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As filed with the Securities and ExchangeCommission on July 28, 2000
Registration No. 333-87607
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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L90, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 7310 95-4761069
(State or other jurisdiction (Primary standard industrial (IRS employer
of incorporation or organization) classification code number) identification number)
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2020 Santa Monica Boulevard, Suite 400
Santa Monica, California 90404
(310) 315-1199
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------
John C. Bohan
President & Chief Executive Officer
L90, Inc.
2020 Santa Monica Boulevard, Suite 400
Santa Monica, California 90404
(310) 315-1199
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Robert A. Miller, Jr., Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Los Angeles, California 90071
(213) 683-6000
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Approximate date of proposed sale to the public:
From time to time as determined by the Selling Stockholders.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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==================================================================================================================
CALCULATION OF REGISTRATION FEE
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Proposed
Amount Proposed Maximum Maximum Amount of
Title of each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par 2,032,142(1) $9.63(2) $19,569,527.46(2) $5,166.36(3)
value per share .............
==================================================================================================================
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(1) This Registration Statement covers the resale by certain stockholders of the
Registrant of up to 2,032,142 shares of Common Stock issued to such
stockholders upon the exercise of warrants and conversion of their Series C
Preferred Stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) using the average of the high and low sale
prices reported on the Nasdaq National Market for the Registrant's Common
Stock on July 24, 2000.
(3) Of this amount, $2,738 has been previously paid.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 28, 2000
2,032,142 Shares
LOGO
Common Stock
This prospectus relates to the offering of up to an aggregate of 2,032,142
shares of L90, Inc. common stock which may be offered by the persons named in
this prospectus under the caption "selling stockholders."
Each selling stockholder, acting as principal for its own account or in
brokerage transactions at prevailing market prices or in transactions at
negotiated prices, may offer for sale the shares. We will not receive any
proceeds from the sale of the shares. It is not possible at the present time to
determine the price to the public in any sale of the shares by the selling
stockholders and each selling stockholder reserves the right to accept or
reject, in whole or in part, any proposed purchase of shares. Accordingly, the
public offering price, the amount of any applicable underwriting discounts and
commissions and the net proceeds to the selling stockholders will be determined
at the time of such sale by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"LNTY." On July 24, 2000, the last reported sales price for our common stock
was $9.75 per share.
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 6.
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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The date of this Prospectus is July _____, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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TABLE OF CONTENTS
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Page Page
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Prospectus Summary........................ 3 Management................................ 40
Risk Factors.............................. 6 Related Party Transactions................ 46
Forward-Looking Statements................ 14 Principal Stockholders.................... 47
Use of Proceeds........................... 15 Selling Stockholders...................... 49
Dividend Policy........................... 15 Description of Capital Stock.............. 50
Other Information......................... 15 Shares Eligible for Future Sale........... 53
Market Price of Common Stock.............. 15 Plan of Distribution...................... 55
Capitalization............................ 16 Legal Matters............................. 55
Dilution.................................. 16 Experts................................... 55
Selected Financial Data................... 17 Where You Can Find More Information....... 55
Management's Discussion and Analysis of Index to Financial Statements............. 56
Financial Condition and Results of
Operations.............................. 18
Business.................................. 29
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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. The selling stockholders 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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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. 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. We believe 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;
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. 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.
Recent Development.
On July 24, 2000, we completed the acquisition of webMillion.com, Inc., a
leading direct marketing promotions company, for an aggregate of 2,000,000
shares of our common stock.
The Offering
The shares being offered include shares which:
. were issued to the selling stockholders upon their conversion of our Series
C preferred stock upon the closing of our initial public offering of our
common stock; and
. were issued to the selling stockholders upon their exercise of warrants.
The selling stockholders have agreed not to sell one-half of their shares until
October 25, 2000. We will not receive any proceeds from the sale of shares of
common stock by the selling stockholders.
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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. See also "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments" for financial information for the three months
ended June 30, 2000. Full financial statements are not currently available for
the three month period ended June 30, 2000.
The following tables assume no exercise of any stock options or warrants
outstanding as of March 31, 2000. As of March 31, 2000, there were options and
warrants outstanding to purchase a total of 2,508,410 shares of common stock
with a weighted average exercise price of $6.88 per share.
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Period from
Inception Three
(January 5, Months
1997) through Year Ended Year Ended Ended
December 31, December 31, December 31, March 31,
1997 1998 1999 2000
------ ---- ---- ----
(unaudited)
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Statement of Operations Data:
Revenue ..................................................... $1,160 $2,189 $ 9,201 $ 8,583
Operating income (loss) ..................................... 307 (306) (7,518) (5,976)
Net income (loss) attributable to common stockholders ....... $ 310 $ (313) $(8,958) $(5,000)
====== ====== ======= =======
Net loss per share:........................................... $(0.05) $ (1.34) $( 0.30)
Basic/Diluted (1) .......................................... ====== ======= =======
Weighted average shares outstanding used in
basic and diluted per share calculation (1) ................ 6,667 6,675 16,584
====== ======= =======
December 31, December 31, December 31, March 31,
1997 1998 1999 2000
----- ------ ------- --------
Balance Sheet Data: (unaudited)
Cash and cash equivalents..................................... $ 235 $2,112 $ 6,896 $103,693
Current assets................................................ 945 3,619 12,366 112,701
Total Assets.................................................. 970 3,936 16,136 121,441
Long-term capital lease obligations, net of current portion... -- 180 443 820
Total stockholders' equity.................................... 495 2,133 7,312 109,101
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Period from
Inception
(January 5, 1997) Three Months
through Year Ended Year Ended Ended
December 31, December 31, December 31, March 31,
1997 1998 1999 2000
---- ---- ---- ----
(unaudited)
(in thousands)
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Supplemental Data:
System revenue(2) ............................................ $4,210 $8,024 $15,366 $10,387
====== ====== ======= =======
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(1) The foregoing table assumes no exercise of any stock options or warrants
outstanding as of March 31, 2000. As of March 31, 2000, there were options
and warrants outstanding to purchase a total of 2,508,410 shares of common
stock with a weighted average exercise price of $6.88 per share.
(2) 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.
We have a history of losses and expect to incur substantial losses in the future
We incurred net losses of approximately $9.5 million for the six months ended
June 30, 2000 and $1.9 million for the six months ended June 30, 1999. Our
accumulated deficit from inception, as of June 30, 2000, was approximately $16.8
million. 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.
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 infringement lawsuit against us in the United
States District Court for the Eastern District of Virginia. The lawsuit was
moved to the United States District Court for the Southern District of New York
in March 2000. The suit alleges that we are infringing, and inducing and
contributing to the infringement by third parties of, a
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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.
On May 24, 2000, DoubleClick filed a reissue application with the U.S. Patent
& Trademark Office with respect to the patent at issue. On May 26, 2000,
DoubleClick filed with the court a motion to stay the entire litigation pending
the U.S. Patent and Trademark Office's review of DoubleClick's reissue
application. On June 12, 2000, we filed with the court an opposition to
DoubleClick's motion to stay the litigation. Our opposition asked the court to
stay the litigation with respect to the issues related to infringement and the
validity of the patent, but asked the court to proceed with respect to the issue
related to our claim of DoubleClick's inequitable conduct. On July 21, 2000, the
court stayed the litigation with respect to the issues related to infringement
and the validity of the patent. The court has allowed us to proceed with
respect to the issue related to our claim of DoubleClick's inequitable conduct.
A trial date has been set for November 6, 2000.
This litigation could 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. 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 from competing in the Internet advertising market
and our operations could 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;
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. disruption or impairment of the Internet;
. changes in our pricing policies or those of our competitors;
. 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.
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. A number of lawsuits
have recently been filed against certain Internet companies related to online
privacy. In addition, the Federal Trade Commission has begun investigations of,
and several attorneys general have instituted legal proceedings against, certain
Internet companies related to online privacy. 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
is able to use 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
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 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 data from Internet users, 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.
Our common stock and our stock price may experience extreme price and volume
fluctuations
The stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. The market price of our common stock has fluctuated in the
past and is likely to be highly volatile. The market price of our common stock
could be subject to wide fluctuations in response to factors such as:
. actual or anticipated variations in our revenue;
. earnings and cash flow;
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. 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.
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 169 full-time and three part-time employees as of June 30, 2000
from 66 full-time and three part-time employees as of June 30, 1999. 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 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 revenue
For the quarter ended June 30, 2000, our top five Web publishers accounted for
approximately 46.5% of our revenue, and our top three Web publishers accounted
for approximately 39.4% of our revenue. One website accounted for 26.5% of our
revenue for the quarter ended June 30, 2000. Our contracts with Web publishers,
including these top Web publishers, are generally one year in
duration and
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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 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 following its acquisition
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 quarter ended June 30, 2000, revenue from our five largest advertisers
accounted for 20.5% of our revenue. No single advertiser accounted for more
than 10% of our revenue for the quarter ended June 30, 2000. 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 quarter ended June 30, 2000, our bad debt expense related to uncollected
advertising fees was $989,908.
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;
. 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.
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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.
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 DoubleClick, 24/7 Media and Engage
Technologies. 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.
11
<PAGE>
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.
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. On
July 24, 2000, we completed the acquisition of webMillion.com, Inc. We cannot
assure you that we will be able to identify other acquisition or investment
candidates. Even if we do identify other 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. In the webMillion.com acquisition,
we issued approximately 2,000,000 shares of common stock.
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.
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
patent, 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 a patent application for our adMonitor
technology in the United States. We have also filed applications for several
trademarks internationally and in the United States. We cannot assure you that
any of our patent or trademark applications will be approved. Even if these
applications are approved, the patents or 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.
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
12
<PAGE>
parties or if the content is defamatory. Any claims or counterclaims could be
time-consuming, result in costly litigation or divert management's attention.
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.
A 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 our common stock are subject to 180 day
lock-up agreements that expired on July 26, 2000. Sales of substantial amounts
of our common stock, or the perception that such sales could occur, could
adversely affect the market price of our common stock.
Our executive officers and directors exercise significant control over our
company, including the ability to control the election of our board of directors
and the outcome of corporate actions requiring stockholder approval
Our executive officers and directors, in the aggregate, beneficially own or
control a substantial number of the outstanding shares of our common stock as of
June 30, 2000. 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.
Our planned international expansion may be affected by factors beyond our
control
We are currently evaluating the initiation of operations in selected
international markets. This potential expansion could occur through internal
growth, acquisition, or both. In June 2000, we established a branch office in
London. Expansion into international markets will require substantial resources
and attention from management. We have no experience in international
operations and may not be able to compete effectively in international markets.
We may face numerous risks inherent in conducting business internationally, such
as:
. the impact of recessions in economies outside the United States;
. changes in domestic regulatory requirements, as well as differences between
domestic and foreign regulatory requirements;
. export restrictions, including export controls relating to encryption
technology;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences;
. difficulties and costs of staffing and managing foreign operations;
. problems associated with any acquisitions we might pursue;
13
<PAGE>
. foreign political and economic instability;
. tariffs and other trade barriers;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity.
Our failure to address these risks adequately may cause our business, results
of operations and financial condition to suffer.
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 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 "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.
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.
14
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of common stock by
the selling stockholders.
DIVIDEND POLICY
Other than a total of $50,000 that we distributed to our common stockholders
during the year ended December 31, 1998, and a total of $403,551 that we
distributed to the holders of our Series A, B and C preferred stock upon their
conversion into common stock upon the closing of our initial public offering of
common stock, we have not declared or paid cash dividends on our common stock
since our incorporation. 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 excludes
options and warrants outstanding as of March 31, 2000, to purchase 2,508,410
shares of common stock with a weighted average exercise price of $6.88 per
share.
MARKET PRICE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "LNTY" since our initial public offering of common stock on January 28,
2000. The following table sets forth, for the periods indicated, the high and
low sales prices per share of our common stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
First Quarter $31.38 $13.88
(January 28, 2000 through March 31, 2000)
Second Quarter 19.00 4.88
(April 1, 2000 through June 30, 2000)
Third Quarter 10.50 9.00
(July 1, 2000 through July 24, 2000)
</TABLE>
On July 24, 2000, the last sale price of our common stock reported by the
Nasdaq National Market was $9.75 per share. As of June 30, 2000, we had
approximately 89 holders of record of our common stock.
