------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ------------------- ----------- ------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Supplemental Data:
System revenue(1)..... $4,210 $8,024 $5,440 $9,232
====== ====== ====== ======
</TABLE>
23
<PAGE>
- --------
(1) System revenue represents the full value of gross billings for ads sold
under either commission-based contracts or service fee-based contracts.
Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure
of advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one
company to another.
(2) The foregoing table assumes no exercise of any stock options or warrants
outstanding as of September 30, 1999, except the pro forma data, which
assume the cashless exercise of warrants to acquire 1,341,968 shares of
common stock. As of September 30, 1999, there were options and warrants
outstanding to purchase a total of 4,734,284 shares of common stock with a
weighted average exercise price of $3.63 per share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with the financial statements and the notes to
financial statements included elsewhere in this prospectus. This discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those anticipated in
these forward-looking statements.
Overview
We are a leading provider of comprehensive online advertising and direct
marketing solutions for advertisers and Web publishers. Since inception,
substantially all of our revenue has been derived from online advertising
sales, and we expect this to continue for the foreseeable future. We offer
advertisements primarily priced on a cost per every thousand ads viewed, or
CPM, basis. We also offer direct marketing programs which may be priced on a
cost per action basis, such as cost for each new user registration. In January
1999, we began to charge our customers for the use of our adMonitor technology.
For the nine months ended September 30, 1999, online advertising sales
accounted for 93.6% of our revenue, and fees generated by our adMonitor
technology accounted for 6.4% of our revenue.
Revenue from ad sales is earned under commission-based and service fee-based
contracts. For commission-based contracts, we receive commissions from Web
publishers for the sale of their ad inventory. Revenue earned from commission-
based contracts reflects only the amount of the commission earned without any
associated cost of revenue. We recognize commissions ratably over the term of
an advertising campaign, which typically ranges from one to twelve months. For
service fee-based contracts, we purchase advertising space, or ad inventory,
from Web publishers and are obligated to pay a service fee to Web publishers
for ads placed on their Web sites. Additionally, under service fee-based
contracts, we bear the risk of loss from the non-collection of fees payable by
advertisers for ads sold. Consequently, revenue earned from service fee-based
contracts reflects the full value of the ads sold. System revenue represents
the full value of gross billings for ads sold under either commission-based
contracts or service fee-based contracts.
In the second quarter of 1999, we began the process of amending many of our
commission-based contracts with Web publishers to provide that we will sell
their ad inventory on a best efforts basis to our advertising clients and remit
to Web publishers, as a service fee, a percentage of the resulting advertising
revenue. We are attempting to amend almost all of our existing commission-based
contracts with Web publishers to convert these contracts into service fee-based
contracts. So long as we have both commission-based and service fee-based
contracts, revenue will include a mix of commissions received under our
commission-based contracts and total billings to our advertising clients under
our service fee-based contracts. For the foreseeable future, we do not expect
to completely convert all of our contracts into service fee-based contracts. As
our amended contracts are phased in, we expect that revenue will increase
disproportionately from prior periods as a result of the recognition of total
billings to our advertising clients as revenue.
The financial statements included elsewhere in this prospectus include
references to system revenue. We believe system revenue provides a consistent
basis for reporting revenue from period to period, regardless of the change in
contract type, as discussed above. System revenue represents the full value of
gross billings for ads sold under either commission-based contracts or service
fee-based
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<PAGE>
contracts. We believe that period to period comparisons of operating results
are not always meaningful and that the results for any period should not be
relied upon as an indication of future performance. For the nine months ended
September 30, 1999, service fee-based contracts accounted for 62.3% of our
revenue, and commission based contracts accounted for 37.7% of our revenue. For
the year ended December 31, 1998, commission-based contracts accounted for 100%
of our revenue.
We expect that revenue generated from the delivery of advertisements on our
network of Web sites will continue to account for a substantial portion of our
revenue for the foreseeable future. Our five largest advertising customers
accounted for 21.3% of revenue for the nine months ended September 30, 1999,
25.5% of revenue for the year ended December 31, 1998 and 30.0% for the period
ended December 31, 1997. Our largest advertising customer accounted for less
than 10.0% of revenue for the nine months ended September 30, 1999, less than
10.0% for the year ended December 31, 1998 and 17.0% for the period ended
December 31, 1997.
We typically enter into one-year contracts with the Web publishers in our
network. Web publishers do not pay a fee to join our network. These agreements
usually may be terminated by either party by giving 30 to 120 days prior
written notice. Additionally, these agreements are usually automatically
renewable for successive one-year terms. Ads delivered on the top five Web
sites in our network accounted for 40.4% of our revenue for the nine months
ended September 30, 1999, 66.7% of our revenue for the year ended December 31,
1998 and 74.5% for the period ended December 31, 1997.
Cost of revenue includes service fees paid to our Web publishers under our
service fee-based contracts and Internet connectivity and bandwidth costs
associated with ad serving. We expect cost of revenue to increase on an
absolute dollar basis in future periods as we increase the number of our Web
publishing clients and as more of the contracts with these Web publishers
become service fee-based.
Results of Operations
Nine Months Ended September 30, 1999 and 1998
Revenue. Revenue increased 171% to $4.0 million for the nine months ended
September 30, 1999 from $1.5 million for the nine months ended September 30,
1998. This was primarily a result of a $1.0 million increase due to the number
of advertising customers and the number of ads delivered increasing over time,
a $1.3 million increase due to our adoption of service fee-based contracts and
$253,000 for the initiation of our charging service fees to customers for the
use of adMonitor.
System Revenue. System revenue represents the full value of gross billings
for ads sold under either commission-based contracts or service fee-based
contracts. Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure of
advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one company to
another. System revenue increased 69.7% to $9.2 million for the nine months
ended September 30, 1999 from $5.4 million for the nine months ended September
30, 1998. This was due to an increase in the number of advertising customers,
an increase in the number of ads delivered and the initiation of our charging
service fees to customers for the use of adMonitor.
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Cost of Revenue. Cost of revenue was $1.3 million for the nine months ended
September 30, 1999. During the nine months ended September 30, 1998, all
revenue was derived solely from advertising sales commissions with no related
service fees to customers for the use of adMonitor, or associated cost of
revenue.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, travel, advertising, trade show costs and marketing materials
expense. Sales and marketing expenses were $3.0 million, or 75.2% of revenue,
for the nine months ended September 30, 1999, and $875,000, or 59.7% of
revenue, for the nine months ended September 30, 1998. This increase was
primarily due to an increase in the number of sales and marketing personnel.
Our sales and marketing organization has grown to 65 employees as of September
30, 1999 from six employees as of January 1, 1998. We expect sales and
marketing expenses to increase on an absolute dollar basis in future periods as
we hire additional personnel in sales and marketing, expand into new markets
and continue to promote our advertising solutions.
Research and Development. Research and development expenses consist primarily
of compensation, consulting expenses and expenses for hardware, software and
materials associated with the development and improvement of our adMonitor
technology. To date, all research and development costs have been expensed as
incurred. Research and development expenses were $1.4 million, or 35.4% of
revenue, for the nine months ended September 30, 1999, and $61,000, or 4.2% of
revenue, for the nine months ended September 30, 1998. This increase was due
primarily to an increase in expenses associated with the deployment and
enhancement of our adMonitor technology. We expect research and development
expenses to increase significantly on an absolute dollar basis in future
periods.
General and Administrative. General and administrative expenses consist
primarily of compensation and professional service fees. General and
administrative expenses were $2.7 million, or 68.1% of revenue, for the nine
months ended September 30, 1999, and $578,000, or 39.5% of revenue, for the
nine months ended September 30, 1998. This increase was primarily a result of a
$617,000 increase in personnel expenses, a $385,000 increase in professional
service fees and a $676,000 increase in facility expenses necessary to support
our growth. We expect general and administrative expenses to increase on an
absolute dollar basis as we hire additional personnel and incur additional
costs related to the growth of our business and our operation as a public
company.
Interest Income (Expense), Net. Interest income (expense), net primarily
consists of interest earned on cash balances, offset by interest expense
incurred with respect to our capital leases and equipment financing
obligations. Net interest expense was $51,000 for the nine months ended
September 30, 1999. Net interest income was $7,000 for the nine months ended
September 30, 1998.
Year Ended December 31, 1998 and the Period Ended December 31, 1997
Revenue. Revenue increased 88.8%, to $2.2 million for the year ended December
31, 1998 from $1.2 million for the period ended December 31, 1997. This
increase was mainly attributable to an increase in the number of advertisers
using our solutions, as well as the number of ads delivered.
System Revenue. System revenue represents the full value of gross billings
for ads sold under either commission-based contracts or service fee-based
contracts. Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure of
advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one company to
another. System
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revenue increased 90.6% to $8.0 million for the year ended December 31, 1998
from $4.2 million for the period ended December 31, 1997. This was mainly
attributable to an increase in the number of advertisers using our solutions,
as well as the number of ads delivered.
Cost of Revenue. During both periods, all revenue was derived solely from
advertising sales commissions and there was no associated cost of revenue.
Sales and Marketing. Sales and marketing expenses were $1.4 million, or 62.2%
of revenue, for the year ended December 31, 1998, and $550,000, or 47.4% of
revenue, for the period ended December 31, 1997. This increase was primarily
due to an increase in the number of sales and marketing personnel.
Research and Development. Research and development expenses were $138,000, or
6.3% of revenue, for the year ended December 31, 1998. Research and development
expenses consisted primarily of expenses associated with the development and
deployment of our adMonitor technology. There were no research and development
expenses for the period ended December 31, 1997.
General and Administrative. General and administrative expenses were
$995,000, or 45.5% of revenue, for the year ended December 31, 1998, and
$303,000, or 26.1% of revenue, for the period ended December 31, 1997. The
increase was primarily a result of a $144,000 increase in personnel expenses, a
$176,000 increase in professional service fees and a $234,000 increase in
facility expenses necessary to support our growth.
Interest Income (Expense), Net. Net interest income was $17,000 for the year
ended December 31, 1998, and $3,000 for the period ended December 31, 1997.
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Quarterly Results of Operations
The following tables set forth unaudited quarterly statement of operations
data for the quarters ended September 30, 1999 in dollars and as a percentage
of revenue. In the opinion of management, this information has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be
read in conjunction with our audited financial statements and the notes to the
financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 404 $ 516 $ 545 $ 724 $ 753 $ 1,168 $ 2,052
Operating expenses:
Cost of revenue....... -- -- -- -- 2 307 1,027
Sales and marketing... 313 239 322 487 803 1,003 1,182
Research and
development.......... 7 20 34 77 139 252 1,013
General and
administrative....... 116 187 275 417 528 812 1,368
------ ------ ------ ------ ------ ------- -------
Total operating
expenses............... 436 446 631 981 1,472 2,374 4,590
------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................. (32) 70 (86) (257) (719) (1,206) (2,538)
Interest income
(expense), net......... 3 -- 3 10 11 (16) (47)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
provision for income
taxes.................. (29) 70 (83) (247) (708) (1,222) (2,585)
Provision for income
taxes.................. -- -- -- 1 -- -- --
------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ (29) $ 70 $ (83) $ (248) $ (708) $(1,222) $(2,585)
====== ====== ====== ====== ====== ======= =======
Supplemental Data:
System revenue (1)...... $1,466 $1,910 $2,064 $2,583 $2,529 $ 3,101 $ 3,602
====== ====== ====== ====== ====== ======= =======
</TABLE>
- --------
(1) System revenue represents the full value of gross billings for ads sold
under either commission-based contracts or service fee-based contracts.
Although system revenue is not recognized under generally accepted
accounting principles, we believe that system revenue is a standard measure
of advertising volume for the Internet advertising industry that enables a
meaningful comparison of activity from period to period and from one
company to another.
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Our system revenue increased during each quarter of 1998. Quarterly system
revenue increased 30.3% from the first to second quarter, 8.1% from the second
to third quarter and 25.2% from the third to fourth quarter of 1998. Quarterly
system revenue decreased 2.1% from the fourth quarter of 1998 to the first
quarter of 1999 due to seasonal factors. Quarterly system revenue increased
22.6% from the first quarter to the second quarter of 1999 and 16.1% from the
second to third quarter of 1999. Quarterly growth was due to increases in the
number of advertisers and the number of ads delivered.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenue....... -- -- -- -- 0.3 26.3 50.0
Sales and marketing... 77.5 46.5 59.1 67.2 106.6 85.9 57.6
Research and
development.......... 1.7 3.9 6.3 10.7 18.5 21.6 49.4
General and
administrative....... 28.7 36.2 50.5 57.7 70.1 69.5 66.7
----- ----- ----- ----- ----- ------ ------
Total operating
expenses............... 107.9 86.6 115.9 135.6 195.5 203.3 223.7
----- ----- ----- ----- ----- ------ ------
Operating loss.......... (7.9) 13.4 (15.9) (35.6) (95.5) (103.3) (123.7)
Interest income
(expense), net......... 0.7 0.1 0.6 1.5 1.4 (1.3) (2.2)
----- ----- ----- ----- ----- ------ ------
Income (loss) before
provision for income
taxes.................. (7.2) 13.5 (15.3) (34.1) (94.1) (104.6) (125.9)
Provision for income
taxes.................. -- -- -- -- -- -- --
----- ----- ----- ----- ----- ------ ------
Net income (loss)....... (7.2)% 13.5% (15.3)% (34.1)% (94.1)% (104.6)% (125.9)%
===== ===== ===== ===== ===== ====== ======
</TABLE>
Our revenue increased during each of the last seven quarters. In 1998,
quarterly revenue increased 27.7% from the first to second quarter, 5.6% from
the second to the third quarter and 32.8% from the third to the fourth quarter.
In 1999, quarterly revenue increased 55.1% from the first to the second quarter
and 75.7% from the second to the third quarter. Quarterly revenue growth was
primarily due to increases in the number of advertising clients, the number of
ads delivered and adMonitor service fees. The increases in revenue from the
first quarter to second quarter of 1999 and from the second quarter to third
quarter of 1999 were also due to increases in the number of service fee-based
contracts.
Increases in total operating expenses were due primarily to the addition of
sales, technical and administrative personnel needed to sustain our growth and
further develop our infrastructure.
Our revenue has historically been, and we expect it to continue to be,
subject to seasonal fluctuations because advertisers generally place fewer
advertisements during the first calendar quarter of each year. Additionally,
expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions, as well as budgeting and buying patterns.
Liquidity and Capital Resources
From our inception through September 1998, we financed our operations
primarily through internally generated cash flow. In September 1998, we
completed a private placement of equity securities to an individual investor
and received $1.9 million in net proceeds. In September 1999, we completed two
private placements of equity securities and received $12.9 million in net
proceeds.
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The net proceeds from these private placements are being used to expand our
business operations, to hire additional personnel, to provide additional
services and for general corporate purposes related to the expansion of our
business.
Net cash used by operating activities was $3.2 million for the nine months
ended September 30, 1999. Net cash provided by operating activities was $1,000
for the year ended December 31, 1998 and $259,000 for the period ended December
31, 1997. Cash used in operating activities for the nine months ended September
30, 1999 resulted from a net loss of $4.5 million, as well as a $1.3 million
increase in accounts receivable and a $576,000 increase in prepaids and other
current assets partially offset by a $1.9 million increase in accounts payable
and a $1.1 million increase in accrued expenses. Cash provided by operating
activities for the year ended December 31, 1998 resulted from a $834,000
increase in accounts payable and a $200,000 increase in accrued liabilities,
partially offset by a $290,000 net loss and a $626,000 increase in accounts
receivable. Cash provided by operating activities for the period ended December
31, 1997 resulted from $310,000 in net income and a $327,000 increase in
accounts payable and a $100,000 increase in accrued liabilities, partially
offset by a $490,000 increase in accounts receivable. The increases in both
accounts receivable and accounts payable include amounts invoiced on behalf of
Web publishers for which the Company has no credit exposure. As of September
30, 1999, the amount billed on behalf of our Web publishing clients, and
therefore included in our accounts receivable and accounts payable balances
with no credit risk to us, was approximately $700,000.
Net cash used in investing activities was $530,000 for the nine months ended
September 30, 1999, $323,000 for the year ended December 31, 1998 and $19,000
for the period ended December 31, 1997. Cash used in investing activities was
primarily related to purchases of property and equipment.
Net cash provided by financing activities was $13.2 million for the nine
months ended September 30, 1999 and $2.2 million for the year ended December
31, 1998. Net cash used by financing activities was $5,000 for the period ended
December 31, 1997, resulting from a withdrawal of capital. Cash provided by
financing activities for the nine months ended September 30, 1999 resulted
primarily from the proceeds from our private placement of equity securities.
Cash provided by financing activities for the year ended December 31, 1998
resulted primarily from the sale of Series A preferred stock, partially offset
by distributions to stockholders.
Although we do not have any material commitments for capital expenditures, we
anticipate that we will experience a substantial increase in our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We currently anticipate that we will continue to
experience significant growth in operating expenses for the foreseeable future.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months.
Impact of the Year 2000
Our business could be significantly harmed if the systems on which we are
dependent to conduct our operations are not Year 2000 compliant. The Year 2000
problem is the result of many computer systems and programs having been
designed to use two digits rather than four to define the applicable year.
Date-sensitive hardware and software may recognize a date using "00" as the
year 1900 rather than the year 2000.
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State of Readiness
Because we believe our internal information systems are Year 2000 compliant,
we have not engaged any third parties to independently verify our readiness
with respect to the Year 2000 problem. We have conducted our own initial
assessment of Year 2000 compliance for both our information and non-information
technology. Based on our initial assessment, we believe all non-information
technology, including security and phone systems, upon which we are materially
dependent, is Year 2000 compliant. We have evaluated our internally developed
software, including our adMonitor technology, during its research and
development process and during the ordinary course of our business. Although we
have not discovered any material Year 2000 problems with our internal
information technology to date, we may in the future.
We believe that the third party hardware and software that we use is Year
2000 compliant. Prior to the purchase of third party hardware or software, we
typically seek assurance from the vendor that the hardware or software is Year
2000 compliant. We also typically test the hardware or software for Year 2000
compliance upon its installation. Moreover, our hardware and software is
subject to evaluation during the operation of our business. We cannot assure
you, however, that we will not experience unanticipated negative consequences,
including material costs caused by undetected errors or defects in the
technology used in our internal systems.
We do not currently have complete information concerning the Year 2000
compliance status of our advertising or Web publishing clients. We have begun
contacting most of these clients to review their Year 2000 compliance efforts
and the potential effects of the Year 2000 problem on their systems and to
gauge their Year 2000 compliance. To date, we have not discovered any problems
with our advertising and Web publishing clients that could harm our business.
However, we cannot assure you that we will be successful in collecting
information from the remainder of our advertising and Web publishing clients,
nor can we assure you that all of them have adequately addressed the Year 2000
problem.
Costs
We expect to resolve any Year 2000 compliance problems that arise primarily
through normal upgrades or, when necessary, through replacement of existing
software with Year 2000 compliant products. We do not anticipate the costs of
these upgrades and replacements to exceed $100,000. To date, we have not
incurred any material expenditures in connection with our Year 2000 compliance
efforts. However, if we discover any Year 2000 issue, the costs of remediating
the problem could be higher than we anticipated and could harm our business,
results of operations and financial condition.