15
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of March 31, 2000. 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>
March 31, 2000
----------------------
(in thousands, except per
share data)
<S> <C>
Long-term capital lease obligations, net of current portion .................... $ 820
Stockholders' equity:
Preferred stock, $0.001 par value; 6,998,000 shares authorized;
no shares issued or outstanding .............................................. --
Common stock, $0.001 par value; 53,333,333 shares authorized;
16,583,947 shares issued and outstanding ...................................... 22
Additional paid-in capital .................................................... 123,044
Notes receivable for common stock ............................................. (126)
Accumulated deficit ........................................................... (13,839)
Distributions ................................................................. --
Dividends....................................................................... --
Total stockholders' equity .................................................... 109,101
Total capitalization .......................................................... $109,921
========
</TABLE>
The foregoing table assumes no exercise of any stock options or warrants
outstanding as of March 31, 2000. As of March 31, 2000, there were options and
warrants outstanding to purchase a total of 2,508,410 shares of common stock
with a weighted average exercise price of $6.88 per share.
DILUTION
None of the shares offered hereby are being sold by L90. Therefore, there
will be no dilution in the net tangible book value per share as a result of the
sale of the shares offered hereby.
16
<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. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments" for financial
information for the three months ended June 30, 2000. Full financial statements
are not currently available for this three month period ended June 30, 2000.
<TABLE>
<CAPTION>
Period from
Inception
(January 5, 1997) Three Months
through Year Ended Year Ended Ended
December 31, December 31, December 31, March 31,
1997 1998 1999 2000
---- ---- ---- ----
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue....................................................... $1,160 $ 2,189 $ 9,201 $ 8,583
Operating expenses:
Cost of revenue........................................... -- -- 4,751 5,456
Sales and marketing....................................... 550 1,362 4,866 2,908
Research and development.................................. -- 138 2,581 2,181
General and administrative................................ 303 995 4,521 4,014
------ ------- ------- -------
Total operating expenses...................................... 853 2,496 16,719 14,559
------ ------- ------- -------
Operating income (loss)....................................... 307 (306) (7,518) (5,976)
Interest income (expense), net................................ 3 17 30 978
------ ------- ------- -------
Net income (loss) before provision for income taxes........... 310 (289) (7,487) (4,998)
Provision for income taxes.................................... -- 1 1 --
------ ------- ------- -------
Net income (loss)............................................. $ 310 $ (290) $(7,488) $(4,998)
====== ======= ======= =======
Cumulative dividends on participating preferred stock......... -- (23) (1,470) (2)
------ ------- ------- -------
Net income (loss) attributable to common
stockholders................................................. $ 310 $ (313) $(8,958) $(5,000)
====== ======= ======= =======
Net loss per share: $(0.05) $ (1.34) $ (0.30)
Basic/Diluted (2)............................................ ======= ======= =======
Weighted average shares outstanding used in
6,667 6,675 16,584
basic and diluted per share calculation(2)................... ======= ======= =======
December 31, December 31, December 31, March 31,
1997 1998 1999, 2000
---- ---- ----- ----
(unaudited)
(in thousands)
Balance Sheet Data:
Cash and cash equivalents..................................... $235 $2,112 $ 6,896 $103,693
Working capital............................................... 470 1,996 4,914 102,186
Total assets.................................................. 970 3,936 16,136 121,441
Convertible preferred stock................................... -- 2,000 16,006 --
Total stockholders' equity.................................... 495 2,133 7,312 109,101
</TABLE>
<TABLE>
Period from
Inception
(January 5, 1997) Three Months
through Year Ended Year Ended Ended
December 31, December 31, December 31, March 31,
1997 1998 1999 2000
---- ---- ---- ----
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Supplemental Data:
System revenue(1)............................................ $4,210 $8,024 $15,366 $10,387
====== ====== ======= =======
</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
17
<PAGE>
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 March 31, 2000. As of March 31, 2000, there were options
and warrants outstanding to purchase a total of 2,508,410 shares of common
stock with a weighted average exercise price of $6.88 per share.
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
References in this Report to "L90," "we," "our" and "us" refer to L90,
Inc. 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. 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.
Since inception, substantially all of our revenue has been derived from online
advertising sales. We also generate revenue through the licensing of our
adMonitor technology. 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, and in May 2000, we began to license our
adMonitor technology on a stand alone basis. For the three months ended March
31, 2000, online advertising sales accounted for 96.1% of our revenue, and fees
generated by our adMonitor technology accounted for 3.9% 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
18
<PAGE>
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 report 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 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 three months
ended March 31, 2000, service fee-based contracts accounted for 93.8% of our
revenue, and commission based contracts accounted for 6.2% of our revenue. For
the year ended December 31, 1999, service fee-based contracts accounted for 4.8%
of our revenue, and commission-based contracts accounted for 95.2% of our
revenue.
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 our revenue increases and as more of
the contracts with Web publishers are structured as service fee-based contracts.
19
<PAGE>
Recent Developments
Acquisition
We consummated the acquisition of webMillion.com, Inc. on July 24, 2000 for
an aggregate of 2,000,000 shares of our common stock. The transaction was
accounted for under the purchase method of accounting.
Financial Data
On July 25, 2000, L90 issued a press release containing the following
financial information for three months ended June 30, 2000. Full financial
statements for this period are currently not available.
L90, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30,
----------------------
2000 1999
---- ----
(in thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 93,746 $ 972
Accounts receivable, net ................................... 10,113 1,930
Prepaid expenses and other assets .......................... 1,491 541
-------- ------
Total current assets ....................................... 105,350 3,443
-------- ------
Restricted cash ............................................ 1,869 -
Property and equipment, net ................................ 12,554 490
-------- ------
Total assets ............................................... $119,773 $3,933
======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses....................... $ 12,298 $2,331
Current portion of capital leases and notes payable......... 390 1,078
Deferred revenues........................................... 719 -
Accrued dividends........................................... - 63
-------- ------
Total current liabilities................................... 13,407 3,472
Long-term debt................................................ 1,611 270
-------- ------
Total liabilities........................................... 15,018 3,742
Stockholders' equity........................................ 104,755 191
-------- ------
Total liabilities and stockholders' equity.................. $119,773 $3,933
======== ======
</TABLE>
20
<PAGE>
L90, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended June 30,
----------------------
2000 1999
------ ------
(in thousands, except per share data)
<S> <C> <C>
System revenue (a)............................................. $14,023 $ 3,101
======= =======
Revenue........................................................ $12,225 $ 1,168
Operating expenses:
Cost of service fee and other revenue...................... 8,024 307
Sales and marketing........................................ 3,494 1,003
Research and development................................... 3,214 252
General and administrative................................. 3,436 812
------- -------
Total operating expenses....................................... 18,168 2,374
------- -------
Operating loss................................................. (5,943) (1,206)
Interest income, net........................................... 1,439 (16)
------- -------
Loss before provision for income taxes......................... (4,504) (1,222)
Provision for income taxes..................................... - -
------- -------
Net loss....................................................... $(4,504) $(1,222)
======= =======
Cumulative dividends on participating preferred stock.......... - -
------- -------
Net loss attributable to common stockholders................... $(4,504) $(1,222)
======= =======
Net loss per share:
Basic/Diluted.............................................. $ (0.20) $ (0.18)
======= =======
Weighted average number of common shares outstanding:
Basic/Diluted.............................................. 21,985 6,667
======= =======
</TABLE>
Results of Operations
Three Months Ended March 31, 2000 and 1999
Revenue. Revenue increased 1,039% to $8.6 million for the three months ended
March 31, 2000 from $753,000 for the three months ended March 31, 1999. This
increase was due to increases in the number of advertising customers that we
serviced, the number of Web publishers on our network and the number of ads
delivered. In addition, this increase was partly attributable to our adoption
of service fee-based contracts and the initiation of our charging service fees
to customers for the use of our adMonitor technology.
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 311% to $10.4 million for the three months
ended March 31, 2000 from $2.5 million for the three months ended March 31,
1999. This increase was due to increases in the number of advertising customers
that we serviced, the number of Web publishers on our network and the number of
ads delivered, as well as the initiation of our charging service fees to
customers for the use of our adMonitor technology.
Cost of Revenue. Cost of revenue was $5.5 million for the three months ended
March 31, 2000 and $2,000 for the three months ended March 31, 1999. During the
three months ended March 31, 1999, virtually all revenue was derived from
advertising sales commissions with no associated cost of revenue.
21
<PAGE>
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, travel, advertising, trade show costs and marketing materials
expense. Sales and marketing expenses were $2.9 million, or 33.9% of revenue,
for the three months ended March 31, 2000, and $803,000, or 106.6% of revenue,
for the three months ended March 31, 1999. This increase was primarily due to
an increase in the number of sales and marketing personnel. Our sales and
marketing organization has grown to 87 employees as of March 31, 2000 from 37
employees as of March 31, 1999. We expect sales and marketing expenses to
increase on an absolute dollar basis in future periods as we hire additional
personnel, 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 $2.2 million, or
25.4% of revenue, for the three months ended March 31, 2000, and $139,000, or
18.5% of revenue, for the three months ended March 31, 1999. This increase was
due primarily to 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 $4.0 million, or 46.8% of revenue, for the three
months ended March 31, 2000, and $528,000, or 70.1% of revenue, for the three
months ended March 31, 1999. This increase was primarily a result of increases
in personnel expenses, professional service fees and 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, Net. Net interest income 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 income was
$978,000 for the three months ended March 31, 2000. Net interest income was
$11,000 for the three months ended March 31, 1999.
Years Ended December 31, 1999 and 1998
Revenue. Revenue increased 320.2% to $9.2 million for the year ended
December 31, 1999 from $2.2 million for the year ended December 31, 1998. This
increase was due to increases in the number of advertising customers that we
serviced, the number of Web publishers on our network and the number of ads
delivered. In addition, this increase was partly attributable to our adoption
of service fee-based contracts and the initiation of our charging service fees
to customers for the use of our adMonitor technology.
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 91.5% to $15.4 million for the year ended
December 31, 1999 from $8.0 million for the year ended December 31, 1998. This
increase was due to increases in the number of advertising customers that we
serviced, the number of Web publishers on our network and the number of ads
delivered, as well as the initiation of our charging service fees to customers
for the use of our adMonitor technology.
Cost of Revenue. Cost of revenue was $4.8 million for the year ended
December 31, 1999. During the year ended December 31, 1998, all revenue was
derived solely from advertising sales commissions with no related service fees
charged to customers for the use of adMonitor, or associated cost of revenue.
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<PAGE>
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, travel, advertising, trade show costs and marketing materials
expense. Sales and marketing expenses were $4.9 million, or 52.9% of revenue,
for the year ended Decemer 31, 1999, and $1.4 million, or 62.2% of revenue, for
the year ended December 31, 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 75 employees as of December 31, 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, 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 $2.6 million, or
28.1% of revenue, for the year ended December 31, 1999, and $138,000, or 6.3% of
revenue, for the year ended December 31, 1998. This increase was due primarily
to 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 $4.5 million, or 49.1% of revenue, for the year
ended December 31, 1999, and $995,000, or 45.5% of revenue, for the year ended
December 31, 1998. This increase was primarily a result of a $1.0 million
increase in personnel expenses, a $677,000 increase in professional service fees
and a $1.3 million 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, Net. Net interest income 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 income was
$30,000 for the year ended December 31, 1999. Net interest income was $17,000
for the year ended December 31, 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 due to increases in the number of advertising customers that
we serviced, the number of Web publishers on our network and 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 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 increase was due to increases in the number of advertising customers that
we serviced, the number of Web publishers on our network and 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.
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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, Net. Net interest income was $17,000 for the year ended
December 31, 1998, and $3,000 for the period ended December 31, 1997.
Quarterly Results of Operations
The following tables set forth unaudited quarterly statement of operations
data for the nine quarters ended March 31, 2000 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
report, 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 report.
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
------ ------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................................ $ 404 $ 516 $ 545 $ 724 $ 753
Operating expenses:
Cost of revenue............................... -- -- -- -- 2
Sales and marketing........................... 313 239 322 487 803
Research and Development...................... 7 20 34 77 139
General and administrative.................... 116 187 275 417 528
------ ------ ------ ------ ------
Total operating expenses....................... 436 446 631 981 1,472
------ ------ ------ ------ ------
Operating income (loss)........................ (32) 70 (86) (257) (719)
Interest income (expense) net.................. 3 -- 3 10 11
------ ------ ------ ------ ------
Income (loss) before provision for taxes....... (29) 70 (83) (247) (708)
Provision for income taxes..................... -- -- -- 1 --
------ ------ ------ ------ ------
Net income (loss).............................. (29) 70 (83) (248) (708)
Cumulative dividends on participating
preferred stock............................... -- -- (3) (20) (20)
------ ------ ------ ------ ------
Net income (loss) attributed to common
$ (29) $ 70 $ (86) $ (268) $ (728)
stockholders.................................. ====== ====== ====== ====== ======
Net income (loss) per share:
Basic/Diluted................................. $(0.00) $ 0.01 $(0.01) $(0.04) $(0.11)
====== ====== ====== ====== ======
Weighted average number of
common shares outstanding:
Basic/Diluted................................. 6,667 6,667 6,667 6,667 6,667
====== ====== ====== ====== ======
Supplemental Data:
Systems Revenue(1)............................. $1,466 $1,910 $2,064 $2,583 $2,529
====== ====== ====== ====== ======
<CAPTION>
Three Months Ended
--------------------------------------------
Jun. 30, Sep. 30, Dec. 31 Mar. 31,
1999 1999 1999 2000
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................................ $1,168 $ 2,052 $5,227 $8,583
Operating expenses:
Cost of revenue............................... 307 1,027 3,415 5,456
Sales and marketing........................... 1,003 1,182 1,878 2,908
Research and Development...................... 252 1,013 1,176 2,181
General and administrative.................... 812 1,368 1,813 4,014
------- ------- ------- -------
Total operating expenses....................... 2,374 4,590 8,282 14,559
------- ------- ------- -------
Operating income (loss)........................ (1,206) (2,538) (3,055) (5,976)
Interest income (expense) net.................. (16) (47) 82 978
------- ------- ------- -------
Income (loss) before provision for taxes....... (1,222) (2,585) (2,973) (4,998)
Provision for income taxes..................... -- -- 1 --
------- ------- ------- -------
Net income (loss).............................. (1,222) (2,585) (2,974) (4,998)
Cumulative dividends on participating
preferred stock............................... (20) (1,204) (225) (2)
------- ------- ------- -------
Net income (loss) attributed to common
stockholders.................................. $(1,242) $(3,789) $(3,199) $(5,000)
======= ======= ======= =======
Net income (loss) per share:
Basic/Diluted................................. $ (0.19) $ (0.57) $ (0.48) $ (0.30)
======= ======= ======= =======
Weighted average number of
common shares outstanding:
Basic/Diluted................................. 6,667 6,667 6,693 16,584
======= ======= ======= =======
Supplemental Data:
Systems Revenue(1)............................. $ 3,101 $ 3,602 $ 6,134 $10,387
======= ======= ======= =======
</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.
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, 16.1% from the
second to the third quarter of 1999, and 70.3% from the third to the fourth
quarter 1999. Quarterly system revenue increased 69.3% from the fourth quarter
of 1999 to the first quarter of 2000. Quarterly growth was due to increases in
the number of advertising customers, the number of Web publishers on our
network, the number of ads delivered and adMonitor service fees.
25
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
As a Percentage of Revenue:
Revenue.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenue.......................... -- -- -- -- 0.3
Sales and marketing...................... 77.5 46.5 59.1 67.2 106.6
Research and Development................. 1.7 3.9 6.3 10.7 18.5
General and administrative............... 28.7 36.2 50.5 57.7 70.1
----- ----- ------ ------ ------
Total operating expenses................... 107.9 86.6 115.9 135.6 195.5
----- ----- ------ ------ ------
Operating income (loss).................... (7.9) 13.4 (15.9) (35.6) (95.5)
Interest income (expense), net............. 0.7 0.1 0.6 1.5 1.4
----- ----- ------ ------ ------
Income (loss) before provision for
income taxes.............................. (7.2) 13.5 (15.3) (34.1) (94.1)
Provision for income taxes................. -- -- -- -- --
----- ----- ------ ------ ------
Net income (loss).......................... (7.2)% 13.5% (15.3)% (34.1)% (94.1)%
===== ===== ====== ====== ======
<CAPTION>
Three Months Ended
-------------------------------------------------
June 30, Sep. 30, Dec. 31, Mar. 31,
1999 1999 1999 2000
------- ------- ------ ------
<S> <C> <C> <C> <C>
As a Percentage of Revenue:
Revenue.................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenue.......................... 26.3 50.0 65.3 63.6
Sales and marketing...................... 85.9 57.6 35.9 33.9
Research and Development................. 21.6 49.4 22.5 25.4
General and administrative............... 69.5 66.7 34.7 46.8
------- ------- ------ ------
Total operating expenses................... 203.3 223.7 158.4 169.7
------- ------- ------ ------
Operating income (loss).................... (103.3) (123.7) (58.4) (69.7)
Interest income (expense), net............. (1.3) (2.2) 1.6 11.4
------- ------- ------ ------
Income (loss) before provision for
income taxes.............................. (104.6) (125.9) (56.9) (58.3)
Provision for income taxes................. -- -- -- --
------- ------- ------ ------
Net income (loss).......................... (104.6)% (125.9)% (56.9)% (58.3)%
======= ======= ====== ======
</TABLE>
Our revenue increased during each of the last nine 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.
Quarterly revenue increased 4.0% from the fourth quarter of 1998 to the first
quarter of 1999. In 1999, quarterly revenue increased 55.1% from the first to
the second quarter, 75.7% from the second to the third quarter, and 155% from
the third to the fourth quarter. Quarterly revenue increased 64.2% from the
fourth quarter of 1999 to the first quarter of 2000. Quarterly revenue growth
was primarily due to increases in the number of advertising clients, the number
of Web sites on our network, the number of ads delivered and adMonitor service
fees. The increases in revenue from quarter to quarter in 1999 and 2000 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.
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<PAGE>
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. In February 2000, we completed our initial public offering of
7,475,000 shares of our common stock (including 975,000 shares subject to the
underwriter's over-allotment option) at $15.00 per share. The initial public
offering resulted in aggregate net proceeds of approximately $102.6 million, net
of underwriting discounts and expenses of the offering. The net proceeds from
these private placements and our initial public offering 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 $4.3 million for the three months
ended March 31, 2000, $6.3 million for the year ended December 31, 1999, $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 three months ended March 31,
2000 resulted from a net loss of $5.0 million, as well as a $3.1 million
increase in accounts receivable and a $926,000 increase in notes receivable,
partially offset by a $3.4 million increase in accounts payable and accrued
expenses, a $487,000 decrease in prepaids and other current assets and a
$189,000 increase in deferred revenue. Cash used in operating activities for the
year ended December 31, 1999 resulted from a net loss of $7.5 million, as well
as a $2.8 million increase in accounts receivable and a $1.1 million increase in
prepaids and other current assets partially offset by a $3.5 million increase in
accounts payable and a $1.4 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.
Net cash used in investing activities was $4.8 million for the three months
ended March 31, 2000, $1.1 million for the year ended December 31, 1999,
$323,000 for the year ended December 31, 1998, and $19,000 for the year ended
December 31, 1997. Cash used in investing activities was primarily related to
purchases of property and equipment related to research and development.
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<PAGE>
Net cash provided by financing activities was $105.9 million for the three
months ended March 31, 2000, $12.2 million for the year ended December 31, 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 three months ended March 31, 2000 resulted primarily from the proceeds
from our initial public offering of common stock. Cash provided by financing
activities for the year ended December 31, 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.
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.
Year 2000 Compliance
We did not experience any significant malfunctions or errors in our operating
or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any significant impact to our
on-going business as a result of the "Year 2000 issue." However, it is
possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. We cannot quantify the amount of our potential
exposure but we believe that any such problems are likely to be minor and
correctable. In addition, we could still be negatively impacted if our
customers or suppliers are adversely affected by the Year 2000 or similar
issues. We currently are not aware of any significant Year 2000 or similar
problems that have arisen for our customers and suppliers. In preparation for
the year 2000, we incurred internal staff costs as well as consulting and other
expenses. Year 2000 expenses incurred to date totaled less than $100,000.
Interest Rate Risk
The primary objective of our investment activities is to preserve the
principal while at the same time achieving an attractive return. To achieve
this objective, we maintain a portfolio of investment grade cash equivalents and
short-term investments. Although we are subject to interest rate risks, we
believe an effective increase or decrease of 10% in interest rate percentages
would not have a material adverse effect on our results from operations. The
potential change noted above is based on sensitivity analysis we performed as of
December 31, 1999.
We did not hold derivative financial instruments as of December 31, 1999, and
have never held these instruments in the past.
Foreign Currency
Currently predominantly all of our sales and expenses are denominated in U.S.
dollars and as a result we have experienced little foreign exchange gains and
losses to date. While we have and will effect some transactions in foreign
currencies during 2000, we do not anticipate that foreign exchange gains or
losses will be significant. We have not engaged in foreign currency hedging
activities to date.
28
<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.
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 872 advertisers including Chevrolet,
iVillage, Microsoft, Netscape, Procter & Gamble and Visa have utilized our
solutions.
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. As the
Internet has grown, advertisers have devoted increasing portions of their
advertising and marketing budgets to online advertising and direct marketing.
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.
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. As a result, advertisers are faced with an increasingly complex and
fragmented environment in which to construct, purchase and implement their
advertising campaigns.
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<PAGE>
. 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.
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
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<PAGE>
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 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.
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<PAGE>
. 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.
. 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.
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<PAGE>
Products and Services
Our products and services are designed to provide our advertisers and 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
---------------------------------------------------------------------------------------------------------------
<S> | <C>
|
L90Premium | . L90Premium leverages the brand names, quality content and desirable
(Beyond the Banner Programs) | demographics of our premium Web sites through advertising programs
| featuring advertising components such as co-branded micro-sites and
| jump pages, content integration, contextual sponsorships, rich media
| and promotions. 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 advertisers to target specific audiences by content
(Special Interest Categories)| categories, including Entertainment, Automotive, Sports, Kids/Teens
| and e-Commerce. 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 entire network of Web
(Reach and Efficiency | sites for advertisers interested in attaining the greatest reach for the
Network) | lowest and most efficient cost.
|
---------------------------------------------------------------------------------------------------------------
L90D.m. | . L90D.m. programs range from pop-up boxes and e-mail newsletter
(Direct Marketing) | sponsorships to "opt-in" registrations and viral marketing programs,
| all designed to reach targeted audiences and build qualified marketing
| databases. These programs include:
|
|--------------------------------------------------------------------------------
| . L90Mail which delivers advertising messages directly to a
| specific targeted audience through e-mail newsletters and
| site updates. Advertisements are integrated within e-mail newsletters
| or sent as stand-alone e-mail messages.
|
|--------------------------------------------------------------------------------
| . L90Opt-in which enables advertisers to build a qualified
| marketing database of consumers that specifically opt-in to
| receive targeted information or special offers.
---------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
---------------------------------------------------------------------------------------------------------------
<S> | <C>
L90Link | . L90Link, which is a marketing tool that uses the entire L90 network,
(Viral Marketing) | 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 these offers to friends
| and colleagues.
|
---------------------------------------------------------------------------------------------------------------
L90Rewards | . L90Rewards is an opt-in data gathering tool and consumer retention
(Opt-In Rewards Program) | program that incorporates sweepstakes and other promotions to build
| its membership base.
---------------------------------------------------------------------------------------------------------------
</TABLE>
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.
. 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.
. Tracking. 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 incremental sales from the
campaign, 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.
. ClickTrack. ClickTrack is the purchase and transaction tracking component
of our adMonitor technology. Through ClickTrack we are able to match the
exact point of a consumer's purchase or transaction with the precise
advertisement that resulted in the sale or transaction. Even if a consumer
views an advertisement, clicks through to the advertiser's Web site, leaves
the Web site and returns two months later to make a purchase or take a
specific action, ClickTrack is able to match and report the resulting sale
or attributable to the advertisement.
. 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.