Risks
We are not currently aware of any significant Year 2000 compliance problems
relating to our software, our information technology systems or our other
systems that would materially harm our business, results of operations or
financial condition. During our ongoing assessment, we may discover Year 2000
compliance problems in our proprietary software that may require substantial
repair or replacement which could cause our business to suffer. Moreover,
software or hardware failures of products supplied to us by third party
vendors, or interruptions or failures in service provided to us by third party
vendors due to the Year 2000 problem, could cause significant harm to our
business. We also depend on the uninterrupted availability of the Internet
infrastructure to conduct our ad serving and tracking business. Furthermore, we
depend on the continued operations of
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<PAGE>
our Web publishers. Year 2000 problems affecting the Internet or our Web
publishers could result in significant harm to our business, results of
operations and financial condition.
Contingency Plans
Failures in infrastructure, such as widespread Internet or electric utility
grid failure, are contingencies against which we cannot guard and which could
cause significant damage to our business for as long as they persisted. Plans
are in place to mitigate, to the extent reasonably possible, any failures in
our adMonitor technology should any arise. These plans include the immediate
replacement or repair of any software components found to be in a failure mode.
This will be carried out by our technical staff with the support of relevant
outside vendors.
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<PAGE>
BUSINESS
Overview
We are a leading provider of Internet-based advertising and direct marketing
solutions for advertisers and Web publishers. We design and implement
advertising campaigns for our advertising clients and strategically place their
ads on our network of Web sites. We provide our Web publishing clients with a
fully-outsourced solution which includes the sale of advertising space on their
Web sites as well as the technology required to deliver advertisements.
Our advertising clients want Web users to take actions such as visiting their
Web sites or making an online purchase when they view advertisements. Our Web
publishing clients seek to improve the sale of advertising space, or ad
inventory, on their Web sites. Our design and development teams help our
clients meet their objectives by creating advertising campaigns that
incorporate sponsorships. Sponsorships are advertisements that employ advanced
marketing techniques such as integrating advertisements into the text or
graphical content of a Web page and contain features such as audio and video,
co-branding between the advertiser and the Web site publisher, and
interstitials, which are advertisements contained in separate Web browser
windows that open up within a client's Web site. In contrast, traditional
banner advertisements are typically found at the top of a Web page and
frequently contain content that is unrelated to that of the Web page. Because
our sponsorship-focused solutions are specifically designed to promote
interactivity between the Web user and our advertisers, we believe that our
advertising campaigns are more effective than traditional banner advertisements
in attracting a Web user's attention and encouraging action.
In addition, we have developed adMonitor, our ad serving and tracking
technology that is used to deliver advertisements to our network of Web site
publishers. adMonitor enables our advertising and Web publishing clients to
implement sophisticated advertising campaigns quickly and to selectively target
ads to Web users based on specific interests or characteristics. adMonitor also
enables our clients to measure and manage the effectiveness of their ad
campaigns.
We represent a network of select Web publishers featuring sites with strong
online brand awareness and innovative content such as Alloy Online, BigYellow,
Hollywood.com and Liquid Audio. Over 500 advertisers including Chevrolet,
iVillage, Microsoft, Netscape, Procter & Gamble and Visa have utilized our
solutions. No advertising client represents more than 10% of our revenue.
Industry Background
Emergence of the Internet as an Advertising and Direct Marketing Medium
The Internet has rapidly emerged as an important medium for facilitating
communication, disseminating information and conducting commerce. International
Data Corporation estimates that the number of worldwide Internet users exceeded
142 million in 1998 and will grow to
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<PAGE>
approximately 502 million by 2003. International Data Corporation also
estimates that worldwide commerce over the Internet will grow from
approximately $50.4 billion in 1998 to approximately $1.3 trillion by 2003.
As the Internet has grown, advertisers have devoted increasing portions of
their advertising and marketing budgets to online advertising and direct
marketing. Forrester Research estimates that worldwide Internet advertising
spending will grow from approximately $3.3 billion in 1999 to approximately
$33.1 billion in 2004. Moreover, worldwide expenditures for online direct
marketing, as estimated by the Direct Marketing Association, will grow from
approximately $603 million in 1998 to approximately $5.3 billion in 2003.
Advantages of Online Advertising and Direct Marketing Over Traditional Media
Unlike traditional broadcast media, the Internet allows advertisers to
selectively target advertisements to individual consumers based upon their
specific interests and characteristics. The interactivity of the Internet also
enables advertisers and marketers to reach the consumer at the point of sale
and to receive immediate feedback on their ad campaigns. Moreover, the Internet
provides advertisers with the ability to monitor and measure the effectiveness
of their campaigns and track the resulting transactions. This timely feedback
enables advertisers to continually optimize ad campaigns and increase their
returns on advertising spending. We believe that online advertising and direct
marketing campaigns generally are more cost effective and easier to develop and
implement than advertising and direct marketing campaigns in traditional media.
Progression of Online Advertising and Marketing
Early online advertising was generally limited to placing banner
advertisements on highly trafficked, individual Web sites with the intent of
maximizing reach. As online advertising evolved, advertisers began to run
banners across categories of Web sites, such as sports or technology, to reach
consumers in general interest groups. Currently, advertisers are looking to use
more powerful targeting techniques and technology to direct ads to individual
users based on specific characteristics derived from their demographic and
behavioral data. Further, advertisers are increasingly demanding effective
advertising campaigns that go beyond traditional banner ads and incorporate
enhanced features such as sponsorships, co-branding, integration of
advertisements into Web site content, or content integration, and rich media,
such as audio and video, as well as direct marketing techniques. eStats
estimates that sponsorships will grow from approximately 40% of total online
advertising in 1998 to approximately 58% in 2001. Additionally, the response
rates achieved by advertising campaigns incorporating rich media, as measured
by the number of users clicking through to the Web site promoted by an
advertisement, commonly known as the click-through rate, are significantly
higher than response rates achieved by simple banner advertisements. These
developments in online
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advertising and marketing have led to increased differentiation in the pricing
of online advertising. We believe that online advertisers increasingly will pay
higher prices for more effective campaigns.
[Performance Bar Graph]
[Bar chart entitled Percent of Online Advertising Dollars, by Ad Format]
Source: eAdvertising Report, Vol. I, April 1999, published by eMarketer.
Challenges for Online Advertisers
Online advertisers seek to continually enhance the effectiveness of their
advertising campaigns. They face several significant challenges, including:
. Complicated Media Buy. Low barriers to entry and easy-to-use Web site
authoring software have resulted in a proliferation of Web sites and Web
pages. eStats estimates that the number of Web sites in the United
States has grown to 3.6 million in 1999. As a result, advertisers are
faced with an increasingly complex and fragmented environment in which
to construct, purchase and implement their advertising campaigns.
. Lack of Technical and Creative Expertise. Advertisers are increasingly
seeking solutions that enable them to achieve their goals by integrating
sponsorships such as rich media and other marketing techniques into
their online advertising campaigns. Implementing online solutions
requires higher levels of technical and creative expertise.
. Engaging the Online User. Because Web users exercise control over their
online experience, online advertisers face greater difficulties in
engaging a user's attention than do advertisers utilizing broadcast
media who rely on the passive reception of their messages. The impact of
traditional banner ad campaigns is limited. As a result, online
advertisers have focused increasingly on developing campaigns that
engage online users and encourage their interaction with the
advertisements.
. Compiling Data and Extracting Value. In order to create effective
advertising campaigns, advertisers seek to gather relevant information
about Web users through various means, such as tracking technology,
which is able to track a user's movements through the Internet, and
modeling techniques, which are used to predict a Web user's online
behavior, and quickly analyze this information to continually refine
campaign strategies. Most advertisers do not have the technical
expertise to compile and analyze campaign performance data and, as a
result, require a third party solution.
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. Execution. Once advertisers have compiled and analyzed the information
gathered about Web users, they must be able to capitalize on the value
of this information to create tailored advertising campaigns and direct
these campaigns to specific groups of Web users. To maximize the
effectiveness of their campaigns, advertisers must be able to implement
changes in their strategies on a timely basis.
Challenges for Web Publishers
Web publishers seek to maximize the value realized from their available Web
site space, or ad inventory. They face several significant challenges,
including:
. Lack of Sales Expertise. Many Web publishers lack sufficient experienced
personnel to effectively sell ad space on their Web sites.
. Difficulty in Differentiation. The number of Web sites has increased
dramatically due in part to growth in the number of Web users, the
advent of easy-to-use Web site authoring software and the continuing
growth of electronic commerce. As a result, Web publishers increasingly
face difficulty in differentiating themselves to prospective advertisers
and in gaining access to advertising decision makers.
. Lack of Ad Delivery and Tracking Technology. Given the pace and scale in
which new ad delivery and tracking technology is evolving, many Web
publishers cannot afford to develop and maintain the technology
necessary to target, deliver and track Web advertising.
. Inventory Management. Maximizing the value of a Web publisher's
available Web site space, or ad inventory, requires efficient inventory
management. It is difficult for Web publishers to maintain price
consistency with their high-CPM ad packages while monetizing their
unsold ad inventory.
The L90 Solution
Our solution is designed to enable advertisers and Web publishers to take
advantage of the Internet as a marketing medium. We offer advertisers creative
campaign development and design services, strategic sales solutions and a
network of Web sites on which to place their ads. Our adMonitor technology
provides them with ad serving, contemporaneous campaign management,
measurement, reporting and transaction tracking capabilities. We offer Web
publishers the opportunity to focus on their core businesses while we provide
online advertising sales, ad inventory management and back office operational
support. Our comprehensive advertising solution combines our high value-added,
strategic ad campaign development services, an extensive knowledge of our Web
publishers and our adMonitor technology. We believe this combination enables us
to obtain improved pricing by maximizing the value of the ad inventory of our
Web publishers.
Benefits to Advertisers
. Strategic Advertising Sales Approach. Our highly skilled sales force
consults closely with advertisers and advertising agencies to determine
their needs and to construct effective advertising solutions that enable
them to realize their online advertising objectives. Utilizing this
consultative approach, we develop comprehensive campaigns that are
intended to achieve higher response rates in a fragmented and crowded
Web publishing marketplace.
. Design and Marketing Expertise. Our extensive design, creative
development and marketing expertise provides our clients with cost
savings in the development and
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deployment of their advertising campaigns. In addition, our design and
marketing expertise allows us to quickly develop and deploy these
advertising campaigns, resulting in an advantage for our clients in the
time it takes to implement an advertising campaign. Our skilled staff
has significant expertise in creating advertising campaigns that employ
leading-edge technologies and techniques, such as sponsorships or the
incorporation of rich media into the campaign and sponsorships. Further,
by maintaining a library of our successful advertising campaigns, we are
able to offer advertisers the ability to select pre-tested solutions
that can be quickly tailored to meet the advertisers needs and goals.
This "plug and play" functionality significantly reduces the time it
takes to implement an advertising campaign.
. Sponsorship Advertising. We have created sponsorship advertising
solutions that enable our advertising clients to develop campaigns that
go beyond traditional banner advertising. Our highly targeted solutions
utilize value-added features such as content integration, co-branding,
rich media and campaign structures such as promotions and sweepstakes.
We believe that our sponsorship solutions enable advertisers to place
their ads in a more relevant and targeted context. For example, by co-
branding an advertiser with a Web publisher or integrating the
advertiser's advertisement into the Web publisher's content, the
advertiser benefits from the Web publisher's existing relationship with
its users. We believe these placements generate higher returns by
leveraging the existing relationship between the Web user and the Web
site.
. Ad Serving and Tracking Technology. Our adMonitor technology delivers
advertising campaigns incorporating rich media, interactivity and ad
targeting. We aggregate information about Web users in our proprietary
databases that can be used on a standalone basis or in conjunction with
other data sources to deliver highly targeted advertising messages to
users across our entire network of Web sites. Additionally, advertisers
can access adMonitor through a Web browser, enabling them to view their
campaigns and obtain real-time reports. adMonitor also enables
advertisers to execute valuable testing programs, such as simultaneously
running a number of different campaigns, and to obtain real-time
performance feedback that assesses their relative effectiveness.
. Highly Targeted Advertising. The combination of our network of Web
sites, category sales specialists and adMonitor technology empowers us
to structure highly targeted campaigns for advertisers. Advertisers can
target delivery based on the Web user's demographic or behavioral data,
or on more complex parameters, such as future buying prospects.
. Direct Marketing Capabilities. We have considerable expertise in
creating direct marketing campaigns that incorporate creative
promotional offers and easy-to-use interactivity in order to realize
increased click-through rates and greater participation by Web users.
Our direct marketing campaigns include components such as interstitials,
sweepstakes, targeted e-mails, Web user registrations and other
techniques designed to encourage specific actions by users or to collect
valuable customer data.
Benefits to Web Publishers
. Outsourced Advertising Sales. Participants in our network benefit from
the services of our skilled sales force. By outsourcing online
advertising sales, Web publishers are able to focus on their core
competencies and avoid the significant investment and distraction of
developing an in-house sales force.
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. Improved Pricing. Based on our ability to deliver highly effective
campaigns, advertisers are willing to pay higher prices for the ad
inventory on our network. We believe the average CPM realized by our Web
publishers is substantially higher than the industry average.
. Efficient Inventory Management. adMonitor provides Web publishers with
an inventory management tool that generates useful real-time reports on
current and expected ad inventory. By monitoring each active ad
campaign, adMonitor continuously updates available inventory to properly
deliver ads on schedule and to ensure that Web publishers achieve a
superior revenue yield from their ad inventory. We seek to optimize
yield by selling packages that emphasize high CPM advertising campaigns,
including sponsorships, sweepstakes, promotions and content integration.
. Creating Visibility. Due to the proliferation in the number of Web
sites, it is often difficult for individual Web sites to gain the
attention of major advertisers. Through the aggregation of online ad
inventory from the Web sites we represent, our Web site network attracts
the attention of major advertisers. Inclusion in our network provides
Web publishers with access to a larger number of major advertisers.
. Web-Hosted Ad Serving and Tracking. adMonitor provides Web publishers
with centralized ad serving, targeting and tracking capabilities to
execute, manage and optimize advertising campaigns incorporating rich
media and sponsorships. Outsourcing this technology enables Web
publishers to avoid the significant investments associated with
developing this capability in-house.
. Flexible, Adaptable Technology Platform. Our adMonitor technology is
designed to be easily modified to incorporate new technologies in order
to meet the needs and demands of Web publishers and advertisers.
adMonitor's flexible technology also provides a platform for additional
direct marketing applications such as e-mail campaign management and
loyalty programs.
. Rapid Implementation. We can implement adMonitor quickly and simply to
begin serving ads for new Web publishing clients, typically within 24
hours. As a result, these clients can begin to generate revenue from the
sale of their ad inventory in a highly efficient manner.
Strategy
Our objective is to be the leading provider of comprehensive online
advertising and direct marketing solutions. The following are the key elements
of our strategy:
Capture a Greater Share of Online Advertising Budgets
We plan to capture a greater share of online advertising budgets by
continuing to strengthen our relationships with advertisers and ad agencies and
to provide comprehensive solutions that offer advertisers a broad range of
options. Due to the creative and strategic emphasis of our advertising
solutions, our sales executives typically work directly with senior advertising
executives in developing and implementing their campaigns.
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Grow Our Sales and Marketing Organization
In order to broaden our market coverage and expand our service offerings, we
intend to continue to grow our sales and marketing organization. We believe
that executing our strategy requires a knowledgeable and experienced sales and
marketing organization. We intend to complement our current staff of trained
professionals with additional qualified personnel, including increasing the
number of category sales specialists and hiring international specialists.
Selectively Expand Our Network of Web Publishers
By enhancing and selectively expanding our network of Web publishers, we
believe our marketing and sales solutions will become an increasingly
attractive choice for online advertisers and Web publishers. We intend to
expand our network by selectively adding new Web publishers that offer
attractive demographics, innovative and quality content, strong management,
brand name recognition and growing traffic. We strive to ensure that our
network of Web publishers will continue to provide the desired audiences for
advertisers.
Enhance and Expand Our adMonitor Technology
We intend to continue to enhance the performance and functionality of our
adMonitor technology. adMonitor has enabled us to become a leading provider of
centralized, outsourced advertising and direct marketing solutions. We believe
that the ability of our technology infrastructure to incorporate new devices,
technologies and targeting techniques, as well as its ability to grow with the
growth of the Internet, will continue to provide us with significant
competitive advantages.
Further Develop and Deploy Our Library of Creative Marketing Solutions
Our design, technical and marketing capabilities enable us to continually
develop new and interactive marketing techniques and solutions. Once designed
and implemented, these marketing and advertising solutions can be modified and
adapted to create new campaigns for multiple advertisers and Web sites. We
intend to enhance our design and creative capabilities and take advantage of
our library of pre-tested solutions in order to provide our advertising clients
with time-to-market and implementation advantages in the development and
deployment of their advertising campaigns.
Expand Our Direct Marketing Capabilities
Our adMonitor technology facilitates online direct marketing by aggregating
demographic and behavioral information about Web users from both our
proprietary databases and third-party sources, such as the consumer databases
of Donnelley Marketing. We are testing a new service through which users
visiting our publishers' Web sites can voluntarily provide personal data in
exchange for personalized ads and merchandise rewards. We intend to expand
these capabilities with the goal of enabling true one-to-one targeting.
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Products and Services
We offer products and services designed to provide our advertisers and our
Web publishers with comprehensive, customized online advertising solutions.
Advertising Solutions
In designing an advertising solution, we offer the following primary
advertising programs:
<TABLE>
<CAPTION>
Advertising Programs Description
- -------------------------------------------------------------------------------
<C> <S>
L90Premium . L90Premium leverages the strengths and
demographics of each of our premium Web
sites through advertising programs
featuring advertising components, such as
co-branding, content integration,
contextual sponsorships, rich media and
targeted banners, as well as promotions and
sweepstakes. We specialize in providing
three types of sponsorship opportunities:
. turnkey sponsorships, which are pre-
packaged programs that can be easily
and quickly implemented to meet the
objectives of the advertiser;
. customized sponsorships, which are
original programs specifically created
for, and based upon the marketing
objectives of, a specific advertiser;
and
. syndicated sponsorships, which are
genre-specific programs that run
across a selection of our premium Web
sites.
- -------------------------------------------------------------------------------
L90Targeted . L90Targeted enables an advertiser to run
ads across 12 distinct interest categories,
such as automotive, sports and technology.
Our category sales specialists possess in-
depth knowledge and understanding of their
respective categories and can assist
advertising clients in developing ad
campaigns that address audiences in these
categories.
- -------------------------------------------------------------------------------
L90R&E . L90R&E offers broad distribution across our
(Reach and Efficiency Network) entire network of Web sites for advertisers
interested in attaining the greatest reach
for the lowest and most efficient cost.
- -------------------------------------------------------------------------------
L90D.m. . L90D.m. programs are designed to reach
(Direct Marketing) targeted audiences and build qualified
marketing databases. These programs
include:
. L90Opt-in, which is a data-driven
research tool and rewards program,
enables us to develop detailed
profiles of consumers by providing
them with special promotions and
rewards in return for sharing insight
into their behaviors and interests.