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<PAGE>
Our Network of Web Publishers
We currently represent approximately 191 Web sites, 44 of which are in our
mature category. A Web publisher must satisfy a number of objective and
subjective criteria before we will designate it as ``mature.'' 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. 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.
Our entire network of Web publishers is organized into ten 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>
. 18-34 . Business/Finance . Sports
. Automotive . e-Commerce . Technology
. Broadband . Entertainment . Women/Health
. Kids/Teens
</TABLE>
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 872
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.
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 the
course of delivering ads to a Web user, we only collect non-personally
identifiable information about the Web user. We do not collect any personally
identifiable information about the Web user unless the Web user voluntarily and
knowingly provides personally identifiable information.
In implementing any service or program designed to gather consumer data, we
are always mindful of our continuing commitment to uphold the privacy principles
of the Direct Marketing Association. In addition, we are a licensee under the
TRUSTe Privacy Program. TRUSTe is an independent, non-profit organization whose
mission is to build users' trust and confidence in the Internet by promoting the
use of fair information practices. We are also a member of the Network
Advertising Initiative. We actively monitor privacy laws and regulations and
seek to comply will all applicable privacy requirements.
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
35
<PAGE>
advertising tools. We have assembled a sales and marketing staff that possesses
the marketing, media, creative and advertising skills required to develop large,
sophisticated advertising campaigns. We have close relationships with, and
detailed knowledge of, our Web publishers. Consequently, we are able to work
with advertisers in developing comprehensive, sponsorship-oriented advertising
solutions.
We sell our advertising solutions in the United States through a sales and
marketing team consisting of a total of 111 employees as of June 30, 2000. 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 six 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 and ongoing customer communications
programs.
Seasonality and Cyclicality
We believe that our business is subject to seasonal fluctuations. Advertisers
generally place fewer advertisements during the first and third calendar
quarters of each year, and direct marketers generally mail substantially more
marketing materials in the third calendar quarter of each year. In addition,
expenditures by advertisers and direct marketers vary in cycles and tend to
reflect the overall economic conditions, as well as budgeting and buying
patterns. Furthermore, user traffic on the Internet tends to decrease during
the summer months which results in fewer advertisements to sell and deliver. A
decline in the general economy or in the economic prospects of advertisers and
direct marketers could adversely affect our revenue.
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 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's browser is directed to the adMonitor system to
retrieve an advertisement. Our adMonitor system selects an appropriate ad to
display based upon the user's profile. Through the use of cookies, small files
of information placed on a user's computer, adMonitor is also able to track the
user's movements through the Web publisher's site. adMonitor also provides
advertisers real-time reporting on the performance of their campaigns.
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,
where technical support is provided 24 hours a day, seven days a week.
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<PAGE>
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 DoubleClick, 24/7 Media and Engage Technologies. 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, 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 patent, copyright, trade secret, unfair
competition and trademark law, as well as contractual agreements. We have filed
a patent application in the United States for our adMonitor technology. We have
also applied to register trademarks internationally and in the United States.
We cannot guarantee that any of our current or future patent applications or
trademark applications will be approved. Even if they are approved, these
patents or trademarks might be successfully challenged by others or invalidated.
Furthermore, if our patent applications or trademark applications are not
approved because third parties own these patents or trademarks, our use of these
patents or 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.
37
<PAGE>
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. We cannot
assure you 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 further alleged infringement and attorneys' fees
and costs.
On May 24, 2000, DoubleClick filed a reissue application with the U.S.
Patent & Trademark Office with respect to the patent at issue. On May 26, 2000,
DoubleClick filed with the court a motion to stay the entire litigation pending
the U.S. Patent and Trademark Office's review of DoubleClick's reissue
application. On June 12, 2000, we filed with the court an opposition to
DoubleClick's motion to stay the litigation. Our opposition asked the court to
stay the litigation with respect to the issues related to infringement and the
validity of the patent, but asked the court to proceed with respect to the issue
related to our claim of DoubleClick's inequitable conduct. On July 21, 2000, the
court stayed the litigation with respect to the issues related to infringement
and the validity of the patent. The court has allowed us to proceed with
respect to the issue related to our claim of DoubleClick's inequitable conduct.
A trial date has been set for November 6, 2000.
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 from
competing in the Internet advertising market and our operations could 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 ``Legal Proceedings'' for
more information relating to the DoubleClick suit.
Employees
As of June 30, 2000, we had 169 full-time employees, including 111 in sales
and marketing, 33 in engineering and product development and 25 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.
38
<PAGE>
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.
On May 24, 2000, DoubleClick filed a reissue application with the U.S. Patent
& Trademark Office with respect to the patent at issue. On May 26, 2000,
DoubleClick filed with the court a motion to stay the entire litigation pending
the U.S. Patent and Trademark Office's review of DoubleClick's reissue
application. On June 12, 2000, we filed with the court an opposition to
DoubleClick's motion to stay the litigation. Our opposition asked the court to
stay the litigation with respect to the issues related to infringement and the
validity of the patent, but asked the court to proceed with respect to the issue
related to our claim of DoubleClick's inequitable conduct. On July 21, 2000, the
court stayed the litigation with respect to the issues related to infringement
and the validity of the patent. The court has allowed us to proceed with
respect to the issue related to our claim of DoubleClick's inequitable conduct.
A trial date has been set for November 6, 2000.
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; Greenwich,
Connecticut; San Francisco; and London. Our adMonitor ad serving and tracking
software and hardware is housed in El Segundo, California. This facility
provides 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.
39
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees and their positions and
ages, as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William M. Apfelbaum............. 53 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..................... 31 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............... 68 Director
Peter E. Ligeti.................. 45 Director
Glenn S. Meyers.................. 39 Director
G. Bruce Redditt................. 49 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 served as President and Chief Executive
Officer of TDI Worldwide, a wholly-owned subsidiary of CBS, from 1989 to May
2000. 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 August 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 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
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<PAGE>
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.
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
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<PAGE>
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. All directors are 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.
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.
42
<PAGE>
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
Compensation
Awards
Annual Shares
Compensation Other Annual Underlying All Other
Name and Principal 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.
43
<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
Securities Options of Stock Price
Underlying Granted to Appreciation for
Options Employees Exercise Price Option Term (3)
Name Granted in 1999 Per Share Expiration 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.
44
<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 6,676,101
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.
As of June 30, 2000, options to purchase up to 2,792,922 shares of common
stock had been granted and are outstanding under our 1999 Stock Incentive Plan.
These options have an average exercise price of $7.66 per share and were held by
172 persons.
45
<PAGE>
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), Christopher 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.
On January 1, 2000, we received an aggregate of $101,333 in notes receivable
for common stock from Messrs. Roah and Cardinali for the exercise of 266,666
options. These notes bear interest at a rate equal to 5.00% per annum and
mature at the earliest of the cessation of the maker's employment by us for any
reason or January 1, 2005. We paid an aggregate of $925,588 in withholding
obligations for Messrs. Roah and Cardinali upon exercise of these options. In
April 2000, Messrs. Roah and Cardinali repaid the notes in full and reimbursed
us in full for the amounts advanced for their withholding obligations.
On July 25, 2000, Messrs. Apfelbaum and Bohan entered into lock-up agreements
with us restricting the sale, transfer, offer, or other disposition until
October 25, 2000 of any of their shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without our
prior written consent.
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.
46
<PAGE>
Series A Preferred Stock Financing
Upon the closing our initial public offering on February 2, 2000, all
outstanding shares of Series A preferred stock automatically converted into an
aggregate of 1,666,666 shares of our common stock. Upon conversion of the Series
A preferred stock, L90 paid the Series A preferred stock holder accrued
dividends equal to approximately $105,863.
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 Series B preferred
stock converted into an aggregate of 2,738,029 shares of common stock upon the
closing of our initial public offering on February 2, 2000. 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.
DigaComm (L90), L.L.C. exercised this warrant on a cashless basis on February 2,
2000, and purchased 276,825 shares of our common stock. The holders of common
stock issued upon conversion of the Series B preferred stock are entitled to
registration rights with respect to the shares of common stock issued upon
conversion of the Series B preferred stock. Upon conversion of the Series B
preferred stock on February 2, 2000, L90 paid the holders of Series B preferred
stock aggregate, accrued dividends equal to approximately $233,224.
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 Series C preferred
stock converted into an aggregate of 871,460 shares of common stock upon the
closing of our initial public offering on February 2, 2000. 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. The holders of this warrant exercised this warrant on January 31, 2000,
and purchased an aggregate of 674,029 shares of our common stock. 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. Rare Medium Group, Inc. exercised this
warrant on a cashless basis on February 2, 2000, and purchased 486,652 shares of
our common stock. The holders of common stock issued upon conversion of the
Series C preferred stock and upon exercise of the warrants have registered these
shares of common stock on a registration statement declared effective on January
28, 2000. These stockholders have agreed not to sell any of these shares for at
least 180 days after January 28, 3000, the effective date of our registration
statement covering our initial public offering and one-half of their shares
until 270 days after January 28, 2000. See ``Description of Capital Stock--
Registration Rights'' for a description of these registration rights. Upon
conversion of the Series C preferred stock on February 2, 2000, L90 paid the
holders of Series C preferred stock aggregate, accrued dividends equal to
approximately $64,464.
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 our initial public 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. Mr.
Apfelbaum exercised this warrant on a cashless basis on January 28, 2000, and
purchased 274,422 shares of our common stock. In addition, Mr. Apfelbaum
exercised a warrant on January 27, 2000, and purchased 438,593 shares of our
common stock at an exercise price per share of $1.71.
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
terminated upon the closing of our initial public offering and with the
conversion at that closing of all of our preferred stock into common stock.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 2000 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.
The percentage of beneficial ownership is based on 21,997,269 shares of our
common stock outstanding as of June 30, 2000. 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 June 30, 2000, are deemed outstanding. These 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.
47
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
as of June 30, 2000
-------------------
Number Percent
------------ ----------
<S> <C> <C>
Named executive officers and directors:
John C. Bohan (1).............................................. 5,728,638 26.0%
William M. Apfelbaum........................................... 2,379,681 10.8
Glenn S. Meyers (2)............................................ 1,155,715 5.2
Peter E. Ligeti (3)............................................ 1,132,685 5.1
Peter G. Diamandis (4)......................................... 843,167 3.8
Christopher J. Cardinali....................................... 453,166 2.1
Mark D. Roah................................................... 448,666 2.0
Frank A. Addante (5)........................................... 476,666 2.1
Peter Sealey (6)............................................... 40,000 *
Thomas A. Sebastian (7)........................................ 66,666 *
Gerald B. Redditt.............................................. -- --
Other 5% Stockholders:
Keystone Venture V, L.P. ...................................... 1,132,685 5.1
1601 Market Street, Suite 2500
Philadelphia, PA 19103
Rare Medium Group, Inc......................................... 1,089,049 5.0
44 West 18th Street, New York, NY 10011
All directors and executive officers as a group (11 persons)..... 12,725,050 56.5
</TABLE>
* Represents less than 1%.
(1) Includes 303,334 shares on which Mr. Bohan has granted options to key
employees of L90.
(2) Includes:
. 1,089,049 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 June 30, 2000.
(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) Reflects 843,167 shares beneficially owned by DigaComm (L90), L.L.C., the
parent of which Mr. Diamandis is a managing member.
(5) Includes 409,999 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 June 30, 2000.
(6) Includes 13,333 shares issuable upon exercise of stock options at a price
of $15.00 per share, which are presently exercisable or will become
exercisable within 60 days from June 30, 2000.
(7) Reflects 66,666 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 June 30, 2000.
48
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth as June 30, 2000 information with regard to the
beneficial ownership of our common stock by the selling stockholders. The
selling stockholders may not have a present intention of selling the shares and
may offer less than the amount of shares indicated. The percentage of beneficial
ownership is based on 21,997,269 shares of our common stock outstanding as of
June 30, 2000. 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 June 30, 2000, are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-----------------------------------------------------------------
Shares Beneficially Shares Shares Beneficially
Owned Before to be Owned After
Offering(1) Offered(2) Offering(3)
Name Number Percentage Number Number Percentage
---- ------------- ----------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
Development Ventures (Two) Inc. ..................... 721,343 3.3% 721,343 0 0%
51 Twin Pond Lane, New Canaan, CT 06840
Communicade Inc. .................................... 388,416 1.8 388,416 0 0
437 Madison Avenue, New York, NY 10022
Rare Medium Group, Inc. ............................. 1,089,049 (4) 5.0 1,089,049 0 0
44 West 18th Street, New York, NY 10011
</TABLE>
----------
(1) The persons named in the above table have sole voting and investment power
with respect to all shares beneficially owned by them. Information with
respect to beneficial ownership is based upon our stock records and data
supplied to us by the selling stockholders.