. L90Link, which is a marketing tool
that uses the entire L90 network, our
adMonitor technology, and the power of
word-of-mouth marketing to generate
customer acquisitions. L90Link rewards
users for taking advantage of
promotional offers and forwarding
</TABLE> these offers to friends and
colleagues.
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Ad Serving and Tracking Technology
Through our Web-hosted adMonitor technology, we offer advertisers and Web
publishers the ability to selectively target and deliver ad campaigns that
incorporate rich media and other marketing features. In addition, adMonitor
enables advertisers to track, measure and manage the effectiveness of their ad
campaigns and receive real-time reports from any Web browser.
. Ad Serving. adMonitor delivers targeted advertising campaigns quickly,
consistently and on schedule. In addition, because adMonitor is a
centrally served technology platform administered from our facilities,
our Web publishing clients are not required to purchase additional
hardware, software or back-up systems to implement or utilize our
adMonitor services. Our adMonitor system is easily modified, can handle
significantly increased volume when needed, and is able to deliver
targeted and specialized advertising campaigns virtually
instantaneously. In addition, because adMonitor is capable of delivering
rich media content, advertisers have the freedom to develop complex
advertising solutions.
. Tracking. adMonitor allows our clients to track their advertising
audience's behavior and collect this information to build proprietary
databases. adMonitor tracks Web users' online behavior after they enter
one of our Web publisher's sites. As a result, we are able to construct
databases of user interests and purchasing habits based on their online
behavior. By applying analytical tools to our databases, we are able to
offer advertisers valuable demographic and behavioral information for
targeting campaigns.
. Targeting. adMonitor enables our advertising clients to target their
campaigns using a wide range of parameters, including domain, content
area, keyword, geography and user-profile data. By utilizing adMonitor's
advanced targeting capabilities, advertisers are able to direct their
campaigns at Web users who are most likely to respond.
. Monitoring. adMonitor provides advertisers with comprehensive
performance reports and the ability to adjust media plans, all in real-
time. Advertisers are able to track the progress of their campaigns from
their Web browsers. These reports contain detailed information such as
the Web sites included in an advertising campaign, the number of
impressions served, the click-through rates and the resulting sales, as
well as other performance measures. In addition, they provide the
information that advertisers need to actively manage their campaigns to
maximize effectiveness. adMonitor is fully Web-hosted and gives
advertisers the ability to optimize in real time the performance of
their advertising campaigns.
. Inventory Management. We provide our Web publishers and advertisers with
detailed, real-time information about current and future ad inventory.
adMonitor automatically monitors each advertising campaign in progress,
adjusts the delivery of ads for variations in site traffic and updates
available ad inventory based upon current advertising campaigns. Our
system ensures that advertising campaigns are optimally scheduled and
delivered and that our Web publishers maximize the value of their ad
inventory.
Our Network of Web Publishers
We currently represent approximately 97 Web publishers, 30 of which are in
our premium category. A Web publisher must satisfy a number of objective and
subjective criteria before we will designate it as "premium." The objective
requirements include measurable data such as minimum traffic volume. The
subjective requirements include matters such as high brand recognition,
desirable demographics and highly innovative content. For the nine months ended
September 30, 1999, our premium Web publishers accounted for 62% of our total
revenue derived from Web publishers. Our other Web publishers are generally
newer Web sites that we believe have high growth potential. The decision to
accept a Web publisher for representation is based on a number of criteria,
including the demographics of the Web site's users, the Web site's content
quality and brand name recognition, the level of existing and projected traffic
on the Web site, and sponsorship opportunities.
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The following table identifies our premium Web publishers as of December 31,
1999:
<TABLE>
<CAPTION>
Premium Web Sites
- ------------------------------------------------- -------------------------------------------------
Company Web Address Company Web Address
- --------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C>
Alloy Online, Inc. www.alloy.com Internet Shopping www.shoplet.com
- ------------------------------------------------- Outlet New York
AutoFusion, Inc. www.carprices.com Corp.
- --------------------------------------------------- ---------------------------------------------------
Bell Atlantic www.BigYellow.com JobsOnline, LLC www.jobsonline.com
Electronic ---------------------------------------------------
Commerce Liquid Audio, Inc. www.liquidaudio.com
Services, Inc. ---------------------------------------------------
- --------------------------------------------------- Lucasfilm Ltd. www.StarWars.com
Broadband Sports, Inc. www.athletedirect.com www.IndianaJones.com
- --------------------------------------------------- ---------------------------------------------------
Campus Pipeline, Inc. www.campuspipeline.com MaMaMedia, Inc. www.mamamedia.com
- --------------------------------------------------- ---------------------------------------------------
click2send.com, Inc. www.click2send.com Regards.com, Inc. www.regards.com
- --------------------------------------------------- ---------------------------------------------------
Extreme Interactive www.scoopswrestling.com Scour www.scour.net
Media, Inc. ---------------------------------------------------
- --------------------------------------------------- Sega of America www.sega.com
Freei Network, Inc. www.go.freei.net ---------------------------------------------------
- --------------------------------------------------- Small World, Inc. www.baseball.smallworld.com
Harry Knowles www.aint-it-cool-news.com www.football.smallworld.com
- --------------------------------------------------- www.golf.smallworld.com
The HolidayChannel, www.holidaychannel.com www.hockey.smallworld.com
Inc. www.hoops.smallworld.com
- --------------------------------------------------- www.tennis.smallworld.com
Hollywood.com, Inc. www.hollywood.com ---------------------------------------------------
- --------------------------------------------------- Sportspage.com, www.sportspage.com
Homestead www.homestead.com Inc.
Technologies ---------------------------------------------------
- --------------------------------------------------- Starchefs www.starchef.com
iFilm Corporation www.ifilm.com ---------------------------------------------------
- --------------------------------------------------- TargetMatch & www.datingclub.com
IMS, Inc. www.kanoodle.com NetMatch www.jobmatch.com
- --------------------------------------------------- www.matchonline.com
Infonautics Corp. www.companysleuth.com www.open4assistance.com
www.elibrary.com www.singlesmonthly.com
www.encyclopedia.com www.travelmatch.com
www.jobsleuth.com ---------------------------------------------------
www.researchpaper.com Weider www.fitnessonline.com
www.sportssleuth.com Publications www.shapeonline.com
- --------------------------------------------------- ---------------------------------------------------
Whatis.com, Inc. www.whatis.com
---------------------------------------------------
The WinSite www.winsite.com
Group, Inc.
---------------------------------------------------
</TABLE>
Our entire network of Web publishers is organized into 12 categories. We
determine the category of a Web site based primarily on its content.
Advertisers may choose to target their ads on sites within one or more of these
categories. Some of our Web sites may fall into multiple categories if they
provide a broad range of content.
Web Site Categories
<TABLE>
<S> <C> <C>
. Automotive . E-Commerce . Sports
. Business/Finance . Entertainment . Technology
. College . Health/Fitness . Travel
. Directories/Portals . Kids/Teens . Women
</TABLE>
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Our Advertising Clients
In connection with the representation of our Web publishers, we have
developed relationships with, and continue to focus our sales and marketing
efforts on, online advertisers and advertising agencies. Since inception, over
500 advertisers from a variety of industries have utilized our services. Our
experienced sales and marketing organization works closely with advertisers and
advertising agencies to enhance the effectiveness of their online advertising
campaigns. No advertising client represented more than 10% of our revenue for
the nine months ended September 30, 1999.
Set forth below is a list of the top 20 advertisers during the nine month
period ended September 30, 1999. The following list of advertisers accounted
for 47.4% of the total revenue derived from advertisers for the nine months
ended September 30, 1999.
Top 20 L90 Advertisers
<TABLE>
<S> <C>
Ameritech Improvenet
Ask Jeeves iVillage
AutoConnect Microsoft
Chevrolet Netscape
Computers4SURE Target Match
Deluxe Entertainment Tickets.com
Dynamic Telecommunications Uproar
Galaxi World Visa
Gateway VR Services
Honda Wired Solutions
</TABLE>
Selected Customer Applications
The following customer case studies are a few examples of comprehensive
advertising solutions we have developed for our advertising clients.
Tickets.com--Brand Building, Ticket Sales and Database Generation
Tickets.com is a premier online resource for event information and tickets,
updating traditional ticketing distribution practices with today's Internet
technology. Tickets.com required an online advertising and marketing solution
that would generate brand awareness, increase market share, drive traffic to
their Web site and build a targeted database.
Working closely with Tickets.com, our marketing and creative teams designed
an integrated sponsorship program that is featured on three of our premium
entertainment and sports Web sites. Our advertising solution places Tickets.com
in contextually-relevant Web site content and positions Tickets.com as the
premier ticket buying and information resource. Specifically, the Tickets.com
sponsorship program utilizes a combination of content integration, contextual
offers, co-branded sites within the host Web publisher's site, and sweepstakes
elements to generate brand awareness for Tickets.com and drive users to the
Tickets.com Web site. For example, we created a "Take Me to the Big Game"
sweepstakes on Small World's Web sites that offers visitors the opportunity to
win tickets to premier sporting events, including the championships of the four
major professional sports.
Additionally, our adMonitor technology enables Tickets.com to capture
registration details at the Web sites on which this sponsorship is featured, as
well as track the movement of visitors through the Web sites. Tickets.com uses
this information to create user profiles based on declared and inferred
behavioral data. By building this growing database of individual user profiles,
Tickets.com intends to provide
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customized offers, such as local sports or special interest tickets, targeted
to individual Web users or groups of users. This campaign demonstrates our
expertise at developing multi-pronged solutions that meet an advertiser's
objective and highlights adMonitor's targeting and database building
capabilities.
Visa--Preferred Card Placement, Market Share Penetration and Card Usage
Visa, one of the premier brand names in electronic payment methods, sought a
solution that would take advantage of the Internet as a new commerce vehicle.
Visa's goals were to strengthen their brand recognition, reinforce current
customer loyalty and increase their overall credit card market share.
We leveraged Music Boulevard's niche as a leading e-commerce site to create a
customized sponsorship for Visa. The sponsorship included "Visa, the Preferred
Card" banner placements throughout the Music Boulevard site, "Visa, the
Preferred Card" banner placements on all checkout pages of the site, and Visa
sponsorship of Rocktropolis' AllStar Column, Classical Insites' Hall of Fame
and Jazz Central Stations' Events on Music Boulevard. In addition, Visa was
featured as the default payment choice on each checkout page on Music
Boulevard. Moreover, if a user attempted to use another payment choice, the
user was presented with a $2 coupon for use on future Music Boulevard
purchases, provided that the user switched to Visa as the form of payment. Due
to the success of the Visa campaign in increasing Visa's marketshare over its
competitors, this campaign, which was originally scheduled to run for six
months, was extended for an additional six months.
iVillage--Integrated Sponsorship Across Online and Print Media
iVillage, the leading women's community site, offers women's health and
fitness information, parenting advice, financial insight, e-mail, chat rooms
and personal homepages. iVillage required an advertising campaign that would
grow its market share and reach a broad demographic cross-section of women.
Our marketing and creative teams designed a comprehensive campaign that takes
advantage of both the online and offline media properties of Weider
Publications, which produces both print magazines, such as Shape, Men's Fitness
and Muscle & Fitness, and Web sites, such as Fitness Online and Shape Online.
Using our adMonitor technology, we serve targeted banner placements throughout
Shape Online and the women-centric areas of Fitness Online, as well as banner
placements throughout Fitness Online. In addition to the online components, the
iVillage campaign includes recurring print ads in Shape magazine. These print
ads are used to build brand awareness for iVillage, to drive readers to the
iVillage Web site and to promote new offerings at iVillage. This campaign has
been running for over nine months and receives an average click-through rate,
or the number of users clicking on an advertisement, that is twice as high as
the industry average. This integrated sponsorship demonstrates our ability to
couple the attributes of online and offline media properties to build an
effective advertising campaign.
OshKosh B'Gosh, Inc. Building Product Awareness for the Genuine Girl Product
Line
Genuine Girl is a new product line from the popular children's clothing
manufacturer OshKosh B'Gosh, Inc. OshKosh B'Gosh needed a creative advertising
solution that would allow them to introduce the Genuine Girl product to their
desired audience, encourage consumer interaction with the product and
ultimately drive users to a retail store to purchase the product.
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Building on the interactive activities featured on MaMaMedia, we helped
create the OshKosh B'Gosh sponsored Genuine Girl program on MaMaMedia. One of
MaMaMedia's popular features is an activity that enables users to create
online, interactive stickers. We customized this activity for OshKosh B'Gosh's
Genuine Girl product line and tailored the program to young girls. By visiting
the Genuine Girl sponsored activity, children are able to create and print out
their own Genuine Girl interactive stickers by dragging and pasting rich media
items, such as talking girls, flowering stars and fluttering butterflies onto
this virtual sticker. By integrating the OshKosh B'Gosh Genuine Girl product
line into the MaMaMedia Web site, OshKosh B'Gosh is able to reach their target
audience in a creative and effective manner. This campaign has resulted in an
average click-through-rate of 15%.
Launch Media Inc. --Response Driven Direct Marketing
Launch Media, Inc. is a digital media company dedicated to creating the
premier Internet destination for discovering new music. Launch was seeking to
acquire new customers and introduce users to its subscription-based CD-ROM
offering.
Taking advantage of our network of Web sites, we developed a direct marketing
solution for Launch designed to reach a diverse group of users and offer them a
trial subscription to Launch. The program incorporates direct marketing
components, such as interstitials, sweepstakes and other opt-in opportunities
throughout a group of Web sites, all of which invite users to "opt-in" to
receive free trial issues of the Launch CD-ROM. This effective direct marketing
solution results in a monthly average of 1,000 user sign-ups.
Levi's Contextual Sponsorship for the Roll-Out of the Levi's E-Commerce Site
Levi's is a leading clothing manufacturer, best known for its manufacturing
and distribution of jeans. Until the advent of the Internet, Levi's primarily
relied on traditional retail stores to distribute its products. Levi's wanted
to introduce Web users to their new e-commerce Web site and tie their online
advertising campaign with their offline marketing plans, which featured their
support of music.
We worked in tandem with Levi's advertising agency, USWeb/CKS, to develop a
co-branded Levi's Web site, the Rock n' Roll Jeans Factory, that was embedded
within the content of Music Blvd.'s Rocktropolis Web site. This co-branded Web
site was designed to allow the user to interact with the new Levi's e-commerce
store while remaining within the Music Blvd. Web site. This program enabled
Levi's to successfully introduce their e-commerce offering to users while they
remained in a familiar landscape.
"Shop the Seasons" Syndicated Shopping Guide and Direct Marketing Solution
We developed the Shop the Seasons campaign in response to e-commerce
advertisers' need for holiday-centric shopping areas. We created the Shop the
Seasons Web site that presents users with a multitude of unique gift
suggestions that are continuously rotated and optimized according to each
advertiser's product offerings. This Web site also includes a promotional
ticker that continuously scrolls through special offers from participating
advertisers. The Shop the Seasons Web site is syndicated across and placed
within the content of our entire network of Web sites.
Additionally, we utilized adMonitor to build the Holiday Helper, a technology
that allows consumers to save a shopping list of the products they want to buy
while moving from advertiser site
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to advertiser site. Users are able to e-mail their personal shopping list to
friends and family for future shopping. In designing the Shop the Seasons
campaign, we incorporated a direct marketing and database building component
that requires users to submit their e-mail address in order to receive
promotional offers and allows them to "opt-in" to receive future offers from
the gift guide's advertisers. The Shop the Seasons campaign highlights an
original concept developed with the expertise of our sales, marketing, creative
and technology teams.
Privacy Concerns
We believe that issues relating to the privacy of Internet users and the use
of personal information about these users are extremely important. In
implementing any service or program designed to gather personal data about Web
users, we are always mindful of our continuing commitment to uphold the privacy
principles of the Direct Marketing Association. These privacy principles
include:
. a prominent, easy to read, online notice of a marketer's information
practices and a user's opportunity to opt out or prohibit the disclosure
of any personal information collected;
. the posting of online solicitations to newsgroups, bulletin boards and
chat rooms only when consistent with the forum's stated policies; and
. additional principles that apply to online activities directed primarily
at children.
Sales and Marketing
Our sales and marketing staff is trained to work strategically with our Web
publishers and advertisers to develop comprehensive advertising solutions. We
believe that advertisers desire sponsorship opportunities that go beyond the
banner to include content integration, contextual sponsorships, promotions,
sweepstakes, e-mail sponsorships, interstitials, custom content and other
highly effective advertising tools. We have assembled a sales and marketing
staff that possesses the marketing, media, creative and advertising skills
required to develop these types of large, comprehensive advertising campaigns.
We have close relationships with, and detailed knowledge of, our Web
publishers. Consequently, we are able to work with advertisers in developing
customized and effective advertising solutions.
We sell our advertising solutions in the United States through a sales and
marketing team consisting of a total of 75 employees as of December 31, 1999.
Our sales and marketing team is organized in a matrix fashion and includes
account executives, who sell all of our Web site ad inventory, and category
sales specialists, who focus on a specific field of content. Currently, our
sales and marketing team is organized according to five geographic regions.
Our experienced Web publisher and advertiser sales and marketing personnel
use a variety of marketing programs to generate demand for our products and
services, build market awareness, develop customer leads and establish business
relationships. Our marketing activities include public relations, print
advertisements, online advertisements and direct marketing, Web advertising
seminars, trade shows, special events, sponsorships and ongoing customer
communications programs.
Technology Platform
We have developed a centralized ad serving and tracking system that is
resident in our facilities. adMonitor is a flexible and versatile system with
the ability to adapt to specific advertiser and Web
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publisher needs. Complex ad campaigns can be quickly developed and implemented
using our technology. adMonitor supports most leading Web tools and
technologies, including JAVA, Java Script, RealAudio, Enliven and VRML and is
capable of delivering these advertising campaigns containing rich media and
interstitials. Moreover, adMonitor is compatible with most leading host
servers.
adMonitor has the ability to selectively serve advertisements to and track
the movements of Web users. Upon viewing and downloading a Web page of one of
our Web publishers, the user is automatically and discretely directed to the
adMonitor system to retrieve an advertisement. Our adMonitor system, based on
the user's profile and the current ad campaign, matches a set of advertisements
to the user and selects the appropriate ad to display. Through the use of
cookies, adMonitor is also able to track the user's movements through the Web
publisher's site. adMonitor provides advertisers real-time reporting tools.
Advertisers can log into the adMonitor system from any Web browser to access
reports on their campaigns. All reports are real-time and can be customized to
satisfy the needs of the advertiser.
adMonitor functions on a fully redundant, high performance system built with
an emphasis on capacity and speed. We use a combination of products from Sun
Microsystems, Cisco Systems, Microsoft, Oracle, 3Com and F5 Labs to support
adMonitor's scalability and reliability. adMonitor is deployed on hardware
resident in multiple, secure data centers located across the United States in
three facilities operated by Exodus Communications, where technical support is
provided 24 hours a day, seven days a week.