(2) The selling stockholders may offer less than the amount of shares indicated.
No representation is made that any shares will or will not be offered for
sale.
(3) This assumes that all shares owned by the selling stockholders which are
offered are sold. The selling stockholders reserve the right to accept or
reject, in whole or in part, any proposed purchase of shares.
(4) Mr. Glenn Meyers, a director of L90, serves as President and Chief Executive
Officer of this selling stockholder.
49
<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 6,998,000 shares of preferred stock, par value $0.001 per
share.
Common Stock
As of June 30, 2000, there were 21,997,269 shares of common stock outstanding
held of record by 89 stockholders. Our common stock is traded on the Nasdaq
National Market under the symbol "LNTY."
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 6,998,000 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. 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. 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.
50
<PAGE>
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 former holder of the Series A
preferred stock is entitled to registration rights.
. Piggyback registration rights. The former 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 Registration Agreement dated August 6, 1999, among L90 and the former
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 October 25, 2000, 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
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 Series C Registration Agreement dated September 22, 1999, among L90 and
the former holders of 1,307,190 shares of Series C preferred stock provides that
these 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
2,032,142. These holders have agreed not to sell any of these shares until July
27, 2000, 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 October 25, 2000.
In connection with our acquisition of webMillion.com, Inc., we entered into a
Registration Rights Agreement dated July 24, 2000 with certain former
stockholders of webMillion.com, Inc. that provides certain registration rights.
. Demand registration rights. Commencing on February 1, 2001, the holders of
a majority of the shares issued to certain former stockholders of
webMillion.com, Inc. have the right to demand that we register their
shares under the Securities Act. The holders may exercise one demand
registration right on Form S-3, provided that the value of the shares to
be registered is at least $1,500,000 and the number of shares to be
registered exceeds 100,000.
. Piggyback registration rights. The holders of the shares issued to certain
former stockholders of webMillion.com, Inc. 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 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 or our board of directors
may impose.
51
<PAGE>
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.
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.
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.
52
<PAGE>
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 ChaseMellon
Shareholder Services. Its telephone number for such purposes is (213) 553-9700.
Listing
Our common stock is traded on the Nasdaq National Market under the trading
symbol "LNTY."
SHARES ELIGIBLE FOR FUTURE SALE
An aggregate of 21,997,269 shares of common stock, assuming no exercise of
outstanding options or warrants, were issued and outstanding as of June 30,
2000. Of these shares, 7,475,000 are 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 Date
Future Sale ----
-----------
<S> <C>
8,491,071.................. These shares are freely tradeable.
983,626.................. These shares are saleable under Rule 144, subject, in some cases, to
volume limitations, or Rule 701.
821,925.................. These shares are restricted securities that are held for less than one
year and are not yet saleable under Rule 144.
8,685,797.................. Between August and September 2000, these shares become saleable under
Rule 144, subject, in some cased, to volume limitations, or Rule 701.
3,014,850.................. After October 25, 2000, a lock-up is released and these shares are freely
tradeable.
</TABLE>
53
<PAGE>
In general, under Rule 144 as currently in effect, 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; 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 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 in reliance on Rule 144, but without compliance with
restrictions, such as the holding period, contained in Rule 144.
Some of the holders of shares of our common stock, or their transferees, are
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. The resale of
up to 2,032,142 shares of common stock have been registered on the registration
statement of which this prospectus is a part. However, these stockholders have
agreed not to sell one-half of these shares until October 25, 2000.
We have on file an effective registration statement on Form S-8 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. Accordingly, shares registered under this
registration statement will, subject 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 6,676,101 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 June 30, 2000,
options to purchase 2,996,425 shares of our common stock were issued and
outstanding. As of that date, 1,063,270 of these options had vested and were
therefore exercisable.
As of June 30, 2000, we had outstanding warrants to purchase 200,000 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.
54
<PAGE>
PLAN OF DISTRIBUTION
The shares offered may be sold by the selling stockholders. These sales may
be made on one or more exchanges or in the over-the-counter market, including
NASDAQ National Market System, or otherwise, at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by each of the selling
stockholders acting as principal for its own account or in ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, broker-dealers engaged by the selling stockholders may arrange
for other broker-dealers to participate in the resales.
Broker-dealers or agents may receive compensation in the form of commissions,
discounts or concessions from selling stockholders in amounts to be negotiated
in connection with the sale. These broker-dealers and any other participating
broker-dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with these sales, and any such commission, discount
or concession may be deemed to be underwriting discounts or commissions under
the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale under Rule 144 may be sold under Rule 144 rather than
under this prospectus.
It is not possible at the present time to determine the price to the public in
any sale of the common stock by the selling stockholders. Accordingly, the
public offering price and the amount of any applicable underwriting discounts
and commissions will be determined at the time of such sale by the selling
stockholders. The aggregate proceeds to the selling stockholders from the sale
of the common stock will be the purchase price of the common stock sold less all
applicable commissions and underwriters' discounts, if any. We will pay
substantially all the expenses incident to the registration, offering and sale
of the common stock to the public by selling stockholders, which is currently
estimated to be $ , other than fees, discounts and commissions of
underwriters, dealers or agents, if any, and transfer taxes.
LEGAL MATTERS
Matters relating to this offering are being passed upon for us by Paul,
Hastings, Janofsky & Walker LLP, Los Angeles, California.
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.
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 to the common stock covered by 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 by 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.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
L90, Inc.
<S> <C>
Report of Independent Public Accountants ...................................................... 57
Balance Sheets as of December 31, 1998 and 1999 ............................................... 58
Statements of Operations for the period ended December 31, 1997, for the years ended
December 31, 1998 and 1999 .................................................................. 59
Statements of Stockholders' Equity for the period ended December 31, 1997, for the years ended
December 31, 1998 and 1999 .................................................................. 60
Statements of Cash Flows for the period ended December 31, 1997, for the years ended
December 31, 1998 and 1999 .................................................................. 61
Notes to Financial Statements ................................................................ 62
Balance Sheets as of March 31, 2000 and December 31, 1999 ..................................... 74
Statements of Operations for the quarters ended March 31, 2000 and 1999 ....................... 75
Statements of Stockholders' Equity for the quarters ended March 31, 2000 and 1999 ............. 76
Statements of Cash Flows for the quarters ended March 31, 2000 and 1999 ....................... 77
Notes to Financial Statements for the quarter ended March 31, 2000 ........................... 78
</TABLE>
56
<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, 1998 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the period from January 5,
1997 (inception) to December 31, 1997, and the years ended December 31, 1998 and
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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,
1998 and 1999 and the results of its operations and its cash flows for the
period from January 5, 1997 (inception) to December 31, 1997, and the years
ended December 31, 1998 and 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Los Angeles, California
January 28, 2000
57
<PAGE>
L90, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders
Equity
December 31,
December 31, 1999
---------------------------- -------------
1998 1999 (unaudited)
------------ ------------- (Note 3)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................................... $2,111,852 $ 6,895,938
Accounts receivable (net of allowances of $142,952 and $668,010 at December 31,
1998 and 1999, respectively ...................................................... 1,310,457 4,128,069
Prepaid expenses and other assets .................................................. 196,562 1,341,950
---------- -----------
Total current assets ............................................................... 3,618,871 12,365,957
---------- -----------
Restricted cash .................................................................... -- 1,268,632
Property and equipment:
Equipment ......................................................................... 320,567 2,695,847
Furniture and fixtures ............................................................ 15,720 70,006
Leasehold improvements ............................................................ 18,347 32,421
---------- -----------
354,634 2,798,274
Less--Accumulated depreciation and amortization ................................... (37,340) (296,808)
---------- -----------
Property and equipment, net ........................................................ 317,294 2,501,466
---------- -----------
Total assets ....................................................................... $3,936,165 $16,136,055
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................................... $1,177,950 $ 4,693,881
Accrued expenses ................................................................... 300,670 1,686,274
Current portion of note payable .................................................... -- 414,222
Current portion of long-term capital lease obligations ............................. 68,025 256,928
Deferred revenues .................................................................. 53,417 --
Accrued dividends .................................................................. 23,233 401,139
---------- -----------
Total current liabilities .......................................................... 1,623,295 7,452,444
Note payable, net of current portion ................................................. -- 928,702
Long-term capital lease obligations, net of current portion .......................... 180,362 442,710
---------- -----------
Total liabilities .................................................................. 1,803,657 8,823,856
---------- -----------
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 2,077,501 ................... 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
</TABLE>
<TABLE>
<S> <C> <C> <C>
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 .................................... -- -- --
Retained earnings .................................................................. 119,440 (8,838,664) (8,838,664)
---------- ----------- ------------
Total stockholders' equity ......................................................... 2,132,508 7,312,199 $ 7,312,199
---------- ----------- ============
Total liabilities and stockholders' equity ......................................... $3,936,165 $16,136,055
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
58
<PAGE>
L90, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period Ended Years Ended December 31,
December 31, ---------------------------------
1997 1998 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenue
Service fee-based revenue .............................. $ -- $ -- $ 7,282,892
Commission-based revenue ............................... 1,159,764 2,189,433 1,917,907
---------- ---------- -----------
Total revenue ............................................ 1,159,764 2,189,433 9,200,799
---------- ---------- -----------
Operating expenses:
Cost of service fee and other revenue .................. -- -- 4,751,034
Sales and marketing .................................... 549,805 1,361,856 4,865,678
Research and development ............................... -- 138,402 2,581,070
General and administrative ............................. 302,776 995,435 4,520,895
---------- ---------- -----------
Total operating expenses ................................. 852,581 2,495,693 16,718,677
---------- ---------- -----------
Operating income (loss) .................................. 307,183 (306,260) (7,517,878)
Interest income, net ..................................... 2,601 17,491 30,397
---------- ---------- -----------
Income (loss) before provision for income taxes .......... 309,784 (288,769) (7,487,481)
Provision for income taxes ............................... -- 800 800
---------- ---------- -----------
Net income (loss) ........................................ $ 309,784 $ (289,569) $(7,488,281)
========== ========== ===========
Cumulative dividends on participating preferred stock .... -- (23,233) (1,469,823)
---------- ---------- -----------
Net income (loss) attributable to common stockholders .... $ 309,784 $ (312,802) $(8,958,104)
========== ========== ===========
Net income (loss) per share:
Basic/Diluted .......................................... $ -- $(0.05) $(1.34)
========== ========== ===========
Weighted average number of common shares outstanding:
Basic/Diluted .......................................... -- 6,666,667 6,675,361
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
59
<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 5, 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 ............................. -- -- -- -- -- (7,488,281) (7,488,281)
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 ....... -- -- -- -- -- (377,906) (377,906)
----------- -------- ------- -------- ---------- ----------- -----------
BALANCE at December 31, 1999 ......... $16,006,019 $ -- $6,693 $181,901 $(43,750) $(8,838,664) $ 7,312,199
=========== ======== ======= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
60
<PAGE>
L90, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended Years Ended December 31,
December 31, ------------------------------------
1997 1998 1999
--------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 309,784 $ (289,569) $(7,488,281)
Adjustments to reconcile net loss to cash used in operating
activities--
Depreciation and amortization .................................... 5,800 30,885 297,245
Changes in assets and liabilities:
Increase in accounts receivable ................................ (489,637) (626,420) (2,817,612)
Increase in prepaid expenses and other assets .................. (25,325) (171,237) (1,145,388)
Increase in accounts payable ................................... 327,237 833,950 3,515,931
Increase in accrued expenses ................................... 100,240 200,430 1,385,604
Increase (decrease) in deferred revenues ....................... 30,418 22,999 (53,417)
--------- ---------- -----------
Net cash provided by (used in) operating activities ........... 258,517 1,038 (6,305,918)
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................... (18,876) (322,762) (1,100,717)
--------- ---------- -----------
Net cash used in investing activities ......................... (18,876) (322,762) (1,100,717)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under capital lease obligations ...... -- 248,387 451,251
Restricted cash .................................................. -- -- (1,268,632)
Withdrawal of capital ............................................ (5,000) -- --
Distribution to Shareholder ...................................... -- (50,000) --
Series A preferred stock ......................................... -- 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 12,190,721
--------- ---------- -----------
Net increase in cash ............................................... 234,641 1,876,663 4,784,086
Cash and cash equivalents, beginning of period ..................... 548 235,189 2,111,852
--------- ---------- -----------
Cash and cash equivalents, end of period ........................... $ 235,189 $2,111,852 $ 6,895,938
========= ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ......................................................... $ -- $ 15,555 $ 124,577
========= ========== ===========
Income taxes ..................................................... $ -- $ -- $ 800
========= ========== ===========
SUMMARY OF NON-CASH FINANCING ACTIVITIES:
Notes receivable for common stock ................................ $ -- $ (43,750) $ --
========= ========== ===========
Accrued dividends ................................................ $ -- $ 23,233 $ 377,906
========= ========== ===========
Acquisition of software license in exchange for note ............. $ -- $ -- $ 1,342,924
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
61
<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 to 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 and
$15,365,966 for the years ended December 31, 1998 and 1999, respectively.
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 years ended December 31, 1998 and 1999 there
were no advertising customers that comprised greater than 10 percent of revenue.
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
62
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
accounted for 36.3 percent and 12.0 percent of revenue, respectively. For the
year ended December 31, 1999, no 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.
The Company maintained its cash balances in two financial institutions
during 1999 and one financial institution during 1998. The balances are insured
by the Federal Deposit Insurance Corporation up to $100,000. At December 31,
1998 and 1999, the Company's uninsured cash balances totaled $2,011,852 and
$6,695,938, respectively.
d. Restricted Cash
Restricted cash consists of cash pledged under outstanding letters of
credit.
e. 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 advertisers.
The Company extends credit to its customers, who are primarily 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.
f. 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.
63
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
g. 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.
h. 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.
i. 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.
j. 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.
k. Stock-Based Compensation
Accounting principles generally accepted in the United States ("GAAP")
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.
l. 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 date of the financial
64
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
m. 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. On January 25, 2000, the Company effected the 2-for-
3 reverse stock split. The effect of this stock split is 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 were automatically
converted into shares of common stock upon the closing of the initial public
offering of the Company's common stock on February 2, 2000.
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,
65
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 were automatically converted into shares of common stock upon
the closing the initial public offering of the Company's common stock on
February 2, 2000. In connection with the closing of the private placement
transaction for Series B preferred stock, the Company incurred fees and expenses
totaling $629,864.
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 were
automatically converted into shares of common stock upon the closing of the
initial public offering of the Company's common stock on February 2, 2000.
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 $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 for warrants to purchase up to
166,667 shares of common stock.
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. Unless previously exercised, 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. Mr.
Apfelbaum exercised this warrant on a cashless basis on January 28, 2000 and
purchased 274,422 shares of common stock.
66
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 December 31, 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.
On November 29, 1999, the Company acquired a software license in exchange for
a promissory note for $1,342,924. The note bears interest at 7.86% per annum.
This note is collateralized by a standby letter of $1,208,632. Remaining
principal payments due under the note are $414,222, $446,788 and $481,914 for
the years ending December 31, 2000, 2001 and 2002, respectively.
On November 29, 1999, the Company obtained a standby letter of credit for a
total of $1,208,632. At December 31, 1999, the Company had pledged $1,208,632 of
cash as collateral for this outstanding letter of credit.
On November 29, 1999, the Company obtained a standby letter of credit for a
total of $60,000. At December 31, 1999, the Company had pledged $60,000 of cash
as collateral for this outstanding letter of credit.
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.
The provision (benefit) for income taxes for December 31, 1998 and 1999
consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------ ------
<S> <C> <C>
Current:
Federal................................... $ -- $ --
State..................................... 800 800
-------- ----------
800 800
Deferred.................................... 136,600 2,981,483
-------- ----------
137,400 2,982,283
Less: Valuation allowance................... 136,600 2,981,483
-------- ----------
$ 800 $ 800
======== ==========
</TABLE>
67
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The net deferred income tax assets at December 31, 1998 and 1999 are comprised
primarily of net operating loss carry forwards and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
---- ----
<S> <C> <C>
Deferred tax asset................................... $ 136,600 $ 2,981,483
Less: Valuation allowance............................ (136,600) (2,981,483)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
At December 31, 1998 and 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.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit
carryforward in certain situations where changes occur in the stock ownership of
a company. If the Company should have an ownership change, as defined for tax
purposes, utilization of the carryforwards could be restricted.
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.
No options were issued by the Company prior to 1998. Employee transactions
during the years ended December 31, 1998 and 1999 are 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 (48,000) 2.23
-------- ---------- -----
Outstanding at end of period....................... 582,000 $0.86 2,151,734 $2.82
======== ==========
Options exercisable at end of period............... -- 816,666
Weighted-average fair value of options granted
during the period................................ $ 0.60 $2.31
</TABLE>
68
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted average
Number remaining
Range of exercise prices outstanding contractual life
------------------------ ----------- ----------------
<S> <C> <C>
$0.38 266,667 8.01 years
$1.20 263,333 8.46 years
$1.50 66,667 8.96 years
$3.53 1,488,400 9.63 years
$4.59 66,667 9.73 years
---------
2,151,734
=========
</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
years ended December 31, 1998 and 1999 would have been increased to the pro
forma amounts indicated below:
69
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------
1998 1999
----------- --------------
<S> <C> <C>
Net loss as reported................... $289,569 $7,488,281
Pro forma adjustment................... 137,769 1,092,595
-------- ----------
Pro forma loss......................... $427,338 $8,580,876
======== ==========
</TABLE>
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 years ended December 31, 1998 and 1999:
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. The holder of this warrant exercised the
warrant on January 27, 2000 and purchased 438,593 shares of common stock. 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. This warrant was exercised on a cashless basis on January 28,
2000 to purchase 274,422 shares of common stock.
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) December7, 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. This warrant was
exercised on a cashless basis on February 2, 2000 to purchase 276,825 shares of
common stock.
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. Two of these warrants
were exercised on January 31, 2000 to purchase 674,029 shares of common stock.
The remaining warrants were exercised on a cashless basis on February 2, 2000 to
purchase 486,653 shares of common stock. The holders of the warrants are
entitled to registration rights regarding the shares of common stock issued upon
conversion and upon exercise of the warrants.
70
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
b. Lease Commitments and Service Agreement
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, $274,000 and $873,000
at December 31, 1997, 1998 and 1999, respectively, with accumulated depreciation
of approximately $0, $11,000, and $127,000, respectively. Rent expense under
operating leases was approximately $24,000, $163,000 and $636,000 at December
31, 1997, 1998 and 1999, respectively.
Future minimum annual payments under noncancellable operating and capital
leases are as follows as of December 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
---- ----------- ------------
<S> <C> <C>
2000...................................... $340,545 $ 444,603
2001...................................... 316,271 409,091
2002...................................... 147,235 404,966
2003...................................... 18,364 404,966
Thereafter................................ 9,927 812,786
-------- ----------
832,342 $2,476,412
======== ==========
Less--Amounts representing interest...... 132,704
--------
699,638
Less--Current portion.................... 256,928
--------
$442,710
========
</TABLE>
71
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1999, the Company entered into a three-year servicing agreement with a
third party to provide Internet data service centers. If this agreement is
terminated without cause, the Company will be assessed a fee equal to fifteen
percent of the total contract value due to the service provider.
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 of 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.
9. Subsequent Events (Unaudited)
a. Initial Public Offering
On February 2, 2000, the Company completed an initial public offering (the
"IPO") of 7,475,000 shares of common stock, including 975,000 shares subject
to the underwriter's over-allotment option, at $15.00 per share of common stock.
The IPO resulted in aggregate net proceeds to the Company of approximately
$102,800,000, net of underwriting discounts and expenses of the offering.
b. Conversion of Preferred Stock and Warrants
Upon the IPO of the Company's common stock, the Company converted all
outstanding shares of Series A, B and C preferred stock into shares of common
stock. Additionally, the Series A, B and C preferred stockholders exercised
their warrants to purchase shares of the Company's common stock (Notes 3 and 6).
c. Grant of Employee Stock Options
Upon the initial public offering of the Company's common stock, the Company
granted an aggregate of 451,526 options to employees to purchase shares of the
Company's common stock under the terms set forth in the Employee Stock Option
Plan (Note 6).
72
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
d. Equipment Lease
On January 5, 2000, the Company entered into a lease agreement for network
equipment. The Company is required to make equal monthly payments which are due
as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000............................... $ 853,688
2001............................... 853,688
----------
$1,707,376
==========
</TABLE>
e. Office Lease
On February 28, 2000, the Company entered into an agreement to lease
additional office space through July 30, 2003. The company is required to make
equal monthly payments which are due as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000.................................. $ 292,500
2001.................................. 351,000
2002.................................. 351,000
2003.................................. 204,750
----------
$1,199,250
==========
</TABLE>
In connection with this agreement, the Company was required to obtain a
standby letter of credit in the amount of $600,000. This letter of credit
expires on July 31, 2001 and is automatically extended for an additional period
of one year through July 31, 2002. The Company has pledged $600,000 under this
letter of credit.
f. Warrant
In connection with an advertising agreement, the Company issued a warrant to
purchase 50,000 shares of common stock at an exercise price of $15.00 per share.
This warrant is only exercisable from January 30, 2001 through February 5, 2001.
The warrant expires on February 5, 2001. The fair value of the warrant was
estimated at $209,000 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0 percent;
expected volatility of 65 percent; risk-free interest rate of 6.12 percent; and
an expected life of one year.
g. On January 1, 2000, the Company received $101,333 in notes receivable for
common stock from employees for the exercise of 266,666 options. These notes
bear interest at a rate equal to 5.00% per annum and mature at the earliest of
the cessation of the maker's employment by the Company for any reason or January
1, 2005. The Company paid an aggregate of $925,588 in withholding obligations
for these employees upon exercise of these options. In April 2000, these
employees repaid the notes in full and reimbursed the Company in full for the
amounts advanced for their withholding obligations.
On January 26, 2000, the Company received payment of $19,000 for a note
receivable from a consultant for 50,000 shares of common stock.