Competition
The online advertising market is extremely competitive. We believe that our
ability to compete depends upon many factors both within and beyond our
control, including the following:
. the timing and market acceptance of new solutions and enhancements to
existing solutions developed either by us or our competitors;
. the continued and increasing acceptance by advertisers of the Internet
as an effective and cost-efficient means of advertising;
. the ability to adapt to the rapidly changing trends of the Internet;
. our customer service and support efforts;
. our sales and marketing efforts;
. our ability to adapt and scale our technology as customer needs change
and grow; and
. the ease of use, performance, price and reliability of solutions
developed either by us or our competitors.
As we expand the scope of our Web services, we may face greater competition
from a number of Web sites and other media companies across a wide range of
different Web services, including in vertical markets where competitors may
have advantages in expertise, brand recognition and other factors. Several
companies offer competitive products or services through Web advertising
networks, including 24/7 Media, DoubleClick and Flycast Communications. Our
business may also encounter competition from providers of advertising inventory
and database management products and related services, including AdForce,
DoubleClick and Engage Technologies. In addition, we may face potential
competition from a number of large Web publishers and Web search engine
companies,
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such as America Online, Excite@Home, Infoseek and Yahoo!. We also compete with
television, radio, cable and print for a share of the overall advertising
budgets of advertisers.
Intellectual Property Rights
Our success and ability to compete are substantially dependent on our
internally developed technologies, including adMonitor, and trademarks that we
protect through a combination of intellectual property laws. We have applied to
register trademarks in the United States. We cannot guarantee that any of our
trademark registrations will be approved. Even if they are approved, these
trademarks might be successfully challenged by others or invalidated.
Furthermore, if our trademark registrations are not approved because third
parties own these trademarks, our use of these trademarks will be restricted
unless we enter into arrangements with these third parties. We cannot assure
you that we can enter into arrangements with these third parties on
commercially reasonable terms.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite these efforts, unauthorized parties may attempt to
disclose, obtain or use our advertising solutions or technologies. Our
precautions may not prevent misappropriation of our advertising solutions or
technologies, particularly in foreign countries where laws or law enforcement
practices may not protect our rights as fully as in the United States.
Our technology collects and utilizes data derived from user activity on the
Internet. This information is used for targeting advertising and predicting
advertising performance. Although we believe that we generally have the right
to use this information and to compile it in our database, we cannot assure you
that any trade secret, copyright or other protection will be available for this
information. In addition, others may claim rights to this information.
Furthermore, we cannot guarantee that any of our other intellectual property
rights will be viable or valuable in the future since the validity,
enforceability and scope of protection of intellectual property rights in
Internet related industries is uncertain and still evolving. In addition, third
parties may assert infringement claims against us. Any claims could subject us
to significant liability for damages and could result in the invalidation of
our intellectual property rights. In addition, any claims could result in
litigation, which would be time-consuming and expensive to defend, and divert
our time and attention. Even if we prevail, this litigation could cause our
business, results of operations and financial condition to suffer. Any claims
or litigation from third parties may also result in limitations on our ability
to use the intellectual property subject to these claims or litigation unless
we enter into arrangements with the third parties responsible for these claims
or litigation, which could be unavailable on commercially reasonable terms. We
believe that factors such as the technological and creative skills of our
personnel, new service offerings, brand recognition and reliable customer
service are more essential to establishing and maintaining our position in the
marketplace, rather than the legal protection of our technology. There can be
no assurance that others will not develop technologies that are similar or
superior to our technology.
On November 12, 1999, DoubleClick filed a lawsuit against us in the United
States District Court for the Eastern District of Virginia. The suit alleges
that we are infringing, and inducing and contributing to the infringement by
third parties of, a patent held by DoubleClick related to methods and networks
for delivering, targeting and measuring advertising over the Internet.
DoubleClick is seeking treble damages in an unspecified amount, a preliminary
and permanent injunction from
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further alleged infringement and attorneys' fees and costs. We believe we have
meritorious defenses to this lawsuit and intend to defend ourselves vigorously.
We currently believe that this lawsuit and its outcome will not cause any
material harm to our business. However, the litigation could result in
significant expenses and diversion of management time and other resources. If
DoubleClick is successful in its claims against us, then we may be hindered or
even prevented from competing in the Internet advertising market and our
operations would be severely harmed. See "Risk Factors -- Intellectual property
infringement claims, including claims by DoubleClick against us, could prevent
or hinder our ability to delivery advertisements over the Internet" and
"Business--Legal Proceedings" for more information relating to the DoubleClick
suit.
Employees
As of December 31, 1999, we had 113 full-time employees, including 75 in
sales and marketing, 24 in engineering and product development and 14 in
accounting, human resources, business operations and administration. In
addition, we had three part-time employees. We are not subject to any
collective bargaining agreements and believe that our employee relations are
excellent. Our future success depends in part on our ability to attract,
retain, integrate and motivate highly-skilled employees. Competition for
employees in the industry is intense.
Legal Proceedings
On November 12, 1999, DoubleClick filed a lawsuit against us in the United
States District Court for the Eastern District of Virginia. The suit alleges
that we are infringing, and inducing and contributing to the infringement by
third parties of, a patent held by DoubleClick related to methods and networks
for delivering, targeting and measuring advertising over the Internet.
DoubleClick is seeking treble damages in an unspecified amount, a preliminary
and permanent injunction from further alleged infringement and attorneys' fees
and costs. We believe we have meritorious defenses to this lawsuit and intend
to defend ourselves vigorously. We currently believe that this lawsuit and its
outcome will not cause any material harm to our business. See "Risk Factors--
Intellectual property infringement claims, including claims by DoubleClick
against us, could prevent or hinder our ability to delivery advertisements over
the Internet."
In addition to the DoubleClick lawsuit, we periodically may become subject to
other legal proceedings in the ordinary course of our business. We are not
currently involved in any such other proceedings which we believe will
materially and adversely affect us.
Facilities
Our principal executive offices are located in Santa Monica, California,
where we lease approximately 11,000 square feet under a lease that expires on
December 31, 2000. We also lease approximately 6,000 square feet of space in
another facility in Santa Monica, California. In addition, we lease space for
our sales and marketing efforts in Chicago; Franklin, Michigan; New York; and
San Francisco. Our adMonitor ad serving and tracking software and hardware is
housed in Irvine, California and Santa Clara, California. These two facilities
provide us with a secure area to store and operate our computer systems and
capacity for communications links and Internet connectivity systems. We are
continually evaluating our facility requirements. We believe that our existing
leased space is more than adequate for our current operations, and that
suitable replacement and additional space will be available in the future on
commercially reasonable terms.
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MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees and their positions and
ages, as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William M. Apfelbaum........... 52 Chairman of the Board of Directors
John C. Bohan.................. 35 President, Chief Executive Officer and
Director
Thomas A. Sebastian............ 35 Senior Vice President, Chief Financial
Officer and Assistant Secretary
Mark D. Roah................... 30 Senior Vice President of Business
Development and Director
Christopher J. Cardinali....... 35 Vice President of Northwestern Sales,
Secretary and Director
Frank A. Addante............... 23 Chief Technology Officer
Sean P. Cowan.................. 32 Senior Vice President of New York Sales
Keith J. Kaplan................ 31 Senior Vice President of National Sales
Peter G. Diamandis............. 67 Director
Peter E. Ligeti................ 44 Director
Glenn S. Meyers................ 38 Director
G. Bruce Redditt............... 48 Director
Peter Sealey................... 59 Director
</TABLE>
William M. Apfelbaum has served as our Chairman of the Board and a director
since September 1998. Mr. Apfelbaum has been the President and Chief Executive
Officer of TDI Worldwide, a wholly-owned subsidiary of CBS, since 1989. Mr.
Apfelbaum is also the founder of CBS Plus which oversees advertising sales
across all seven of CBS's media divisions, including their Internet-based
properties. Mr. Apfelbaum graduated with a B.A. from New York University. He
has guest lectured at the Harvard Business School, the London Business School
and New York University's Stern School of Business.
John C. Bohan has served as our President and Chief Executive Officer and a
director since our inception. Mr. Bohan is a co-founder of L90. From April 1995
to December 1996, he was Executive Vice President for Screaming Media, formerly
known as Interactive Connection. From August 1994 until March 1995, Mr. Bohan
served as an advertising sales Account Executive for USA Networks. Mr. Bohan
worked as a cable advertising sales Account Executive for Landmark
Communications in both New York City and Los Angeles from February 1990 to
August 1994. Mr. Bohan graduated with a B.A. in Economics from Middlebury
College.
Thomas A. Sebastian has served as Chief Financial Officer, Senior Vice
President and Assistant Secretary of L90 since July 1999. Between June 1997 and
June 1999, Mr. Sebastian served as Vice President of Finance of Fair, Isaac &
Company. Between May 1996 and May 1997, he was an Investment Banker at Volpe,
Brown, Whelan & Company. Between June 1994 and May 1996, Mr. Sebastian worked
as Corporate Finance Manager at Hewlett-Packard Company. Mr. Sebastian
graduated with a B.S. in Computer Science from the University of Virginia and
an M.B.A. from the Anderson School at UCLA.
Mark D. Roah has served as our Senior Vice President of Business Development
since April 1999 and has served as a director of L90 since our inception. Mr.
Roah is a co-founder of L90. From
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January 1997 to April 1999, he served as our Vice President of Southwestern
Sales. Between January 1996 and December 1996, Mr. Roah worked as an Account
Executive at Screaming Media, formerly known as Interactive Connection. From
August 1992 until November 1994, Mr. Roah worked as a Financial Analyst at
Shaman Pharmaceuticals and between November 1994 and December 1995 he was a
Marketing Manager for ICS Communications. Mr. Roah graduated with a B.S. in
Finance from San Francisco State University.
Christopher J. Cardinali has served as our Vice President of Northwestern
Sales and Secretary and has served as a director since our inception. Mr.
Cardinali is a co-founder of L90. Between January 1996 and December 1996, Mr.
Cardinali worked as an Account Executive at Screaming Media, formerly known as
Interactive Connection. Between June 1995 and December 1995, he was a
consultant for Halo Interactive. Mr. Cardinali graduated with a B.A. in
Economics and Philosophy from Boston College and also received an M.B.A. from
the Anderson School at UCLA.
Frank A. Addante has served as our Chief Technology Officer since February
1998. Between January 1995 and February 1998, Mr. Addante served as Vice
President of ReaXions, Inc., an Internet advertising and e-commerce technology
development company. Between January 1997 and February 1998, ReaXions provided
technology consulting services to L90, during which time Mr. Addante served as
our primary contact within ReaXions. Prior to January 1995, Mr. Addante
attended the Illinois Institute of Technology.
Sean P. Cowan has served as our Senior Vice President of New York Sales since
October 1999. Between September 1997 and September 1999, Mr. Cowan served as
Vice President, National Sales, for Paramount Advertiser Services, Paramount
Pictures. Between September 1992 and September 1997, he served as an Account
Executive for Paramount Advertiser Services, Paramount Pictures. Mr. Cowan
graduated with a B.S. in Marketing from State University of New York, College
at Oswego.
Keith J. Kaplan has served as our Senior Vice President of National Sales
since October 1999. Between August 1998 and September 1999, Mr. Kaplan served
as National Account Manager for Transportation Displays Incorporated. Between
April 1995 and August 1998, Mr. Kaplan served as Northeast Division Manager for
Paramount Pictures. From February 1990 to April 1995, he served as National
Sales Manager for Cablevision Systems (SportsChannel). Mr. Kaplan graduated
with B.A. in Communications from Syracuse University.
Peter G. Diamandis has served as one of our directors since August 1999. Mr.
Diamandis is currently a managing member of DigaComm, L.L.C., a private
investment firm. Between February 1991 and September 1996, he served as Vice
Chairman of DM Holdings, Inc., the parent company of Donnelley Marketing, Inc.
Mr. Diamandis was also the founder or publisher of several popular magazines,
including Self Magazine, New York and Mademoiselle. Mr. Diamandis serves on the
board of directors of Big Flower Press Holdings, Inc. Mr. Diamandis graduated
with a B.S. in Finance from Bucknell University.
Peter E. Ligeti has served as a director of L90 since August 1999. Since
1988, Mr. Ligeti has been a principal of Keystone Venture Capital, a
Philadelphia-based venture capital firm, where he has managed many of
Keystone's technology-related investments and provided financing to emerging
growth companies. Mr. Ligeti has represented Keystone on the boards of such
companies as Solbright, Nettech, BATNET, Hollywood Stock Exchange, Integrated
Circuit Systems, Paradigm Software Technologies, Ansoft, Infonautics and
National Medical Technologies. Mr. Ligeti graduated with a B.A. from Harvard
University and an M.B.A. from the Wharton School at the University of
Pennsylvania.
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<PAGE>
Glenn S. Meyers has served as one of our directors since September 1999.
Since April 1998, Mr. Meyers has served as a director and the President and
Chief Executive Officer of Rare Medium Group, Inc. Mr. Meyers has also served
as a director and Chief Executive Officer of Rare Medium, Inc. since September
1995. Prior to September 1995, Mr. Meyers served as President of Brookridge
Capital Management, an Internet venture capital firm. Mr. Meyers graduated with
a B.S. from the University of Florida School of Business Administration.
G. Bruce Redditt has served as one of our directors since September 1999.
Since May 1998, Mr. Redditt has served as Executive Vice President of Omnicom
Group Inc. His duties include overseeing Communicade, a division of Omnicom
Group that holds investment positions in companies specializing in Web-based,
interactive media services. Between July 1995 and April 1998, Mr. Redditt
served as Executive Vice President of Sony Pictures Entertainment. Between July
1986 and June 1995, Mr. Redditt held a number of communication positions within
GTE Corporation, last as Corporate Vice President. Mr. Redditt graduated with a
B.S. from Florida State University.
Peter Sealey has served as one of our directors since August 1999. Dr. Sealey
has been a Lecturer and an Adjunct Professor of Marketing at the Haas School of
Business at the University of California, Berkeley since 1994. In addition,
during the same period Dr. Sealey has been self-employed as a management
consultant. Dr. Sealey was employed by the Coca-Cola Company for 24 years,
where he held a series of senior management positions, including Senior Vice
President, Global Marketing. Dr. Sealey serves on the board of directors of
Autoweb.com, Cybergold, Inc. and USWeb Corporation. Dr. Sealey graduated with a
B.S. from the University of Florida, an M.I.A. from Yale University, and an
M.A. and a Ph.D. from Claremont Graduate University.
Composition of the Board
Our board of directors has nine authorized members. Our certificate of
incorporation and a stockholders agreement to which substantially all our
stockholders are a party provide that one director is to be elected by the
holders of the Series A preferred stock, three are to be elected by the holders
of the Series B preferred stock, one is to be elected by the holders of the
Series C preferred stock (which member is to be designated by Rare Medium
Group, Inc.) and four are to be elected by the holders of the common stock, one
of whom is to be nominated by the other eight directors. These election rights
of the Series A, Series B preferred and Series C preferred stockholders will
expire upon the closing of this offering upon conversion of their preferred
stock into common stock. The stockholders agreement will also expire at that
time. Thereafter, all directors will be elected by the holders of common stock.
Members of the board of directors will be elected each year at our annual
meeting of stockholders, and serve until the following annual meeting of
stockholders or until their respective successors have been elected and
qualified.
Board Committees
We have established an audit committee, comprised of Mr. Ligeti and Mr.
Diamandis, and a compensation committee, comprised of Mr. Apfelbaum and Mr.
Sealey. The audit committee reviews our internal accounting procedures and
consults with and reviews the results and scope of the audit and other services
provided by our independent accountants. The compensation committee administers
our stock option plans and reviews and approves the compensation and benefits
for our key executive officers. This committee also establishes and reviews
general policies relating to compensation and benefits of our employees.
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Director Compensation
Other than reimbursing directors for customary and reasonable expenses of
attending board and committee meetings, we do not currently compensate our non-
employee directors.
Employment Agreements
In September 1999, we entered into at-will employment agreements with each of
Messrs. Bohan, Sebastian, Roah, Cardinali and Addante. These agreements provide
for annual base salaries of $58,000, $130,000, $100,000, $60,000 and $81,600,
respectively. In addition, these agreements provide for sales commissions for
Messrs. Bohan, Roah, Cardinali and Addante in accordance with our then current
policy. Each agreement provides for an initial two-year term, and is
automatically renewed for successive one-year terms, unless otherwise
terminated in writing by us or the employee prior to 30 days before the
expiration of the initial term or any successive term. These agreements provide
for customary benefits and for the ongoing payment to each of these employees
of their base salaries for the balance of the initial term or any successive
term if he is terminated without cause. In November 1999, we entered into an
arrangement with Mr. Sebastian governing the vesting of stock options and
restricted stock grants upon a termination of his employment following a change
in control. The agreement provides that all of Mr. Sebastian's options and
restricted stock grants shall become exercisable upon a termination of his
employment following a change in control. In addition, the agreement provides
that in the event of a termination of his employment following a change in
control, Mr. Sebastian will receive a cash payment to offset the effects of any
"excess parachute" excise tax imposed upon him.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or paid
to our Chief Executive Officer and the other executive officers whose cash
compensation exceeded $100,000 in 1999 for services rendered to L90 in all
capacities during 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
Name and Principal ------------ Other Annual Shares Underlying All Other
Position Salary Compensation(1) Options Compensation
- ------------------ ------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C>
John C. Bohan........... $58,000 $204,649 -- --
President and Chief
Executive Officer
Thomas A. Sebastian..... $85,000 -- 166,666 --
Senior Vice President,
Chief Financial
Officer and Assistant
Secretary
Christopher J.
Cardinali.............. $60,000 $ 69,480 133,333(2) $4,800(3)
Vice President of
Northwestern Sales
Mark D. Roah............ $39,792 $111,985 133,333(2) $4,800(3)
Senior Vice President
of Business
Development
Frank A. Addante........ $63,600 $ 39,344 640,000 --
Chief Technology
Officer
</TABLE>
- --------
(1) The amounts listed in "Other Annual Compensation" is comprised solely of
sales commissions.
(2) These shares underlie an option granted by John C. Bohan to the option
holder. The option and the shares underlying the option may be deemed
compensation received by the option holder for services rendered to L90.
(3) This amount represents a vehicle allowance.
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<PAGE>
Option Grants in 1999
The following table sets forth information regarding options granted to the
named executives during the year ended December 31, 1999. We have not granted
any stock appreciation rights. Options were granted at an exercise price equal
to the fair market value of the common stock at the date of the grant. In
determining the fair market value of the common stock, the board of directors
considered various factors, including recent arms' length transactions, our
financial condition and business prospects, operating results, the absence of a
market for the common stock and the risks normally associated with investments
in companies engaged in similar businesses. The term of each option granted is
generally 10 years from the date of grant. Options may terminate before their
expiration dates, if the optionee's status as an employee is terminated or upon
the optionee's death or disability.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to for Option Term(3)
Options Employees Exercise Price Expiration ---------------------
Name Granted in 1999 Per Share Date 5% 10%
- ---- ---------- ---------- -------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John C. Bohan........... -- -- -- -- -- --
Thomas A. Sebastian..... 166,666 10.1 $3.53 Aug. 17, 2009 $ 369,998 $ 937,648
Christopher J.
Cardinali.............. 133,333(1) 7.5(2) $3.53 Aug. 10, 2009 $ 295,999 $ 750,119
Mark D. Roah............ 133,333(1) 7.5(2) $3.53 Aug. 10, 2009 $ 295,999 $ 750,119
Frank A. Addante........ 640,000 38.9 $3.53 Aug. 10, 2009 $1,420,798 $3,600,583
</TABLE>
- --------
(1) These shares underlie an option granted by John C. Bohan to the option
holder. The option and the shares underlying the option may be deemed
compensation received by the option holder for services rendered to L90.
(2) This percentage only includes 133,333 shares underlying an option that may
be deemed compensation received by the option holder for services rendered
to L90.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted based upon the
fair market value on the date of grant. These assumptions are not intended
to forecast future appreciation of our stock price. The amounts reflected
in the table may not be achieved.
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<PAGE>
1999 Year-Ended Option Values
The following table sets forth for each of the named executives information
concerning the number of shares subject to both exercisable and unexercisable
stock options as of December 31, 1999. Also reported are values for "in-the-
money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of our common
stock as of December 31, 1999. None of the named executives exercised any
options in 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at FY-End Options at FY-End(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John C. Bohan.............. -- -- -- --
Thomas A. Sebastian........ -- 166,666 -- $1,244,995
Christopher J. Cardinali... 266,666 -- $2,411,994 --
Mark D. Roah............... 266,666 -- $2,411,994 --
Frank A. Addante........... 333,333 306,667 $2,489,998 $2,290,802
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option as of December 31, 1999, which the
Board of Directors has determined to be $11.00 per share, and the exercise
price of the named executive's options. In determining the fair market
value of L90's common stock, the board of directors considered various
factors, including L90's financial condition and business prospects, its
operating results, the absence of a market for its common stock and the
risks normally associated with technology companies.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was adopted by the board of directors on April
30, 1999, and provides for awards or sales of shares and options, including
incentive stock options and nonstatutory stock options. A total of 2,333,333
shares of common stock has been reserved for issuance under our 1999 Stock
Incentive Plan.
Our 1999 Stock Incentive Plan is administered by our compensation committee
of the board of directors. The board of directors may amend our 1999 Stock
Incentive Plan as it desires without further action by our stockholders except
as required by applicable law. Our 1999 Stock Incentive Plan will remain in
effect until terminated by the board or for a term of 10 years from its
original adoption date, whichever is earlier.
The consideration for each award under our 1999 Stock Incentive Plan will be
established by the administrator, but in no event will the option price for any
award be less than 100% of the fair market value of the stock on the date of
the grant. In the event that an employee recipient of incentive stock options
under our 1999 Stock Incentive Plan holds 10% or more of our outstanding common
stock on the date of the grant, the option price for these options may not be
less than 110% of the fair market value of the stock on the date of the grant.
Awards will have such terms and be exercisable in such manner and at such times
as the administrator may determine. However, each option must expire within a
period of not more than 10 years from the date of grant.
Our 1999 Stock Incentive Plan provides that, in the event of a change in our
capitalization, outstanding options, restricted shares and options available
for grant under the 1999 Stock Incentive Plan will be subject to adjustment in
the discretion of the administrator.
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<PAGE>
As of September 30, 1999, options to purchase up to 1,567,066 shares of
common stock had been granted and are outstanding under our 1999 Stock
Incentive Plan. These options have an average exercise price of $3.57 per share
and were held by 94 persons.
RELATED PARTY TRANSACTIONS
Founder Transactions
Beginning in January 1998, we sold an aggregate of 6,666,667 shares of common
stock to founders and key executive officers at a value of $0.38 per share.
These purchasers were John C. Bohan (6,016,667 shares), Mark Roah (200,000
shares), C.J. Cardinali (200,000 shares), Todd Taplin (133,333 shares), Frank
Addante (66,667 shares) and Neal Weinberg (50,000 shares). The consideration
tendered by Messrs. Bohan, Roah, Cardinali and Taplin was the contribution of
the operating business of John Bohan & Associates, LLC. Messrs. Addante and
Weinberg tendered promissory notes in consideration for their shares.
Preferred Stock Financings
We used the funds raised in each of the preferred stock financings described
below:
. to expand our business operations;
. to hire additional personnel;
. to provide additional services; and
. for other general corporate purposes related to the expansion of our
business.
Series A Preferred Stock Financing
On September 16, 1998, in a private placement transaction, we issued 2,000
shares of Series A preferred stock to William Apfelbaum, our Chairman of the
Board of Directors, at $1,000 per share, convertible into common stock at the
conversion price per share of $1.20. The number of shares of common stock into
which the Series A preferred stock will convert is an aggregate of
1,666,666 shares. In connection with sale of Series A preferred stock, Mr.
Apfelbaum was granted a right to require us to repurchase the Series A
preferred stock and any shares of common stock issued upon conversion of the
Series A preferred stock held by Mr. Apfelbaum. Mr. Apfelbaum irrevocably
waived his right to exercise this right in August, 1999. Mr. Apfelbaum, our
chairman, was issued a warrant to purchase up to 438,593 shares of our common
stock at a price per share of $1.71. The holder of the Series A preferred stock
is entitled to incidental registration rights regarding the shares of common
stock issued or issuable upon conversion and upon exercise of the warrant. See
"Description of Capital Stock--Registration Rights" for a description of these
registration rights. The holder of the outstanding shares of Series A preferred
stock is entitled to receive, upon conversion of shares of Series A preferred
stock into common stock, a dividend in cash accruing from September 16, 1998,
at an annual rate of $40 per share of Series A preferred stock so converted.
The holder of Series A preferred stock has the right to elect one member of the
board of directors. To date, the holder of the Series A preferred stock has
designated William Apfelbaum to the board of directors. All shares of Series A
preferred stock will automatically convert into shares of common stock upon the
closing of the offering.
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Series B Preferred Stock Financing
In a private placement transaction, which closed in September 1999, we issued
a total of 4,107,044 shares of Series B preferred stock at $2.35 per share
convertible into common stock at a three-to-two ratio. The principal purchasers
of the Series B preferred stock included DigaComm (L90), L.L.C. and Keystone
Venture V, L.P. DigaComm (L90), L.L.C. also purchased a warrant to acquire up
to 353,964 shares of our common stock at a price per share of $5.30. Unless
previously exercised, this warrant will automatically be exercised on a
cashless basis into 228,896 shares of common stock upon the closing of the
offering. The holders of the Series B preferred stock are entitled to
registration rights regarding the shares of common stock issued or issuable
upon conversion. See "Description of Capital Stock--Registration Rights" for a
description of these registration rights. The holders of the outstanding shares
of Series B preferred stock are entitled to receive, upon conversion of shares
of Series B preferred stock into common stock, a dividend in cash accruing from
August 6, 1999, at an annual rate of $0.14 per share of Series B preferred
stock so converted. The holders of Series B preferred stock collectively have
the right to elect three members of the board of directors. To date, the
holders of the Series B preferred stock have designated Peter Diamandis, Peter
Ligeti and Peter Sealey to the board of directors. Mr. Diamandis is a managing
member of DigaComm, L.L.C., the parent of DigaComm (L90), L.L.C. Mr. Ligeti is
a general partner of Keystone Venture V, L.P. All shares of Series B preferred
stock will automatically convert into shares of common stock upon the closing
of the offering.
Series C Preferred Stock Financing
In a private placement transaction, which closed in September 1999, we issued
a total of 1,307,190 shares of Series C preferred stock at $3.06 per share
convertible into common stock at a three-to-two ratio. The purchasers of the
Series C preferred stock were Development Ventures (Two) Inc. and Rare Medium
Group, Inc. Development Ventures (Two) Inc. purchased a warrant to acquire up
to an additional 674,029 shares of our common stock at a price of $4.59. Rare
Medium Group, Inc. purchased a warrant to acquire up to an additional 600,000
shares of our common stock at a price of $4.59. Unless previously exercised,
both warrants will automatically be exercised on a cashless basis into 884,175
shares of common stock upon the closing of this offering. The holders of
Series C preferred stock have registered the re-sale of the shares of common
stock issued or issuable upon conversion of the Series C preferred stock and
exercise of their warrants on the registration statement of which this
prospectus is a part. However, these stockholders have agreed not to sell any
of these shares for at least 180 days after the date of this prospectus, and
one-half of their shares until 270 days after the date of this prospectus.
See "Description of Capital Stock--Registration Rights" for a description of
these registration rights. The holders of the outstanding shares of Series C
preferred stock are entitled to receive, upon conversion of shares of Series C
preferred stock into common stock, a dividend in cash accruing from
September 22, 1999, at an annual rate of $0.18 per share of Series C preferred
stock so converted. The holders of Series C preferred stock collectively have
the right to elect one member of the board of directors, which member shall be
designated by Rare Medium for so long as it and its affiliates hold at least 50
percent of the outstanding shares of Series C preferred stock. Rare Medium has
designated Glenn S. Meyers to the board of directors. Mr. Meyers is President
and Chief Executive Officer of Rare Medium Group, Inc. All shares of Series C
preferred stock will automatically convert into shares of common stock upon the
closing of the offering.
58
<PAGE>
Warrants
On June 7, 1999, we issued to The Roman Arch Fund L.P. and The Roman Arch
Fund II, L.P. four warrants to purchase up to an aggregate of 333,333 shares of
common stock, later adjusted to an aggregate of 150,000 shares of common stock,
at an initial purchase price of $2.40 per share, subject to adjustment. These
warrants may be exercised on a cashless basis. These warrants expire on the
earlier of June 7, 2005, or the fifth anniversary of this offering. Warrants to
purchase up to 83,333 shares of common stock, to the extent not previously
exercised, may be exchanged at the election of the holder within 180 days of
the closing of this offering for warrants to purchase up to 166,667 shares of
common stock.
On August 13, 1999, we issued to William Apfelbaum a warrant to purchase up
to 353,964 shares of common stock, at an exercise price of $5.30 per share.
Unless previously exercised this warrant will be automatically exercised on a
cashless basis into 228,896 shares of common stock upon the closing of the
offering.
Shareholders Agreement
In connection with the financings described above, substantially all of our
stockholders entered into an agreement with us which provides for specified
voting for our board of directors and requires that corporate activities, such
as a merger or sale of assets, be approved by our stockholders. This agreement
also contains various other rights. However, the provisions of this agreement
will terminate upon the closing of this offering and with the conversion at
that closing of all of our preferred stock into common stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect this offering and the conversion of the preferred stock into common
stock, and the cashless exercise of warrants, upon the closing of this
offering, for each of the following persons:
. each person or entity who we know to beneficially own 5% or more of the
outstanding common stock,
. each of the named executives,
. each of our directors, and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each beneficial owner listed below
is c/o L90, Inc., 2020 Santa Monica Boulevard, Suite 400, Santa Monica,
California 90404.
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 ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of December 31, 1999,
are deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of each other person. Except
as indicated in the footnotes to this table and under applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Owned After Offering
--------------------------------------------------
Number Percent Number Percent
-------------- ------------------------ ----------
<S> <C> <C> <C> <C>
Named executive officers and directors:
John C. Bohan (1)..................... 6,016,666 45.2% 6,016,666 30.4%
William M. Apfelbaum (2).............. 2,459,224 17.7 2,459,224 12.1
Peter E. Ligeti (3)................... 1,132,685 8.5 1,132,685 5.7
Glenn S. Meyers (4)................... 1,102,396 8.1 1,102,396 5.5
Peter G. Diamandis (5)................ 920,306 6.8 920,306 4.6
Christopher J. Cardinali (6).......... 466,666 3.4 466,666 2.3
Mark D. Roah (7)...................... 466,666 3.4 466,666 2.3
Thomas A. Sebastian................... -- -- -- --
Frank A. Addante (8).................. 400,000 2.9 400,000 2.0
Peter Sealey.......................... 26,666 * 26,666 *
Gerald B. Redditt..................... -- -- -- --
Other 5% Stockholders:
Keystone Venture V, L.P. (9).......... 1,132,685 8.5 1,132,685 5.7
1601 Market Street, Suite 2500
Philadelphia, PA 19103
Development Ventures (Two) Inc. (10).. 1,109,759 8.2 1,109,759 5.5
51 Twin Pond Lane, New Canaan, CT
06840
Rare Medium Group, Inc. (11).......... 1,035,730 7.7 1,035,730 5.2
44 West 18th Street, New York, NY
10011
DigaComm (L90), L.L.C. (12)........... 920,306 6.8 920,306 4.6
400 North Michigan Avenue, Suite 520
Chicago, IL 60611
All directors and executive officers as
a group
(11 persons)(13)...................... 12,724,609 85.7 12,724,609 59.6
</TABLE>
60
<PAGE>
- --------
* Represents less than 1%.
(1) Includes 570,000 shares on which Mr. Bohan has granted options to other
key employees of L90.
(2) Includes:
. 1,666,666 shares issuable upon conversion of 2,000 shares of Series A
preferred stock,
. 438,593 shares issuable upon conversion of a warrant at an exercise
price of $1.71 per share, and
. 353,964 shares issuable upon exercise of a warrant at an exercise price
of $5.30 per share.
(3) Reflects 1,132,685 shares beneficially owned by Keystone Venture V, L.P.
Mr. Ligeti is the managing director of Keystone V Management Co., Inc.,
which is the general partner of Keystone V Partners, L.P., and Keystone V
Partners, L.P. is the general partner of Keystone Venture V, L.P.
(4) Includes:
. 1,035,730 shares beneficially owned by Rare Medium Group, Inc., of
which Mr. Meyers serves as President and Chief Executive Officer, and
. 66,666 shares issuable upon exercise of stock options at a price of
$4.59 per share, which are presently exercisable or will become
exercisable within 60 days from December 31, 1999.
(5) Reflects 920,306 shares beneficially owned by DigaComm (L90), L.L.C., the
parent of which Mr. Diamandis is a managing member.
(6) Includes:
. 133,333 shares issuable upon exercise of stock options at a price of
$.38 per share, which are presently exercisable or will become
exercisable within 60 days from December 31, 1999, and
. 133,333 shares issuable upon exercise of options granted by Mr. Bohan
at a price of $3.53 per share, which are presently exercisable or will
become exercisable within 60 days from December 31, 1999.
(7) Includes:
. 133,333 shares issuable upon exercise of stock options at a price of
$.38 per share, which are presently exercisable or will become
exercisable within 60 days from December 31, 1999, and
. 133,333 shares issuable upon exercise of options granted by Mr. Bohan
at a price of $3.53 per share, which are presently exercisable or will
become exercisable within 60 days from December 31, 1999.
(8) Includes 333,333 shares issuable upon exercise of stock options at a price
of $3.53 per share, which are presently exercisable or will become
exercisable within 60 days from December 31, 1999.
(9) Includes 1,132,685 shares issuable upon conversion of 1,699,028 shares of
Series B preferred stock.
(10) Includes:
. 435,730 shares issuable upon conversion of 653,595 shares of Series C
preferred stock, and
. 674,029 shares issuable upon exercise of a warrant at an exercise price
of $4.59 per share.
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<PAGE>
(11) Includes:
. 435,730 shares issuable upon conversion of 653,595 shares of Series C
preferred stock, and
. 600,000 shares issuable upon exercise of a warrant at an exercise price
of $4.59 per share.
(12) Includes:
. 566,342 shares issuable upon conversion of 849,514 shares of Series B
preferred stock, and
. 353,964 shares issuable upon exercise of a warrant at an exercise price
of $5.30 per share.
(13) Excludes:
. 133,333 shares issuable upon exercise of options granted by Mr. Bohan
to Mr. Cardinali, and
. 133,333 shares issuable upon exercise of options granted by Mr. Bohan
to Mr. Roah.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following descriptions of our capital stock and material provisions of
our certificate of incorporation and our bylaws are summaries and are qualified
by reference to our certificate of incorporation and our bylaws, which are
included as exhibits to the registration statement of which this prospectus is
a part.
We are authorized to issue up to 53,333,333 shares of common stock, par value
$0.001 per share, and 15,000,000 shares of preferred stock, par value $0.001
per share.
Common Stock
As of September 30, 1999, there were 6,693,333 shares of common stock
outstanding held of record by seven stockholders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of an
aggregate of 13,118,124 shares of common stock to reflect:
. the offering;
. the conversion of all outstanding preferred stock; and
. the cashless exercise of warrants to purchase 1,341,968 shares of common
stock
there will be approximately 19,811,457 shares of common stock outstanding upon
the closing of this offering.
All outstanding shares of common stock are fully paid and nonassessable, and
the shares of common stock to be issued upon completion of the offering will be
fully paid and nonassessable. Holders of common stock are entitled to one vote
per share in all matters to be voted on by the stockholders and do not have
cumulative voting rights. Accordingly, subject to any voting rights granted to
holders of any preferred stock, holders of a majority of the shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to
receive ratably those dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of any outstanding preferred stock. In the event of a
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
after prior distribution rights of shares of preferred stock then outstanding,
if any. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
Preferred Stock
Under our certificate of incorporation, the board of directors is authorized,
without further stockholder approval, to issue up to 15,000,000 shares of
preferred stock in one or more series and to designate and alter all rights
(including voting rights), preferences, privileges and qualifications,
limitations, restrictions granted to or imposed upon any wholly unissued series
of stock. Our board of directors is also authorized to determine the number of
shares constituting any such series and to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
any series. Our board of directors may authorize the issuance of preferred
stock with voting, conversion or other rights that are senior to the rights of
the holders of common stock. To date, 8,002,000 shares of preferred stock have
been designated as Series A, Series B and Series C preferred stock, leaving
6,998,000 shares available for designation in the future. Upon the completion
of this offering, all outstanding shares of our preferred stock will be
automatically converted into common stock and no shares of preferred stock will
be outstanding.
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<PAGE>
Holders of Series A, Series B or Series C preferred stock are entitled to
two-thirds of one vote per preferred share in all matters to be voted on by the
stockholders and do not have cumulative voting rights. Holders of Series A
preferred stock are entitled to receive cumulative dividends that accrue at an
annual rate of $40.00 per share. Holders of Series B preferred stock are
entitled to receive cumulative dividends that accrue at an annual rate of $0.14
per share. Holders of Series C preferred stock are entitled to receive
cumulative dividends that accrue at an annual rate of $0.18 per share. In the
event of a liquidation dissolution or winding up, the holders of Series A,
Series B and Series C preferred stock are entitled to share ratably, on a pari
passu basis among each other and senior to the holders of common stock, in all
assets remaining after payment of liabilities. The Series A, Series B and
Series C preferred stock do not have preemptive rights or other subscription
rights. The Series A, Series B and Series C preferred stock are convertible
into shares of common stock on a three-for-two basis.
Six million nine hundred ninety-eight thousand shares of preferred stock are
available for designation in the future and could thus be issued quickly with
terms calculated to delay or prevent a change in control of L90 or to make
removal of management more difficult. Additionally, the issuance of preferred
stock may have the effect of decreasing the market price of the common stock,
and may adversely affect the voting and other rights of the holders of common
stock. Upon the closing of the offering, no shares of preferred stock will be
outstanding and we have no current plans to issue any of the preferred stock.
See "Related Party Transactions" for a description of prior issuances of
preferred stock.