73
<PAGE>
L90, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................................................. $103,692,627 $ 6,895,938
Accounts receivable, net of allowances of $668,010 and $957,200 at December 31,
1999 and March 31, 2000, respectively................................................... 7,228,151 4,128,069
Notes receivable from officers............................................................ 925,588 --
Prepaid expenses and other assets......................................................... 854,391 1,341,950
------------ -----------
Total current assets................................................................ 112,700,757 12,365,957
------------ -----------
Restricted cash........................................................................... 1,868,632 1,268,632
Property and equipment:
Equipment.............................................................................. 7,456,026 2,695,847
Furniture and fixtures................................................................. 108,883 70,006
Leasehold improvements................................................................. 38,012 32,421
------------ -----------
7,602,921 2,798,274
Less--Accumulated depreciation and amortization........................................ (731,653) (296,808)
------------ -----------
Property and equipment, net............................................................... 6,871,268 2,501,466
------------ -----------
Total assets........................................................................ $121,440,657 $16,136,055
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable.......................................................................... $ 7,974,960 $ 4,693,881
Accrued expenses.......................................................................... 1,847,711 1,686,274
Current portion of note payable........................................................... 347,967 414,222
Current portion of long-term capital lease obligations.................................... 153,678 256,928
Deferred revenues......................................................................... 190,600 --
Accrued dividends......................................................................... -- 401,139
------------ -----------
Total current liabilities........................................................... 10,514,916 7,452,444
Note payable, net of current portion...................................................... 1,005,320 928,702
Long-term capital lease obligations, net of current portion............................... 819,776 442,710
------------ -----------
Total liabilities................................................................... 12,340,012 8,823,856
------------ -----------
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 2,077,501.......................... -- 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, 16,583,947 and
21,960,830 shares issued and outstanding, actual and proforma, respectively............. 21,961 6,693
Additional paid-in capital................................................................ 123,043,880 181,901
Notes receivable for common stock......................................................... (126,083) (43,750)
Capital contributions, net of shareholder draws........................................... -- --
Retained earnings......................................................................... (13,839,113) (8,838,664)
------------ -----------
Total stockholders' equity.......................................................... 109,100,645 7,312,199
------------ -----------
Total liabilities and stockholders' equity.......................................... $121,440,657 $16,136,055
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
74
<PAGE>
L90, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
2000 1999
----------- ----------
<S> <C> <C>
Revenue
Service fee-based revenue................................. $ 8,053,803 $ 35,859
Commission-based revenue.................................. 529,667 717,459
----------- ----------
Total revenue.......................................... 8,583,470 753,318
----------- ----------
Operating expenses:
Cost of service fee and other revenue..................... 5,455,575 2,295
Sales and marketing....................................... 2,908,254 802,661
Research and development.................................. 2,181,052 139,163
General and administrative................................ 4,014,425 527,836
----------- ----------
Total operating expenses............................... 14,559,306 1,471,955
----------- ----------
Operating loss.............................................. (5,975,836) (718,637)
Interest income, net........................................ 977,798 10,731
----------- ----------
Loss before provision for income taxes...................... (4,998,038) (707,906)
Provision for income taxes.................................. -- --
----------- ----------
Net loss.................................................... $(4,998,038) $ (707,906)
=========== ==========
Cumulative dividends on participating preferred stock....... (2,411) (20,000)
----------- ----------
Net loss attributable to common stockholders................ $(5,000,449) $ (727,906)
=========== ==========
Net loss per share:
Basic/Diluted............................................. $ (0.30) $ (0.11)
=========== ==========
Weighted average number of common shares outstanding:
Basic/Diluted............................................. 16,583,947 6,666,667
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
75
<PAGE>
L90, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
2000 1999
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $ (4,998,038) $ (707,906)
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization............................................. 434,845 30,988
Noncash charge for warrants issued........................................ 208,500 --
Changes in assets and liabilities:
Increase in accounts receivable........................................ (3,100,082) (12,161)
Increase in notes receivable from officers............................. (925,588) --
Increase (decrease) in prepaid expenses and other assets............... 487,559 (66,572)
Increase in accounts payable........................................... 3,281,079 362,007
Increase (decrease) in accrued expenses................................ 161,437 (38,592)
Increase in deferred revenues.......................................... 190,600 --
------------ ----------
Net cash used in operating activities............................... (4,259,688) (432,236)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (4,804,647) (159,275)
------------ ----------
Net cash used in investing activities............................... (4,804,647) (159,275)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under capital lease obligations.............................. 273,816 70,860
Net borrowings under loan payable obligations............................... 10,363 --
Restricted cash............................................................. (600,000) --
Proceeds from initial public offering, net of issuance costs................ 102,587,595 --
Repayment of notes receivable for common stock.............................. 19,000 --
Exercise of warrants........................................................ 3,843,793 --
Distribution of dividends................................................... (403,550) --
Exercise of common stock options............................................ 130,007 --
------------ ----------
Net cash provided by financing activities........................... 105,861,024 70,860
------------ ----------
Net increase (decrease) in cash............................................. 96,796,689 (520,651)
Cash and cash equivalents, beginning of period.............................. 6,895,938 2,111,852
------------ ----------
Cash and cash equivalents, end of period............................ $103,692,627 $1,591,201
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................................. $ 62,321 $ 12,639
============ ==========
Income taxes.............................................................. $ -- $ --
============ ==========
SUMMARY OF NON-CASH FINANCING ACTIVITIES:
Notes receivable for common stock......................................... $ (101,333) $ --
============ ==========
Accrued dividends......................................................... $ 2,411 $ 20,000
============ ==========
Cashless exercise of warrants............................................. $ 1,038 $ --
============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
76
<PAGE>
L90, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Notes
Receivable
Additional for
Preferred Capital Common Paid-in Common
Stock Account Stock Capital Stock
------------- --------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE at January 5, 1997.................. $ -- $13,068 $ -- $ -- $ --
Withdrawal of capital....................... -- (5,000) -- -- --
Net income.................................. -- -- -- -- --
------------ ------- ------- ------------ ---------
BALANCE at December 31, 1997................ -- 8,068 -- -- --
Net loss.................................... -- -- -- -- --
Issuance of Series A preferred stock........ 2,000,000 -- -- -- --
Issuance of common stock.................... -- -- -- 43,750 (43,750)
Distributions to shareholders............... -- -- -- -- --
Conversion to C-corporation................. -- (8,068) 6,667 6,401 --
Accrual of cumulative dividends on
participating preferred stock.............. -- -- -- -- --
------------ ------- ------- ------------ ---------
BALANCE at December 31, 1998................ 2,000,000 -- 6,667 50,151 (43,750)
Net loss.................................... -- -- -- -- --
Issuance of Series B preferred stock, net
of costs of $706,471....................... 8,957,694 -- -- -- --
Issuance of Series C preferred stock, net
of costs of $45,505........................ 3,956,408 -- -- -- --
Issuance of common stock for options........ -- -- 26 93,974 --
Issuance of debt related warrants........... -- -- -- 37,776 --
Issuance of preferred stock warrants........ 1,091,917 -- -- -- --
Accrual of cumulative dividends on
participating preferred stock.............. -- -- -- -- --
------------ ------- ------- ------------ ---------
BALANCE at December 31, 1999................ $ 16,006,019 $ -- $ 6,693 $ 181,901 $ (43,750)
Net loss (unaudited)........................
Conversion of preferred stock into
common stock............................... (16,006,019) -- 5,276 16,000,743 --
Issuance of common upon IPO, net of
costs of $9,537,405........................ -- -- 7,475 102,580,120 --
Notes receivable for exercise of options.... -- -- 267 101,066 (101,333)
Repayment of notes receivable for
common stock............................... -- -- -- -- 19,000
Issuance of common stock for options........ -- -- 99 129,908 --
Exercise of warrants........................ -- -- 1,113 3,842,680 --
Issuance of warrant......................... -- -- -- 208,500 --
Cashless exercise of warrants............... -- -- 1,038 (1,038) --
Accrual of cumulative dividends on
participating preferred stock.............. -- -- -- -- --
------------ ------- ------- ------------ ---------
BALANCE at March 31, 2000
(unaudited)................................ $ -- $ -- $21,961 $123,043,880 $(126,083)
============ ======= ======= ============ =========
</TABLE>
<TABLE>
<CAPTION>
Retained
--------------
Earnings Total
-------------- --------------
<S> <C> <C>
BALANCE at January 5, 1997.................. $ 177,458 $ 190,526
Withdrawal of capital....................... -- (5,000)
Net income.................................. 309,784 309,784
------------ ------------
BALANCE at December 31, 1997................ 487,242 495,310
Net loss.................................... (289,569) (289,569)
Issuance of Series A preferred stock........ -- 2,000,000
Issuance of common stock.................... -- --
Distributions to shareholders............... (50,000) (50,000)
Conversion to C-corporation................. (5,000) --
Accrual of cumulative dividends on
participating preferred stock.............. (23,233) (23,233)
------------ ------------
BALANCE at December 31, 1998................ 119,440 2,132,508
Net loss.................................... (7,488,281) (7,488,281)
Issuance of Series B preferred stock, net
of costs of $706,471....................... -- 8,957,694
Issuance of Series C preferred stock, net
of costs of $45,505........................ -- 3,956,408
Issuance of common stock for options........ -- 94,000
Issuance of debt related warrants........... -- 37,776
Issuance of preferred stock warrants........ (1,091,917) --
Accrual of cumulative dividends on
participating preferred stock.............. (377,906) (377,906)
------------ ------------
BALANCE at December 31, 1999................ $ (8,838,664) $ 7,312,199
Net loss (unaudited)........................ (4,998,038) (4,998,038)
Conversion of preferred stock into
common stock............................... -- --
Issuance of common upon IPO, net of
costs of $9,537,405........................ -- 102,587,595
Notes receivable for exercise of options.... -- --
Repayment of notes receivable for
common stock............................... -- 19,000
Issuance of common stock for options........ -- 130,007
Exercise of warrants........................ -- 3,843,793
Issuance of warrant......................... -- 208,500
Cashless exercise of warrants............... -- --
Accrual of cumulative dividends on
participating preferred stock.............. (2,411) (2,411)
------------ ------------
BALANCE at March 31, 2000
(unaudited)................................ $(13,839,113) $109,100,645
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
77
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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. Interim Results
The unaudited condensed financial statements for the three month periods ended
March 31, 2000 and 1999 have been prepared by us and are unaudited. In our
opinion, the unaudited consolidated condensed financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of March 31, 2000 and the results of
our operations and our cash flows for the three month periods ended March 31,
2000 and 1999. The financial data and other information disclosed in these notes
to the condensed financial statements related to these periods are unaudited.
The results for the three month period ended March 31, 2000 are not necessarily
indicative of the results to be expected for any subsequent quarter or the
entire fiscal year ending December 31, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited
financial statements be read in conjunction with our audited financial
statements and notes thereto for the year ended December 31, 1999 as included in
our annual report on Form 10-K.
b. 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 to 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-
78
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 $2,528,880 and $10,387,443, for the quarters ended March 31, 1999 and
2000, respectively.
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.
The Company maintained its cash balances in two financial institutions during
1999 and 2000. The cash balances in each financial institution is insured by the
Federal Deposit Insurance Corporation up to $100,000. At December 31,1999 and
March 31, 2000, the Company's uninsured cash balances totaled $6,695,938 and
$103,492,727, respectively.
d. Restricted Cash
Restricted cash consists of cash pledged under outstanding letters of credit.
e. 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 advertisers.
The Company extends credit to its customers, who are primarily 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.
f. 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.
g. Equipment Under Capital Leases
79
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
h. Deferred Revenue
Deferred revenue primarily represents advertising campaign revenue to be
recognized over the period of the campaign subsequent to the respective year-end
and quarter-end. This revenue will be recognized ratably over the term of the
advertising campaign, which usually ranges from one to twelve months.
i. 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.
j. 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.
k. Stock-Based Compensation
Accounting principles generally accepted in the United States ("GAAP")
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.
l. 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 date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
80
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
m. 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
a. Initial Public Offering
In February 2000, the Company completed an initial public offering (the
"IPO") of 7,475,000 shares of common stock, including 975,000 shares subject
to the underwriter's over-allotment option, at $15.00 per share of common stock.
The IPO resulted in aggregate net proceeds to the Company of approximately
$102,600,000, net of underwriting discounts and expenses of the offering.
b. Conversion of Preferred Stock and Warrants
Upon the IPO of the Company's common stock, the Company converted all
outstanding shares of Series A, B and C preferred stock into 5,276,156 shares of
common stock. Additionally, the Series A, B and C preferred stockholders
exercised their warrants to purchase shares of the Company's common stock.
4. Debt
On November 29, 1999, the Company acquired a software license in exchange for
a promissory note for $1,453,715. The note bears interest at 7.86% per annum.
This note is collateralized by a standby letter of credit for a total of
$1,208,632. At December 31, 1999, the Company had pledged $1,208,632 of cash as
collateral for this outstanding letter of credit. Remaining principal payments
due under the note are $442,032, $486,708 and $524,976 for the years ending
December 31, 2000, 2001 and 2002, respectively.
On November 29, 1999, the Company obtained a standby letter of credit for a
total of $60,000. At December 31, 1999, the Company had pledged $60,000 of cash
as collateral for this outstanding letter of credit.
On March 28, 2000 the Company obtained a standby letter of credit for a total
of $600,000. At March 31, 1999 the Company had pledged $600,000 of cash as
collateral for this outstanding letter of credit.