Registration Rights
The Stock Purchase and Stockholders Agreement dated September 16, 1998, among
L90 and the holders of 8,333,333 shares of common stock and securities
convertible into common stock, provides that the holder of the Series A
preferred stock is entitled to registration rights.
. Piggyback registration rights. The holder of our Series A preferred
stock may request to have its shares registered under the Securities Act
any time we file a registration statement to register any of our
securities for our own account or the account of any of our
stockholders. The number of times such rights may be exercised is
unlimited, but the number of shares that can be registered at any one
time is subject to limitations that an underwriter may impose. The
holder has waived his registration rights in connection with this
offering.
The Registration Agreement dated August 6, 1999, among L90 and the holders of
4,107,044 shares of our Series B preferred stock, provides that the holders are
entitled to registration rights.
. Demand registration rights. Commencing 270 days after the closing of
this offering, the holders of a majority of the shares issued upon
conversion of our Series B preferred stock have the right to demand that
we register their shares under the Securities Act. The holders may
exercise their demand registration rights up to two times on Form S-1
and an unlimited number of times on Form S-3, provided that the value of
the shares to be registered is at least $5,000,000.
. Piggyback registration rights. The holders of the shares issued upon
conversion of our Series B preferred stock may request to have their
shares registered under the Securities Act any time we file a
registration statement to register any of our securities for our own
account or the account of any of our stockholders. The number of times
such rights may be
64
<PAGE>
exercised is unlimited, but the number of shares that can be registered
at any one time is subject to limitations that an underwriter may
impose. The holders have waived their registration rights in connection
with this offering.
The Series C Registration Agreement dated September 22, 1999, among L90 and
the holders of 1,307,190 shares of Series C preferred stock, provides that the
holders are entitled to have their shares of common stock issuable upon
conversion of the Series C preferred stock, as well as the common stock
issuable upon exercise of their warrants, registered on the same registration
statement of which this prospectus is a part. The total number of these shares
is 2,145,489 and they are included in a separate resale prospectus. However,
these holders have agreed not to sell any of these shares until 180 days after
the date of this prospectus, at which time they may sell one-half of their
shares. These holders have also agreed that they will not sell the other one-
half of their shares until 270 days after the date of this prospectus.
Anti-Takeover Effects of Provisions of Delaware Law and L90's Certificate of
Incorporation and Bylaws
We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. Generally, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Upon completion of the offering, there will be approximately 33,521,876
shares of common stock and 6,998,000 shares of preferred stock available for
future issuance. Delaware law does not require stockholder approval for the
issuance of authorized shares, or to designate price, rights, preferences,
privileges and restrictions, including voting rights, of the preferred stock.
The additional shares may be used for a variety of corporate purposes. The
issuance of common stock or preferred stock may have the effect of delaying,
deferring or preventing a change in control by making it more difficult for a
third party to acquire a majority of our outstanding voting stock.
Indemnification of Directors, Officers and Agents and Limitation of Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors, officers and agents for monetary damages
for breach of fiduciary duty as a director, officer or agent, except:
. for any breach of the director's, officer's or agent's duty of loyalty
to us or our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful dividends and stock purchases under section 174 of the
Delaware General Corporation Law; or
. for any transaction from which the director, officer or agent derived an
improper personal benefit.
65
<PAGE>
Our bylaws provide that:
. we must indemnify our directors, officers and agents to the fullest
extent permitted by Delaware law, subject to very limited exceptions;
. we must advance expenses, as incurred, to our directors, officers and
agents in connection with any legal proceeding to the fullest extent
permitted by Delaware law, subject to limited exceptions.
The limitation of liability and indemnification provisions in our certificate
of incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. These provisions may also
have the effect of reducing the likelihood of stockholder derivative litigation
against directors, officers and agents, even though a derivative action, if
successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholder's investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors, officers and agents
under these indemnification provisions.
We have entered into an agreement with each of our directors and officers
that, among other things, indemnifies him or her for expenses, including
attorneys' fees and associated legal expenses, judgments and fines and amount
paid in settlement, actually and reasonably incurred by him or her in
connection with any action, suit or proceeding arising out of his or her
services as our director or officer. We believe that these agreements are
necessary to attract and retain qualified directors and officers. Our bylaws
also permit us to secure insurance on behalf of any director, officer, employee
or agent for any liability arising out of his or her actions on our behalf,
regardless of whether Delaware law would permit indemnification. We have
obtained liability insurance for our directors and officers.
At present, there is no pending litigation or proceeding involving any of our
directors, officers or agents for which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Chase Mellon
Shareholder Services. Its telephone number for such purposes is (213) 553-9700.
Listing
Our common stock has been approved for trading and quotation on the Nasdaq
National Market under the trading symbol "LNTY."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate of 19,811,457 shares of common stock, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants, other than the cashless exercise of warrants
to acquire 1,341,968 shares of common stock upon the closing of this offering.
Of these shares, the 6,500,000 shares sold in the offering will be freely
tradeable without restriction or further registration under the Securities Act,
except that any shares purchased by our "affiliates," as that term is defined
in Rule 144 of the Securities Act, may generally only be sold in compliance
with the limitations of Rule 144 described below. All other outstanding shares
not sold in this offering will be deemed "restricted securities" as defined
under Rule 144. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or 701 promulgated under the Securities Act, which rules are summarized below.
Subject to the lock-up agreements described below and the provisions of Rules
144 and 701, additional shares will be available for sale in the public market
as follows:
<TABLE>
<CAPTION>
Approximate Number of
Shares Eligible for
Future Sale Date
--------------------- ----
<C> <S>
6,500,000............... After the date of this prospectus, freely tradeable
shares sold in this offering.
877,818................. After 180 days from the date of this prospectus, a
180-day lock-up is released and these shares are
freely tradeable.
8,200,000............... After 180 days from the date of this prospectus, a
180-day lock-up is released and these shares are
saleable under Rule 144, subject, in some cases, to
volume limitations, or Rule 701.
3,222,488............... After 180 days from the date of this prospectus,
restricted securities that are held for less than one
year and are not yet saleable under Rule 144.
877,818................. After 270 days from the date of this prospectus, a
270-day lock-up is released and these shares are
freely tradeable.
</TABLE>
In general, under Rule 144 as currently in effect, beginning 90 days 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 the holding period of any prior owner, except if the prior owner was
one of our affiliates, would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding (which
will equal approximately 198,115 immediately after this offering); or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about L90.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold
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<PAGE>
or at least two years, including the holding period of any prior owner except
one of our affiliates, is entitled to sell the shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144; therefore, unless otherwise restricted, 144(k) shares could be
sold immediately upon the completion of this offering.
Under Rule 701 of the Securities Act as currently in effect, any of our
employees, consultants or advisors who purchased shares from us in connection
with a compensatory stock or option plan or other written agreement is eligible
to resell these shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with restrictions, such as the
holding period, contained in Rule 144. However, because all shares that we have
issued under Rule 701 are subject to lock-up agreements, they will only become
eligible for sale when the 180-day lock-up agreements expire. As a result, they
may be sold 90 days after this offering only if the holder obtains the prior
written consent of SG Cowen Securities Corporation.
All of our officers, directors, and other existing stockholders, except for
the holder of 133,333 shares, have agreed not to sell, transfer, offer, or
otherwise dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of SG Cowen Securities Corporation for a
period of 180 days after the date of this prospectus.
Upon completion of this offering, some of the holders of shares of our common
stock, or their transferees, will be entitled to rights with respect to the
registration of their shares under the Securities Act. See "Description of
Capital Stock-Registration Rights" for a description of these registration
rights. Registration of these shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act (except for shares purchased by our affiliates) immediately upon the
effectiveness of a registration. Furthermore, the resale of up to 2,145,489
shares issuable to three of our stockholders upon conversion of their Series C
preferred stock and exercise of their warrants have been registered on the same
registration statement of which this prospectus is a part. However, these
stockholders have agreed not to sell any of these shares until 180 days after
the date of this prospectus, and not to sell one-half of these shares until
270 days after the date of this prospectus.
We intend to file a registration statement under the Securities Act covering
shares of our common stock reserved for issuance upon exercise of options
granted under our 1999 Stock Incentive Plan and options granted outside of this
plan. See "Management-1999 Stock Incentive Plan" for more information on this
Plan. This registration statement is expected to be filed and become effective
as soon as practicable after the effective date of this offering. Accordingly,
shares registered under this registration statement will, subject to the 180-
day lock-up period and to Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market, unless these shares are
subject to vesting restrictions with us. A total of 2,930,000 shares have been
reserved for issuance upon exercise of options granted under our 1999 Stock
Incentive Plan and options granted outside of this plan. As of December 31,
1999, options to purchase 2,151,733 shares of our common stock were issued and
outstanding. As of that date, 816,666 of these options had vested and were
therefore exercisable.
As of December 31, 1999, we had outstanding warrants to purchase 2,570,550
shares of common stock. If these warrants are exercised and the exercise price
is paid in cash, the shares must be held for one year before they can be sold
under Rule 144. However, warrants to purchase 1,981,957 shares are subject to a
cashless exercise provision upon the closing of this offering which would
result in the issuance of 1,341,968 shares of common stock. These shares would
be saleable under Rule 144 one year after the issuance of the warrants.
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<PAGE>
U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
Following is a general discussion of the material U.S. federal income and
estate tax consequences of the ownership and disposition of the common stock
applicable to non-U.S. holders of common stock. For purposes of this
discussion, a non-U.S. holder is any holder of common stock that, for U.S.
federal income tax purposes, is not a U.S. person, as defined below. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant in light of a non-U.S. holder's particular facts
and circumstances, such as being a U.S. expatriate, and does not address any
tax consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. L90, Inc.
has not and will not seek a ruling from the Internal Revenue Service with
respect to the U.S. federal income and estate tax consequences described below,
and as a result, there can be no assurance that the Internal Revenue Service
will not disagree with or challenge any of the conclusions set forth in this
discussion.
For purposes of this discussion, the term U.S. person means:
. a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or any political
subdivision thereof that is subject to U.S. federal income tax on a net
basis in respect of income or gain with respect to the common stock of
L90, Inc.;
. an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
Dividends
A dividend paid to a non-U.S. holder generally will be subject to U.S.
withholding tax either at a rate of 30% of the gross amount of the dividend or
such lower rate as may be specified by an applicable income tax treaty.
Dividends received by a non-U.S. holder that are effectively connected with a
U.S. trade or business conducted by the non-U.S. holder or a "permanent
establishment" or fixed base in the United States of such non-U.S. holder are
exempt from that withholding tax. However, those effectively connected
dividends, net of deductions and credits, are taxed at the same graduated rates
applicable to U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate non-U.S. holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable income tax treaty.
A non-U.S. holder that is eligible for a reduced rate of withholding tax due
to an applicable income tax treaty may be required to submit forms or other
documentation to avail itself of that treaty and may be able to obtain a refund
of any excess amounts withheld by L90, Inc. by filing an appropriate claim for
refund with the Internal Revenue Service.
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<PAGE>
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax on
any gain realized upon the sale or other disposition of common stock unless:
. the gain is effectively connected with a U.S. trade or business of the
non-U.S. holder, which gain, in the case of a corporate non-U.S. holder,
must also be taken into account for branch profits tax purposes, or, in
the case of inapplicable income tax treaty, the gain is attributable to
a "permanent establishment" of the non-U.S. holder or of a U.S.
partnership, limited liability company or trust or estate in which the
non-U.S. holder is a partner, member or beneficiary;
. the non-U.S. holder is an individual who holds his or her common stock
as a capital asset within the meaning of Section 1221 of the Code,
generally, an asset held for investment purposes, and who is present in
the United States for a period or periods aggregating 183 days or more
during the calendar year in which the sale or disposition occurs and
other conditions are met;
. L90 is or has been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the holder's holding
period for its common stock. L90 believes that, as of the date of this
prospectus, it is not and does not expect that it will become a "United
States real property holding corporation" for U.S. federal income tax
purposes; or
. the non-U.S. holder is a U.S. expatriate subject to the tax provisions
of U.S. law.
Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interests" equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or held for use in
a trade or business. However, even if we were to become a "United States real
property holding corporation," any gain realized by a non-U.S. holder still
would not be subject to United States federal income tax if our shares are
"regularly traded", within the meaning of the applicable regulations, on an
established securities market, such as, the New York Stock Exchange or NASDAQ
Stock Market. We believe that our common stock will be "regularly traded on an
established securities market." If, however, our common stock is not so traded,
on a sale or disposition by a non-U.S. holder of the common stock the
transferee of such stock will be required to withhold 10% of the proceeds
unless we certify that either we are not, nor have we been, a United States
real property holding company or another exemption from withholding applies. If
a non-U.S. holder who is an individual is subject to tax under clauses (1) or
(4) above, such individual generally will be taxed on the net gain derived from
a sale of common stock under regular graduated United States federal income tax
rates. If an individual non-U.S. holder is subject to tax under clause
(2) above, such individual generally will be subject to a flat 30% tax on the
gain derived from a sale, which may be offset by United States capital losses,
notwithstanding the fact that such individual is not considered a resident
alien of the United States. Thus, individual non-United States holders who have
spent, or expect to spend, more than a de minimis period of time in the United
States in the taxable year in which they contemplate a sale of common stock are
urged to consult their tax advisers prior to the sale concerning the United
States federal income tax consequences of such sale.
Backup Withholding and Information Reporting
Generally, L90 would be required to report annually to the Internal Revenue
Service the amount of dividends, if any, paid on the common stock, the name and
address of the recipient, and the
70
<PAGE>
amount, if any, of tax withheld. A similar report would be sent to the
recipient. Under applicable income tax treaties or other agreements, the
Internal Revenue Service may make its reports available to tax authorities in
the recipient's country of residence.
Dividends paid to a non-U.S. holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the non-U.S. holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payer. Backup
withholding will generally not apply to dividends paid to non-U.S. holders at
an address outside the United States on or prior to December 31, 2000 unless
the payer has knowledge that the payee is a U.S. person. Under recently
finalized Treasury Department regulations regarding withholding and information
reporting, payment of dividends to non-U.S. holders at an address outside the
United States after December 31, 2000 may be subject to backup withholding at a
rate of 31% unless such non-U.S. holder satisfies various certification
requirements. These regulations generally presume that a non-U.S. holder is
subject to backup withholding at the 31% rate and information reporting unless
L90 receives certification of such holder's non-U.S. status. Backup withholding
at the 31% rate also generally will not apply to dividends paid to non-U.S.
holders that are subject to the 30% withholding on gross dividends, or a lower
rate specified by an applicable income tax treaty, as discussed above.
Under current Treasury Department regulations, the payment of the proceeds of
the disposition of common stock to or through the U.S. office of a broker is
subject to information reporting and backup withholding at a rate of 31% unless
the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes an exemption. Generally, the payment of the proceeds of
the disposition by a non-U.S. holder of common stock outside the United States
to or through a foreign office of a broker will not be subject to backup
withholding but will be subject to information reporting requirements if the
broker is:
. a U.S. person;
. a "controlled foreign corporation" for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income for specified periods
is from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-
U.S. status and other conditions are met, or the non-U.S. holder otherwise
establishes an exemption.
In the case of the payment of proceeds from the disposition of common stock
effected by a foreign office of a broker that is a United States person or a
"United States related person", existing regulations require information
reporting on the payment unless (1) the broker receives a statement from the
owner, signed under penalty of perjury, certifying its non-United States status
or the broker has documentary evidence in its files as to the non-U.S. holder's
foreign status, and the broker has no actual knowledge to the contrary, and
other United States federal tax law conditions are met or (2) the beneficial
owner otherwise establishes an exemption. For this purpose, a "United States
related person" is either (1) a "controlled foreign corporation" for United
States federal income tax purposes; or (2) a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment, or for such part of the period
that the broker has been in existence, is derived from activities that are
effectively connected with the conduct of a United States trade or business.
After December 31, 2000, the Final Regulations will impose information
reporting and backup withholding on payments of the gross
71
<PAGE>
proceeds from the sales or redemptions of common stock that are effected
through foreign offices of brokers having any of a broader class of specified
connections with the United States. Such information reporting and backup
withholding may be avoided, however, if the applicable IRS certification
requirements are complied with. Prospective investors should consult with their
own tax advisers regarding the Final Regulations and in particular with respect
to whether the use of a particular broker would subject the investor to these
rules.
In general, the recently finalized Treasury Department regulations, described
above, do not significantly alter substantive withholding and information
reporting requirements but would alter procedures for claiming benefits of an
income tax treaty and change the certification procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Department regulations on
an investment in the common stock. Those final Treasury Department regulations
are generally effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
Estate Tax
An individual non-U.S. holder who owns common stock at the time of his or her
death or had made lifetime transfers of an interest in common stock will be
required to include the value of that common stock in his or her gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise. Therefore, the value of such stock may be subject to U.S.
federal and state estate tax.
The foregoing discussion is a summary of the principal U.S. federal income
and estate tax consequences of the ownership, sale or other disposition of
common stock by non-U.S. holders. Accordingly, investors are urged to consult
their own tax advisors with respect to the income and estate tax consequences
of the ownership and disposition of common stock, including the application and
effect of the laws of any state, local, foreign or other taxing jurisdiction.
72
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
January 27, 2000, the underwriters named below, through their representatives
SG Cowen Securities Corporation, Banc of America Securities LLC, CIBC World
Markets Corp. and Wit Capital Corporation, have severally agreed to purchase
from us the number of shares of common stock set forth opposite their names at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
SG Cowen Securities Corporation.................................... 2,210,000
Banc of America Securities LLC..................................... 1,657,500
CIBC Oppenheimer Corp. ............................................ 1,105,000
Wit Capital Corporation............................................ 552,500
ABN AMRO Incorporated.............................................. 130,000
Fleetboston Robertson Stephens Inc. ............................... 130,000
Thomas Weisel Partners LLC......................................... 130,000
William Blair & Company, L.L.C. ................................... 65,000
C.E. Unterberg, Towbin............................................. 65,000
Crowell, Weedon & Co. ............................................. 65,000
Cruttenden Roth Incorporated....................................... 65,000
Janney Montgomery Scott LLC........................................ 65,000
Jefferies & Company................................................ 65,000
Raymond James & Associates, Inc. .................................. 65,000
Stephens Inc. ..................................................... 65,000
Sutro & Co. Incorporated........................................... 65,000
---------
Total............................................................ 6,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditional and may be terminated at their discretion based on their
assessment of the state of the financial markets and may also be terminated
upon the occurrence of the events specified in the underwriting agreement. The
underwriters are severally committed to purchase all of the common stock being
offered by L90 if any of such shares are purchased, other than those covered by
the over-allotment option described below.
The underwriters propose to offer the common stock directly to the public at
the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to some dealers at that price less a
concession not in excess of $0.63 per share. Dealers may reallow a concession
not in excess of $0.10 per share to some other dealers. After the shares of
common stock are released for sale to the public, the underwriters may vary the
offering price and other selling terms.
We have granted to the underwriters an option, exercisable for up to 30 days
after the date of this prospectus, to purchase up to 975,000 additional shares
of common stock at the public offering price set forth on the cover of this
prospectus to cover over-allotments, if any. If the underwriters exercise their
over-allotment option, the underwriters have severally agreed, subject to
limited conditions, to purchase approximately the same percentage that the
number of shares of common stock to be purchased by each of them, as shown in
the foregoing table, bears to the common stock covered by this prospectus.
73
<PAGE>
At our request, the underwriters have reserved up to 5% of the shares of
common stock for sale at the initial public offering price to our employees,
directors, specific existing stockholders, specific clients and third party
vendors. The number of shares of common stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.
Omnicom Group Inc. has expressed to us its preliminary interest in acquiring
up to 166,666 shares of our common stock in this offering at the initial public
offering price of $15.00 per share. As of January 26, 2000, Communicade, Inc.,
a wholly-owned subsidiary of Omnicom, owned 228,758 shares of Series C
preferred stock (which is convertible into 152,506 shares of common stock) and
a warrant to purchase 235,910 shares of common stock. Mr. Bruce Redditt, one of
our directors, is an Executive Vice President of Omnicom. Omnicom is not
obligated to purchase any of our common stock, and there is no assurance that a
sale of our common stock to Omnicom will occur. If Omnicom were desirous of
purchasing shares in this offering, up to 166,666 shares would be made
available to them.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, under an e-Dealer Agreement, all
dealers purchasing shares from Wit Capital in the offering similarly have
agreed to make a prospectus in electronic format available on Web sites
maintained by each of the e-Dealers. Wit Capital offers securities over the
Internet to its customers in compliance with the no-action letter addressed to
it and the related request letter, each dated July 14, 1999.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act, and to contribute to payments
that the underwriters may be required to make in respect thereof.
L90 and all of our directors, officers and other existing stockholders,
except for the holder of 133,333 shares, have agreed that for a period of at
least 180 days following the date of this prospectus, without the prior written
consent of SG Cowen Securities Corporation, they will not directly or
indirectly, offer, sell, assign, transfer, pledge, contract to sell, or
otherwise dispose of, other than by operation of law, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, including, without limitation, common stock which may be deemed
to be beneficially owned in accordance with rules and regulations promulgated
under the Securities Act. Except for holders of 2,145,488 shares of common
stock, the resale of which is registered on the same registration statement of
which this prospectus is a part, all holders of demand or incidental
registration rights have waived these rights with respect to this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when
the common stock originally sold by the syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Penalty bids
may have the effect of deterring syndicate members from selling to people who
have a history of quickly selling their shares. In passive market making,
market
74
<PAGE>
makers in the common stock who are underwriters or prospective underwriters
may, subject to some limitations, make bids for or purchases of the common
stock until the time, if any, at which a stabilizing bid is made. These
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of these transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
The underwriters have advised us that they do not intend to confirm sales in
excess of 5% of the common stock offered to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price has been determined by
negotiations between us and the underwriters. Among the factors considered in
these negotiations were prevailing market conditions, the market
capitalizations and the stages of development of other companies that we and
the underwriters believe to be comparable to us, estimates of our business
potential, our results of operations in recent periods, the present state of
our development and other factors deemed relevant.
We estimate that our out of pocket expenses for this offering will be
approximately $1,200,000.
Wit Capital, a member of the National Association of Securities Dealers, Inc.
will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
co-manager or selected dealer in over 125 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with L90 or any of its founders or significant stockholders.
LEGAL MATTERS
Matters relating to this offering are being passed upon for us by Paul,
Hastings, Janofsky & Walker LLP, Los Angeles, California. Brobeck, Phleger &
Harrison LLP, Los Angeles, California is acting as counsel for the
underwriters.
EXPERTS
Our financial statements, included in this prospectus, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
75
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement on Form S-1 under the Securities Act with
respect to the common stock covered under this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules filed with the registration statement. Some items
are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to L90 and the common stock covered under this
prospectus, reference is made to the registration statement and the exhibits
filed as a part thereof. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, in each case, qualified in all respects by
reference to such exhibit. Upon completion of the offering, we will be subject
to the informational requirements of the Securities Exchange Act of 1934, and
in accordance with the Exchange Act, will file reports and other information
with the SEC. The registration statement, including exhibits, as well as
reports and other information which we filed with the SEC, may be inspected
without charge at the Public Reference Room of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's regional offices at Seven World
Trade Center, 13th Floor, New York, NY 10048, and Citicorp Center, 500 West
Madison Street, Chicago, IL 60661. Copies of such materials can also be
obtained at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Electronic filings made through
the Electronic Data Gathering Analysis and Retrieval System are publicly
available through the SEC's Web Site at http://www.sec.gov.
We will issue to our stockholders annual reports and, upon request, will make
available unaudited quarterly reports for the first three quarters of each
fiscal year. Annual reports will include audited financial statements and
reports of our independent accountants with respect to the examination of these
financial statements.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
L90, Inc.
Report of Independent Public Accountants................................. F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999... F-3
Statements of Operations for the period ended December 31, 1997, for the
year ended December 31, 1998 and for the nine months ended September 30,
1998 and 1999........................................................... F-4
Statements of Stockholders' Equity for the period ended December 31,
1997, for the year ended December 31, 1998 and for the nine months ended
September 30, 1999...................................................... F-5
Statements of Cash Flows for the period ended December 31, 1997, for the
year ended December 31, 1998 and for the nine months ended September 30,
1998 and 1999........................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
L90, Inc.:
We have audited the accompanying balance sheets of L90, Inc. (a Delaware
Corporation) as of December 31, 1997 and 1998, and September 30, 1999, and the
related statements of operations, stockholders' equity and cash flows for the
period from January 5, 1997 (inception) to December 31, 1997, the year ended
December 31, 1998 and the nine month period ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of L90, Inc. as of December 31,
1997 and 1998, and September 30, 1999 and the results of its operations and its
cash flows for the period from January 5, 1997 (inception) to December 31,
1997, the year ended December 31, 1998 and the nine month period ended
September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Los Angeles, California
November 1, 1999
F-2
<PAGE>
L90, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders
December 31, Equity
-------------------- September 30, September 30,
1997 1998 1999 1999
-------- ---------- ------------- -------------
(unaudited)
(Note 3)
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.. $235,189 $2,111,852 $11,555,831
Accounts receivable (net of
allowances of $69,860 and
$142,952 at December 31,
1997 and 1998,
respectively, and $316,022
at September 30, 1999).... 684,037 1,310,457 2,566,721
Prepaid expenses and other
assets.................... 25,325 196,562 772,552
-------- ---------- -----------
Total current assets....... 944,551 3,618,871 14,895,104
-------- ---------- -----------
Property and equipment:
Equipment................. 24,455 320,567 792,350
Furniture and fixtures.... 7,417 15,720 68,621
Leasehold improvements.... -- 18,347 23,801
-------- ---------- -----------
31,872 354,634 884,772
Less--Accumulated
depreciation and
amortization............. (6,455) (37,340) (168,592)
-------- ---------- -----------
Property and equipment,
net....................... 25,417 317,294 716,180
-------- ---------- -----------
Total assets............... $969,968 $3,936,165 $15,611,284
======== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable........... $344,000 $1,177,950 $ 3,133,178
Accrued expenses........... 100,240 300,670 1,363,264
Current portion of long-
term capital lease
obligations............... -- 68,025 140,753
Deferred revenues.......... 30,418 53,417 --
Accrued dividends.......... -- 23,233 175,589
-------- ---------- -----------
Total current liabilities.. 474,658 1,623,295 4,812,784
Long-term capital lease
obligations, net of current
portion..................... -- 180,362 286,094
-------- ---------- -----------
Total liabilities.......... 474,658 1,803,657 5,098,878
-------- ---------- -----------
Stockholders' Equity:
Preferred stock, $0.001 par
value; 15,000,000 shares
authorized:
Series A preferred stock,
$0.001 par value,
2,000 shares authorized,
2,000 shares issued and
outstanding, including
paid-in capital of
$2,077,483............... -- 2,000,000 2,077,503 $ --
Series B preferred stock,
$0.001 par value,
5,000,000 shares
authorized,
4,107,044 shares issued
and outstanding,
including paid-in-capital
of $9,348,823............ 9,352,930 --
Series C preferred stock,
$0.001 par value,
3,000,000 shares
authorized,
1,307,190 shares issued
and outstanding,
including paid-in-capital
of $4,574,279............ 4,575,586 --
Common stock, $0.001 par
value, 53,333,333 shares
authorized, 6,693,333 and
11,969,489 shares issued
and outstanding, actual
and proforma,
respectively.............. -- 6,667 6,693 11,969
Additional paid-in
capital................... -- 50,151 181,901 16,182,644
Notes receivable for common
stock..................... -- (43,750) (43,750) (43,750)
Capital contributions, net
of shareholder draws...... 8,068 -- -- --
Retained earnings.......... 487,242 119,440 (5,638,457) (5,638,457)
-------- ---------- ----------- -----------
Total stockholders'
equity.................... 495,310 2,132,508 10,512,406 $10,512,406
-------- ---------- ----------- ===========
Total liabilities and
stockholders' equity...... $969,968 $3,936,165 $15,611,284
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
L90, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period Ended Year Ended Nine Months Ended
December 31, December 31, September 30,
------------ ------------ ------------------------
1997 1998 1998 1999
------------ ------------ ---------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue
Service fee-based
revenue............... $ -- $ -- $ -- $ 2,474,727
Commission-based
revenue............... 1,159,764 2,189,433 1,465,259 1,498,580
---------- ----------- ---------- ------------
Total revenue............ 1,159,764 2,189,433 1,465,259 3,973,307
---------- ----------- ---------- ------------
Operating expenses:
Cost of service fee and
other revenue......... -- -- -- 1,335,504
Sales and marketing.... 549,805 1,361,856 874,897 2,988,069
Research and
development........... -- 138,402 61,122 1,404,641
General and
administrative........ 302,776 995,435 578,077 2,707,578
---------- ----------- ---------- ------------
Total operating
expenses................ 852,581 2,495,693 1,514,096 8,435,792
---------- ----------- ---------- ------------
Operating income (loss).. 307,183 (306,260) (48,837) (4,462,485)
Interest income
(expense), net.......... 2,601 17,491 6,822 (51,139)
---------- ----------- ---------- ------------
Income (loss) before
provision for income
taxes................... 309,784 (288,769) (42,015) (4,513,624)
Provision for income
taxes................... -- 800 -- --
---------- ----------- ---------- ------------
Net income (loss)........ $ 309,784 $ (289,569) $ (42,015) $ (4,513,624)
========== =========== ========== ============
Cumulative dividends on
participating preferred
stock................... -- (23,233) -- (1,244,273)
---------- ----------- ---------- ------------
Net income (loss)
attributable to common
stockholders............ $ 309,784 $ (312,802) $ (42,015) $ (5,757,897)
========== =========== ========== ============
Net income (loss) per
share:
Basic/Diluted.......... $ -- $ (0.05) $ (0.01) $ (0.86)
========== =========== ========== ============
Weighted average number
of common shares
outstanding:
Basic/Diluted.......... -- 6,666,667 6,666,667 6,667,434
========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
L90, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Receivable
Additional for
Preferred Capital Common Paid-in Common Retained
Stock Account Stock Capital Stock Earnings Total
----------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at January 1,
1997................... $ -- $ 13,068 $ -- $ -- $ -- $ 177,458 $ 190,526
Withdrawal of capital... -- (5,000) -- -- -- -- (5,000)
Net income.............. -- -- -- -- -- 309,784 309,784
----------- ---------- ---------- ---------- ---------- ----------- -----------
BALANCE at December 31,
1997................... -- 8,068 -- -- -- 487,242 495,310
Net loss................ -- -- -- -- -- (289,569) (289,569)
Issuance of Series A
preferred stock........ 2,000,000 -- -- -- -- -- 2,000,000
Issuance of common
stock.................. -- -- -- 43,750 (43,750) -- --
Distributions to
shareholders........... -- -- -- -- -- (50,000) (50,000)
Conversion to
C-corporation.......... -- (8,068) 6,667 6,401 -- (5,000) --
Accrual of cumulative
dividends on
participating preferred
stock.................. -- -- -- -- -- (23,233) (23,233)
----------- ---------- ---------- ---------- ---------- ----------- -----------
BALANCE at December 31,
1998................... 2,000,000 -- 6,667 50,151 (43,750) 119,440 2,132,508
Net loss................ -- -- -- -- -- (4,513,624) (4,513,624)
Issuance of Series B
preferred stock, net of
costs of $706,471...... 8,957,694 -- -- -- -- -- 8,957,694
Issuance of Series C
preferred stock, net of
costs of $45,505....... 3,956,408 -- -- -- -- -- 3,956,408
Issuance of common stock
for options............ -- -- 26 93,974 -- -- 94,000
Issuance of debt related
warrants............... -- -- -- 37,776 -- -- 37,776
Issuance of preferred
stock warrants......... 1,091,917 -- -- -- -- (1,091,917) --
Accrual of cumulative
dividends on
participating preferred
stock.................. -- -- -- -- -- (152,356) (152,356)
----------- ---------- ---------- ---------- ---------- ----------- -----------
BALANCE at September 30,
1999................... $16,006,019 $ -- $ 6,693 $ 181,901 $ (43,750) $(5,638,457) $10,512,406
=========== ========== ========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
L90, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended Year Ended Nine Months Ended
December 31, December 31, September 30,
------------ ------------ ------------------------
1997 1998 1998 1999
------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)........... $ 309,784 $ (289,569) $ (42,015) $(4,513,624)
Adjustments to reconcile net
loss to cash used in
operating activities--
Depreciation and
amortization............. 5,800 30,885 8,023 169,028
Changes in assets and
liabilities:
Increase in accounts
receivable............... (489,637) (626,420) (411,857) (1,256,263)
Increase in prepaid
expenses and other
assets................... (25,325) (171,237) (83,846) (575,990)
Increase in accounts
payable.................. 327,237 833,950 529,607 1,955,228
Increase in accrued
expenses................. 100,240 200,430 76,246 1,062,594
Increase (decrease) in
deferred revenues........ 30,418 22,999 30,526 (53,417)
--------- ---------- ---------- -----------
Net cash provided by
(used in) operating
activities.............. 258,517 1,038 106,684 (3,212,444)
--------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................. (18,876) (322,762) (18,428) (530,139)
--------- ---------- ---------- -----------
Net cash used in
investing activities.... (18,876) (322,762) (18,428) (530,139)
--------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
under capital lease
obligations............... -- 248,387 (8,340) 178,460
Loan proceeds.............. -- -- 200,000 --
Withdrawal of capital...... (5,000) -- -- --
Distribution to
Shareholder............... -- (50,000) -- --
Series A preferred stock... -- 2,000,000 2,000,000 --
Series B preferred stock,
net....................... -- -- -- 8,957,694
Series C preferred stock,
net....................... -- -- -- 3,956,408
Exercise of common stock
options................... -- -- -- 94,000
--------- ---------- ---------- -----------
Net cash provided by
(used in) financing
activities.............. (5,000) 2,198,387 2,191,660 13,186,562
--------- ---------- ---------- -----------
Net increase in cash........ 234,641 1,876,663 2,279,916 9,443,979
Cash and cash equivalents,
beginning of period........ 548 235,189 235,189 2,111,852
--------- ---------- ---------- -----------
Cash and cash equivalents,
end of period.............. $ 235,189 $2,111,852 $2,515,105 $11,555,831
========= ========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period
for:
Interest................... $ -- $ 15,555 $ -- $ 42,670
========= ========== ========== ===========
Income taxes............... $ -- $ -- $ -- $ --
========= ========== ========== ===========
SUMMARY OF NON-CASH
FINANCING ACTIVITIES:
Notes receivable for common
stock..................... $ -- $ (43,750) $ -- $ --
========= ========== ========== ===========
Accrued dividends.......... $ -- $ 23,233 $ -- $ 152,356
========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of the Business
L90, Inc., (the "Company") is an internet-based provider of online
advertising and direct marketing solutions for advertisers and Web
publishers. The Company provides fully-outsourced ad sales, as well as ad
serving and tracking technology. The Company develops targeted advertising
campaigns that leverage the capabilities of the internet. The Company's
adMonitor technology platform provides Web publishers, advertisers and ad
agencies with the ability to target, deliver, measure and analyze their
marketing campaigns.
The Company commenced operations in January 1997 as a sole
proprietorship. In May 1997, the Company became a California limited
liability company and changed its name to John Bohan and Associates, LLC.
At that time, the Company did business as AdNet Strategies. In January
1998, the Company incorporated in California, elected S-corporation status
and changed its name to AdNet Strategies, Inc. In December 1998, the
Company became a California C-corporation under the name Latitude 90, Inc.
In September 1999, the Company reincorporated in Delaware as L90, Inc.
2. Summary of Significant Accounting Policies
a. Revenue Recognition
Revenue from ad sales is earned under commission-based and service fee-
based contracts. For commission-based contracts, the Company generally
invoices the full amount of revenue due from Web Publishers for the sale of
their ad inventory and is entitled to receive a commission. Revenue earned
from commission-based contracts reflects only the amount of the commission
earned without any associated cost of revenue. The Company recognizes
commissions ratably over the term of the advertising campaigns, which
usually range from one to twelve months. For service fee-based contracts,
the Company is obligated to pay a service fee to the Web publishers for ads
placed on their Web sites that is included in cost of revenue.
Additionally, under service fee-based contracts, the Company must collect
and bear the risk of loss from the advertiser for ads sold. Consequently,
revenue earned from service fee-based contracts reflects the full value of
the ads sold, or the Company's credit risk exposure on service fee-based
sales.
System revenue represents the full value of gross billings for ads sold
under either commission-based or service fee-based contracts and is not
affected by the mix of such contracts. Revenue of the Company was derived
from system revenue of $4,210,080 for the period ended December 31, 1997,
$8,023,501 for the year ended December 31, 1998 and $9,231,591 for the nine
month period ended September 30, 1999.
b. Current Vulnerability Due to Certain Concentrations
The Company sells advertising space to its customers. For the period
ended December 31, 1997, approximately 17 percent of revenue was to one
advertising customer. No other advertising customer accounted for 10
percent or more of revenue in that period. For the year ended December 31,
1998 and the nine months ended September 30, 1999, there were no
advertising customers that comprised greater than 10 percent of revenue.
F-7
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company purchases advertising space from its Web site partners. For
the period ended December 31, 1997, the three largest Web site partners
accounted for 27.1 percent, 22.0 percent and 17.3 percent of revenue,
respectively. For the year ended December 31, 1998, the two largest Web
site partners accounted for 36.3 percent and 12.0 percent of revenue,
respectively. For the nine months ended September 30, 1999, the largest Web
site partner accounted for 11.2 percent of revenue. No other Web site
partner accounted for 10 percent or more of the advertising space sold to
generate revenue. The loss of the largest advertising customer or any of
the largest Web site partners could have an adverse effect on the Company's
operations.
c. Cash and Cash Equivalents
For purposes of the balance sheets and statements of cash flows, cash and
cash equivalents includes all cash instruments due on demand or with an
original maturity of 90 days or less.
d. Accounts Receivable
The Company has receivables due from advertisers and from Web publishers
resulting from the sales of ads. These receivables relate to both
commission-based and service fee-based contracts. The Company's credit
exposure on commission-based contracts is limited to the net amount of cash
to be received by the Company from ad sales. The Company's credit exposure
on service fee-based contracts is the full amount of the ad sales as the
Company is obligated to pay the Web publishers for ads sold on their Web
sites irrespective of receiving payment from the advertisers.
The Company extends credit to its customers, who are located in the
United States. The ability of these customers to meet their obligations to
the Company is dependent on their economic health, as well as their
industry and other factors. The Company maintains an allowance for doubtful
accounts which represents management's estimate of expected losses on
specific accounts and inherent losses on other as yet unidentified accounts
included in accounts receivable. In estimating the potential losses on
specific accounts, management performs ongoing credit evaluations of its
customers based on management analysis and reviews of available public
documents. The amounts the Company will ultimately realize could differ
materially in the near term from the amounts assumed in arriving at the
allowance for doubtful accounts reported in the financial statement.
e. Property and Equipment
Property and equipment are recorded at cost and depreciated over the
estimated useful life of the asset, using the straight-line method of
depreciation. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the term of the lease. Property,
equipment and leasehold improvements have estimated useful lives ranging
from three to five years.
f. Equipment Under Capital Leases
Equipment under capital leases is recorded at the lower of the present
value of the minimum lease payments or the fair value of the leased
property at the inception of the lease. Amortization of leased property is
computed using the straight-line method over the term of the lease.
F-8
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
g. Deferred Revenue
Deferred revenue primarily represents advertising campaign revenue to be
recognized over the period of the campaign subsequent to the respective
year-end. This revenue will be recognized ratably over the term of the
advertising campaign, which usually ranges from one to twelve months.
h. Income Taxes
The Company provides for income taxes in accordance with the asset and
liability method. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using the enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
i. Net Loss Per Share
Basic earnings per share ("EPS") is computed by dividing income or loss
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or result in the
issuance of common stock that would then share in the earnings of the
Company. Potentially dilutive securities are excluded from the Company's
calculation of diluted EPS when their inclusion would be antidilutive.
j. Stock-Based Compensation
Generally Accepted Accounting Principles permit companies to use either
of two alternative accounting methods to recognize employee stock-based
compensation. Under the first accounting method, if options are granted at
an exercise price equal to the market value of the stock at the time of the
grant, no compensation expense is recognized. The Company follows this
accounting method, which it believes better reflects the motivation for its
issuance of stock options, namely, that they are incentives for future
performance rather than compensation for past performance. Under the second
accounting method, issuers record compensation expense over the period they
are expected to be outstanding prior to exercise, expiration, or
cancellation. The amount of compensation expense recognized over this term
is the "fair value" of the options at the time of the grant as determined
by an option pricing model. The option pricing model attributes fair value
to the options based upon the length of their term, the volatility of the
stock price in past periods, and other factors. Under this method, the
issuer recognizes compensation expense regardless of whether the officer or
director exercised the options. Pro forma disclosures of net income under
this method are presented in Note 6.
k. Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the
F-9
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
l. New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires all
costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as
incurred. Costs incurred during the application development stage are
required to be capitalized and amortized over the estimated useful life of
the software. SOP 98-1 was adopted by the Company on January 1, 1999 and
did not have a material effect on the Company's financial position or
results of operations.
3. Equity
On April 29, 1999, the Board of Directors of the Company authorized a
stock split converting each share of common stock into ten shares of common
stock. This stock split increased the total number of common stock shares
authorized from 1,800,000 to 18,000,000. In October 1999, the Company
announced that it will effect a reverse stock split converting three shares
of common stock into two shares of common stock. This action is pending the
approval of the Board of Directors and is intended to be effective prior to
the initial public offering of the Company's common stock. The effect of
these stock splits are retroactively reflected in the financial statements
and the accompanying notes to the financial statements.
On September 22, 1999, the Company restated and amended its certificate
of incorporation authorizing 80,000,000 shares of common stock, later
adjusted to 53,333,333 as a result of the reverse stock split, and
15,000,000 authorized shares of preferred stock.
a. Series A Preferred Stock Financing
On September 16, 1998, in a private placement transaction, the Company
issued 2,000 shares of Series A preferred stock to William Apfelbaum at
$1,000 per share, convertible into common stock at the conversion price per
share of $1.20. The number of shares of common stock into which the Series
A preferred stock will convert is an aggregate of 1,666,666 shares. Mr.
Apfelbaum, the Company's chairman, was issued a warrant to purchase up to
438,593 shares of the Company's common stock at a price per share of $1.71.
The holder of the Series A preferred stock is entitled to registration
rights regarding the shares of common stock issued or issuable upon
conversion and upon exercise of the warrant. The holder of the outstanding
shares of Series A preferred stock is entitled to receive, upon conversion
of shares of Series A preferred stock into common stock, a dividend in cash
accruing from September 16, 1998, at an annual rate of $40 per share of
Series A preferred stock so converted. The holder of Series A preferred
stock has the right to elect one member of the board of directors. To date,
the holder of the Series A preferred stock has designated William Apfelbaum
to the board of directors. All shares of Series A preferred stock will
automatically convert into shares of common stock upon the closing of an
initial public offering of the Company's common stock.
F-10
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
b. Series B Preferred Stock Financing
Commencing on August 6, 1999, in a private placement transaction, the
Company issued a total of 4,107,044 shares of Series B preferred stock at
$2.35 per share convertible into common stock at a three-to-two ratio. The
principal purchasers of the Series B preferred stock included DigaComm
(L90), L.L.C. and Keystone Venture V, L.P. DigaComm (L90), L.L.C. also
purchased a warrant to acquire up to 353,964 shares of common stock of the
Company at a price per share of $5.30. Unless previously exercised this
warrant will be automatically exercised on a cashless basis into shares of
common stock, with a fair value equivalent to the intrinsic value of the
warrant, upon the closing of an initial public offering of the Company's
common stock. The holders of the Series B preferred stock are entitled to
registration rights regarding the shares of common stock issued or issuable
upon conversion and upon exercise of the warrant. The holders of the
outstanding shares of Series B preferred stock are entitled to receive,
upon conversion of shares of Series B convertible preferred stock into
common stock, a dividend in cash accruing from August 6, 1999, at an annual
rate of $0.141 per share of Series B preferred stock so converted. The
holders of Series B preferred stock collectively have the right to elect
three members of the board of directors. All shares of Series B preferred
stock will automatically convert into shares of common stock upon the
closing of an initial public offering of the Company's common stock. In
connection with the closing of the private placement transaction for Series
B preferred stock, the Company incurred fees and expenses totaling
$629,864. This amount has been accrued for at September 30, 1999 and has
subsequently been paid.
c. Series C Preferred Stock Financing
On September 22, 1999, in a private placement transaction, the Company
issued 1,307,190 shares of Series C preferred stock to Development Ventures
(Two) Inc. and Rare Medium Group, Inc. at $3.06 per share, convertible into
common stock at a three-to-two ratio. The holders of the outstanding shares
of Series C preferred stock are entitled to receive, upon conversion of the
Series C preferred stock into common stock, a dividend in cash accruing
from September 22, 1999, at an annual rate of $0.18 per share of Series C
preferred stock so converted. Development Ventures (Two) Inc. also
purchased a warrant to acquire up to 674,029 shares of common stock of the
Company at a price per share of $4.59. Rare Medium Group, Inc. also
purchased a warrant to acquire up to 600,000 shares of common stock of the
Company at a price per share of $4.59. Unless previously exercised, both
warrants will automatically be exercised on a cashless basis into shares of
common stock upon the closing of an initial public offering. The holders of
Series C preferred stock are entitled to have their shares of common stock
issuable upon conversion of the Series C preferred stock, as well as the
common stock issuable upon exercise of their warrants, registered on the
same registration statement. All shares of Series C preferred stock will
automatically convert into shares of common stock upon the closing of an
initial public offering of the Company's common stock.
d. Warrants
On June 7, 1999, the Company issued to The Roman Arch Fund L.P. and The
Roman Arch Fund II, L.P. four warrants to purchase up to an aggregate of
333,333 shares of common stock, later adjusted to an aggregate of 150,000
shares of common stock, at an initial purchase price of
F-11
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
$2.40 per share, subject to adjustment. These warrants may be exercised on
a cashless basis. These warrants expire on the earlier of (i) June 7, 2005
or (ii) the fifth anniversary of an initial public offering with gross
proceeds of at least $20,000,000. Eighty-three thousand three hundred
thirty-three of these warrants, to the extent not previously exercised, may
be exchanged at the election of the holder within 180 days of the closing
of an initial public offering of the Company's common stock with gross
proceeds of at least $20,000,000.
On August 13, 1999, the Company issued to William Apfelbaum a warrant to
purchase up to 353,964 shares of common stock, at an exercise price of
$5.30 per share. This warrant will automatically convert into the right to
receive 353,964 shares of common stock immediately prior to the closing of
an initial public offering of the Company's common stock.
e. Unaudited Pro Forma Stockholders' Equity
Concurrent with the consummation of an initial public offering of the
Company's common stock, the Company will cause the conversion of all
existing Series A, B and C preferred stock into 5,276,156 shares of the
Company's common stock. The unaudited pro forma stockholders' equity at
September 30, 1999, gives effect to this conversion.
4. Debt
On June 7, 1999, the Company entered into two senior promissory note
agreements in the aggregate principal amount of $1,000,000 and warrants to
purchase an aggregate of up to 333,333 shares of common stock. These notes
bear interest at 9% through June 7, 2000, and 12% thereafter until paid in
full. During August 1999, the Company paid in full its obligations under
these two senior promissory note agreements and issued the warrants in
aggregate of 150,000 shares of common stock.
5. Income Taxes
During 1997, the Company was a sole proprietorship and limited liability
corporation. In 1998, the Company was an S-corporation and the federal and
state taxes were the responsibility of stockholders rather than the
Company. Effective November 30, 1998, the Company became a C-corporation
for income tax purposes. Pursuant to this election, such taxes will be the
responsibility of the Company rather than stockholders.
Deferred income taxes arise as a result of temporary differences in the
methods used to determine income for financial reporting purposes versus
income for tax reporting purposes. These differences result primarily from
accruals, reserves and net operating losses carrying forward.
F-12
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes for December 31, 1998 and the
nine months ended September 30, 1999 consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Current:
Federal........................................ $ -- $ --
State.......................................... 800 --
-------- ----------
800 --
Deferred........................................ 136,600 1,806,963
-------- ----------
137,400 1,806,963
Less: Valuation allowance....................... 136,600 1,806,963
-------- ----------
$ 800 $ --
======== ==========
</TABLE>
The net deferred income tax assets at December 31, 1998, and
September 30, 1999, are comprised primarily of net operating loss carry
forwards and are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred tax asset............................. $ 136,600 $ 1,806,963
Less: Valuation allowance...................... (136,600) (1,806,963)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
At December 31, 1998 and September 30, 1999, the Company provided a
valuation allowance for net deferred tax assets which management determined
were "more likely than not" to be unrealizable. As a result, no deferred
tax assets have been recorded by the Company.
6. Stock Options and Warrants
a. Stock Options
During 1998, the Company issued 648,667 nonqualified stock options at an
exercise price equal to the then current fair market value of the stock, as
determined by the Company's Board of Directors. These options vest between
two to three years after the grant date and expire no later than ten years
after the grant date.
During February 1999, the Company granted 46,666 stock options to
employees with a strike price of $1.50 vesting ratably through March 1,
2003. These options are dependent upon continued employment with the
Company.
During April 1999, the Company adopted an employee stock option plan
authorized by the Board of Directors to grant up to an aggregate of
1,666,666 options to purchase common stock shares. These shares may be
comprised of authorized but unissued shares or shares previously issued but
reacquired by the Company. The price of these options will be not less than
the fair market value of the shares, or greater than 110 percent of the
fair market value of the shares, at the date of grant. This plan will
terminate ten years from the adoption date and may be amended by the Board
of Directors with stockholder approval.
F-13
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
No options were issued by the Company prior to 1998. Employee
transactions during the year ended December 31, 1998, and for the nine
months ended September 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------- -------------------------
Weighted Weighted
average Average
Employee stock options Shares exercise price Shares exercise price
---------------------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................. -- $ -- 582,000 $0.86
Granted.................. 648,667 0.89 1,644,400 3.51
Exercised................ -- -- (26,666) 3.53
Forfeited................ (66,667) 1.20 (36,000) 1.80
------- ---------
Outstanding at end of
period.................. 582,000 $0.86 2,163,733 $2.82
======= =========
Options exercisable at
end of period........... -- 793,333
Weighted-average fair
value of options granted
during the period....... $ 0.60 $ 2.31
</TABLE>
The following table summarizes information about employee stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Weighted average
Number remaining
Range of exercise prices outstanding contractual life
------------------------ ----------- ----------------
<S> <C> <C>
$0.38......................................... 266,667 8.26 years
$1.20......................................... 263,333 8.71 years
$1.50......................................... 66,667 9.21 years
$3.53......................................... 1,500,400 9.88 years
$4.59......................................... 66,667 9.98 years
---------
2,163,733
=========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plan. No compensation cost has been recognized for its
employee stock option grants, which are fixed in nature, as the options
have been granted with an exercise price equal to the then current fair
market value of the Company's stock as determined by the Company's Board of
Directors. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant dates for awards
under this plan consistent with the method of Financial Accounting
Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss for the year ended December 31, 1998
and the nine months ended September 30, 1999 would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Net loss as reported.......................... $289,569 $4,513,624
Pro forma adjustment.......................... 137,769 973,717
-------- ----------
Pro forma loss................................ $427,338 $5,487,341
======== ==========
</TABLE>
F-14
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the year ended December 31, 1998:
dividend yield of 0 percent; expected volatility of 20 percent; risk-free
interest rates of 5.9 percent; and an expected life of five years.
b. Common Stock Warrants
On September 16, 1998, the Company entered into a Series A preferred
stock agreement which included a warrant to purchase 438,593 shares of
common stock at a strike price of $1.71 per share. In August 1999, the
Company issued another warrant to this holder of Series A preferred stock
to purchase 353,964 shares of common stock at a strike price of $5.30 per
share.
On June 7, 1999, the Company issued warrants, in association with the
senior promissory notes, to purchase an aggregate of up to 333,333 shares
of common stock, later adjusted to an aggregate of 150,000 shares of common
stock. These warrants may be exercised on a cashless basis. These warrants
are exercisable at a price equal to $2.40 per share at any time or from
time to time commencing on the earliest of (i) December 7, 1999, (ii) the
closing of a qualified initial public offering as defined, (iii) the
closing of a qualified private placement as defined and prior to 5:00 p.m.,
Los Angeles, California time, on the earlier of (i) June 7, 2005 or (ii)
the fifth anniversary of the commencement of trading of the Company's
common stock in connection with an initial public offering with gross
proceeds of at least $20,000,000.
In August 1999, in association with the Series B preferred stock
issuance, the Company issued a warrant to purchase 353,964 shares of the
Company's common stock at a price of $5.30 per share expiring August 2004.
To the extent not previously exercised, this warrant will be automatically
exercised on a cashless basis into shares of common stock immediately upon
the closing of an initial public offering of the Company's common stock.
The holder of the warrant is entitled to registration rights regarding the
shares of common stock issued or issuable upon conversion and upon exercise
of the warrant.
In September 1999, in association with the Series C preferred stock
issuance, the Company issued warrants to purchase 1,274,029 shares of the
Company's common stock at a price of $4.59 per share expiring September
2004. To the extent not previously exercised, these warrants will be
automatically exercised on a cashless basis into shares of common stock
immediately upon the closing of an initial public offering of the Company's
common stock. The holders of the warrants are entitled to registration
rights regarding the shares of common stock issued on issuable upon
conversion and upon exercise of the warrants.
7. Commitments and Contingencies
a. Litigation
The Company may become subject to legal proceeding from time to time in
the normal course of business. The Company is not currently involved in any
litigation that management believes will have a material adverse effect on
the Company's financial position or results of operations.
F-15
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
b. Lease Commitments
The Company is committed under noncancellable operating and capital lease
obligations for certain facilities and equipment. The equipment related to
capital leases has an original cost of approximately $0 and $274,000 at
December 31, 1997 and 1998, respectively, and $521,662 at September 30,
1999, with accumulated depreciation of approximately $0, $11,000, and
$77,150, respectively. Rent expense under operating leases was
approximately $24,000 and $163,000 for December 31, 1997 and 1998,
respectively, and $442,250 for September 30, 1999.
Future minimum annual payments under noncancellable operating and capital
leases are as follows as of September 30, 1999:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
Three-month period ending December 31, 1999........... $ 52,906 $ 172,174
<CAPTION>
Year
----
<S> <C> <C>
2000.................................................. 212,342 408,356
2001.................................................. 193,222 347,755
2002.................................................. 64,293 294,427
Thereafter............................................ 14,336 982,045
-------- ----------
537,249 $2,204,757
======== ==========
Less--Amounts representing interest................... 110,420
--------
426,829
Less--Current portion................................. 140,753
--------
$286,094
========
</TABLE>
8. Related Party Transactions
During 1998, the Company received $43,750 in notes receivable for common
stock from employees for the issuance of 116,667 shares of common stock
with a par value of $0.001 per share. These notes bear interest at a rate
equal to 5.28 percent per annum and mature at the earliest of cessation of
maker's employment by the Company for any reason or May 18, 2004. In
addition, during 1998, the Company issued an aggregate of 6,550,000 shares
of common stock with a par value of $0.001 per share to certain other
employees and a former employee in exchange for their contribution of the
operating business of John Bohan & Associates, LLC, which was valued at
$2,456,250.
During 1998, the Company entered into an agreement with a stockholder to
purchase 2,000 shares of preferred stock for $2,000,000 and a warrant to
purchase 438,593 shares of common stock at a strike price of $1.71 per
share.
During September, 1999, a member of the Board of Directors exercised
options to purchase 26,667 shares of common stock at $3.53 per share. This
transaction has been reflected in the financial statements and accompanying
notes to the financial statements.
F-16
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Subsequent Event (Unaudited)
Legal Proceedings
On November 12, 1999, DoubleClick, Inc. ("DoubleClick") filed a lawsuit
against the Company in the United States District Court for the Eastern
District of Virginia. The suit alleges that the Company is infringing, and
inducing and contributing to the infringement by third parties of, a patent
held by DoubleClick related to methods and networks for delivering,
targeting and measuring advertising over the internet. DoubleClick is
seeking treble damages in an unspecified amount, a preliminary and
permanent injunction from further alleged infringement and attorneys' fees
and costs. The Company believes that it has meritorious defenses to this
lawsuit and intends to defend itself vigorously. The Company currently
believes that this lawsuit and its outcome will not have a material adverse
effect on the Company's results of operations or financial position.
However, the litigation could result in significant expenses and diversion
of management time and other resources. Further, if DoubleClick
successfully asserts an infringement claim against the Company, its
operations would be impacted severely. The DoubleClick suit could result in
limitations on the Company's ability to market its products and services,
delays and costs associated with redesigning its products and services or
payments of license fees or other payments.
F-17
<PAGE>
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6,500,000 Shares
[LOGO OF L90, INC.]
Common Stock
------------------------
PROSPECTUS
------------------------
SG COWEN
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
WIT CAPITAL CORPORATION
January 28, 2000
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