81
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. Stock Options and Warrants
a. Stock Options
Employee transactions during the quarter ended March 31, 2000 are summarized
as follows:
<TABLE>
<CAPTION>
2000
---------------------------
Weighted
average
exercise
Employee stock options Shares price
---------------------- ------------ ------------
<S> <C> <C>
Outstanding at beginning of period.............................. 2,151,734 $ 2.82
Granted......................................................... 587,358 16.59
Exercised....................................................... (365,967) 0.63
Forfeited....................................................... (64,714) 5.12
---------- ------
</TABLE>
<TABLE>
<S> <C> <C>
Outstanding at end of period.................................... 2,308,411 $ 6.61
========== ======
Options exercisable at end of period............................ 958,786
Weighted average fair value of options granted during period.... $16.59
</TABLE>
The following table summarizes information about employee stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Weighted average
Number remaining
Range of exercise prices outstanding contractual life
------------------------------ ----------------- ------------------------
<S> <C> <C>
$1.20....................... 170,001 8.88 years
$1.50....................... 65,167 8.91 years
$3.53....................... 1,428,215 9.38 years
$4.59....................... 66,667 9.48 years
$15.00-$20.00............... 475,978 9.84 years
$20.01-$25.00............... 94,300 9.93 years
$25.01-$28.00............... 8,083 9.86 years
---------
2,308,411
=========
</TABLE>
b. Common Stock Warrants
In connection with an advertising agreement, the Company issued a warrant to
purchase 50,000 shares of common stock at an exercise price of $15.00 per share.
This warrant is only exercisable from January 30, 2001 through February 5, 2001.
The warrant expires on February 5, 2001. The fair value of the warrant was
estimated at $209,000 on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: dividend yield of 0 percent;
expected volatility of 65 percent; risk-free interest rate of 6.12 percent; and
an expected life of one year.
6. 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.
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 lawsuit was moved to the United States District Court for the
Southern District of New York in March 2000. 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.
82
<PAGE>
L90, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
b. Office Lease
On February 28, 2000, the Company entered into an agreement to lease
additional office space through July 30, 2003. The company is required to make
equal monthly payments which are due as follows:
<TABLE>
<CAPTION>
Year Office Lease
---- ------------
<S> <C>
2000 $ 292,500
2001 351,000
2002 351,000
2003 204,750
----------
$1,199,250
==========
</TABLE>
In connection with this agreement, the Company was required to obtain a
standby letter of credit in the amount of $600,000. This letter of credit
expires on July 31, 2001 and is automatically extended for an additional period
of one year through July 31, 2002. The Company has pledged $600,000 under this
letter of credit.
7. Related Party Transactions
On January 1, 2000, the Company received $101,333 in notes receivable for
common stock from employees for the exercise of 266,666 options. These notes
bear interest at a rate equal to 5.00% per annum and mature at the earliest of
the cessation of the maker's employment by the Company for any reason or January
1, 2005. The Company paid an aggregate of $925,588 in withholding obligations
for these employees upon exercise of these options. In April 2000, these
employees repaid the notes in full and reimbursed the Company in full for the
amounts advanced for their withholding obligations.
On January 26, 2000, the Company received payment of $19,000 for a note
receivable from a consultant for 50,000 shares of common stock.
83
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid in connection with the sale of the Common
Stock being registered, all of which will be paid by the Registrant.
<TABLE>
<S> <C>
Registration fee ........................................................... $ 31,525
NASD filing fee ............................................................ 10,965
Nasdaq National Market listing fee ......................................... 95,000
Blue Sky fees and expenses ................................................. 3,000
Accounting fees and expenses ............................................... 308,000
Legal fees and expenses .................................................... 395,000
</TABLE>
<TABLE>
<S> <C>
Transfer agent and registrar fees .......................................... 10,000
Printing and engraving expenses ............................................ 300,000
* Miscellaneous expenses ..................................................... 46,510
----------
* Total ...................................................................... $1,200,000
==========
</TABLE>
_______________
* Estimate
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation (the "Certificate") provides
Dthat, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Registrant's directors shall not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Registrant. The Certificate eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the DGCL and provides that the Registrant shall fully indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (whether civil, criminal, administrative
or investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws.
Section 145 of the DGCL empowers a corporation to indemnify its directors and
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The Registrant has obtained
liability insurance for its officers and directors, and has entered into
indemnification agreements with each of its officers and directors and intends
to enter into indemnification agreements with each of its future officers and
directors. Pursuant to such indemnification agreements, the Registrant has
agreed to indemnify its officers and directors against certain liabilities,
including liabilities arising out of the offering made by this registration
statement.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate or any indemnification agreement.
The Registrant is not aware of any threatened litigation or proceeding that may
result in a claim for such indemnification.
84
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since January 1997
(inception):
Beginning in January 1998, we sold an aggregate of 6,666,666 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), Christopher J. Cardinali (200,000 shares), Todd Taplin (133,333
shares), Frank Addante (66,666 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. Such shares were sold in reliance upon an exemption from registration
under the Securities Act of 1933 pursuant to Section 4(2) thereof.
In November 1998, the Registrant sold 2,000 shares of its Series A Convertible
Preferred Stock, par value $0.01 per share, and a warrant to William Apfelbaum
in exchange for $2,000,000 in cash. Such shares of Series A Convertible
Preferred Stock will convert into an aggregate of 1,666,666 shares of Common
Stock on the closing of the Registrant's initial public offering. The warrant
issued to William Apfelbaum was for the purchase of up to 438,593 shares of
Common Stock at an exercise price of $1.71 per share. These securities were
sold in reliance upon the exemption provided for by Section 4(2) of the
Securities Act.
In August and September 1999, the Registrant sold 4,107,044 shares of its
Series B Convertible Preferred Stock, par value $.001 per share to (i) DigaComm
(L90), L.L.C. in exchange for $2,000,000 in cash, (ii) Keystone Venture V, L.P.
in exchange for $4,000,000 in cash, (iii) The Roman Arch Fund L.P. and The Roman
Arch Fund II L.P. in exchange for $500,000 in cash, (iv) Remtula and Shinin
Suleman, co-trustees for Trust dated 9/10/93 for the benefit of Trevor F.
Suleman and Miles L. Suleman in exchange for $500,000 in cash, (v) Lawrence Haut
in exchange for $117,500 in cash, (vi) Donald and Cathy Allman in exchange for
$100,000 in cash, (vii) Seymour Zises in exchange for $25,000 in cash, (viii)
Matthew Ludmer in exchange for $30,000 in cash, (ix) Jodi Yegelwel in exchange
for $50,000 in cash, (x) Lewis Katz in exchange for $200,000 in cash, (xi) Herb
Corbin in exchange for $50,000 in cash, (xii) Paul Konigsberg in exchange for
$40,000 in cash, (xiii) Dime Capital Partners, Inc. in exchange for $1,000,000
in cash, (xiv) James Stern in exchange for $500,000 in cash, (xv) Cambridge Lat
90 Associates, LLC in exchange for $500,000 in cash and (xvi) Harley Greenfield
in exchange for $50,000 in cash. Such shares of Series B Convertible Preferred
Stock will automatically convert into 2,738,029 shares of Common Stock on a
three-for-two basis on the closing of the Registrant's initial public offering.
In addition, the Registrant sold to (i) DigaComm (L90), L.L.C. a warrant for the
purchase of up to 353,964 shares of Common Stock at an exercise price of $5.30
per share and (ii) William Apfelbaum a warrant for the purchase of up to 353,964
shares of Common Stock at an exercise price of $5.30 per share. These
securities were sold in reliance upon the exemption provided for by Section 4(2)
of the Securities Act and Regulation D promulgated thereunder.
In September 1999, the Registrant sold 1,307,190 shares of its Series C
Convertible Preferred Stock, par value $0.001 per share, to (i) Development
Ventures (Two) Inc. in exchange for $2,000,000 in cash and (ii) Rare Medium
Group, Inc. in exchange for $2,000,000 in cash. Such shares of Series C
Convertible Preferred Stock will automatically convert into 871,460 shares of
Common Stock on a three-for-two basis on the closing of the Registrant's initial
public offering. In addition, the Registrant sold to (i) Development Ventures
(Two) Inc. a warrant for the purchase of up to 674,029 shares of Common Stock
at an exercise price of $4.59 per share and (ii) Rare Medium Group, Inc. a
warrant for the purchase of up to 600,000 shares of Common Stock at an exercise
price of $4.59 per share. These securities were sold in reliance upon the
exemption provided for by Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
85
<PAGE>
As of December 31, 1999, the Registrant has issued and sold 26,666 shares of
its Common Stock to employees, consultants, officers and directors upon the
exercise of options for an aggregate consideration of $94,000. All shares of
Common Stock issued upon exercise of these options were issued and sold in
reliance upon the exemption provided for under Rule 701 promulgated under the
Securities Act.
On June 7, 1999, the Registrant issued to The Roman Arch Fund L.P. and The
Roman Arch Fund II, L.P. four warrants to purchase an aggregate of 333,333
shares of its Common Stock, later adjusted to an aggregate of 150,000 shares of
its Common Stock, at an initial purchase price of $2.40 per share, subject to
adjustment. These warrants were issued by the Registrant in connection with a
loan made by The Roman Arch Fund L.P. and The Roman Arch Fund II, L.P. to the
Registrant in the aggregate principal amount of $1,000,000. These warrants were
issued and sold in reliance upon the exemption provided for by Section 4(2) of
the Securities Act.
On January 27, 2000, the Registrant issued to Entertaindom, Inc. a warrant to
purchase an aggregate of 50,000 shares of its Common Stock at an exercise price
of $15.00 per share. This warrant was issued by the Registrant in connection
with an advertisement contract entered into between the two parties. This
warrant was issued and sold in reliance upon the exemption provided for by
Section 4(2) of the Securities Act.
On July 24, 2000, the Registrant issued an aggregate of 2,000,000 shares of
common stock to the former stockholders and warrant holders of webMillion.com,
Inc. These shares were issued in exchange for all of the outstanding capital
stock and warrants of webMillion.com, Inc. The shares of common stock were
issued and sold in reliance upon the exemption provided for by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
---------- -------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement of Merger dated September 15, 1999.
3.1* Amended and Restated Certificate of Incorporation previously filed
as Exhibit 3.1 to L90's Annual Report on Form 10-K for the year
ended December 31, 1999, which is incorporated herein by reference.
3.2* Amended and Restated Bylaws.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of
Incorporation and Bylaws of the Registrant defining the rights of holders of Common Stock
of the Registrant.
4.2* Stock Purchase and Stockholders Agreement dated September 14, 1998.
4.3* Registration Agreement dated August 6, 1999.
4.4* Series C Registration Agreement dated September 22, 1999.
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1* 1999 Stock Incentive Plan.
10.2* Stock Purchase and Stockholders Agreement dated September 14, 1998. See Exhibit 4.2
10.3* Sublease dated May 21, 1999 between Widom, Wein, Cohen, O'Leary, Terasawa and
Latitude 90.
10.4* Representation Agreement dated April 24, 1997 between AdNet Strategies, Inc. and Four11
Corporation.
10.5* Representation Agreement dated September 12, 1997 between John Bohan & Associates,
L.L.C. and N2K, Inc.
</TABLE>
86
<PAGE>
<TABLE>
<C> <S>
10.6* National Sales Representation Agreement dated March 10, 1998 between Zip2 Corp. and
AdNet Strategies, Inc.
10.7* Representation Agreement dated December 31, 1998 between Latitude 90, Inc. and Go2Net,
Inc.
10.8* Advertising Sales Agency Agreement dated January 1, 1999 between Latitude 90, Inc. and
Bell Atlantic Electronic Commerce Services, Inc.
10.9* Equipment Lease dated December 2, 1998 between AdNet Strategies, Inc. and Premier
Capital Corporation.
10.10* Shareholders Agreement dated August 6, 1999 (as amended).
10.11* Amended and Restated Shareholders Agreement dated September 22, 1999.
10.12* Series B Preferred Stock Purchase Agreement dated August 6, 1999 between the Registrant
and the holders of Series B preferred stock (as amended).
10.13* Series C Preferred Stock Purchase Agreement dated September 22, 1999 between the
Registrant and the holders of Series C preferred stock.
10.14* Warrant dated September 16, 1998 issued to William Apfelbaum.
10.15* Stock Purchase Warrant dated August 16, 1999 issued to DigaComm, L.L.C.
10.16* Stock Purchase Warrant dated August 16, 1999 issued to William Apfelbaum.
10.17* Stock Purchase Warrant dated September 22, 1999 issued to Development Ventures (Two)
Inc.
10.18* Stock Purchase Warrant dated September 22, 1999 issued to Rare Medium Group, Inc.
10.19* Promissory Note in the original principal amount of $600,000, made June 7, 1999 by the
Registrant in favor of The Roman Arch Fund L.P.
10.20* Promissory Note in the original principal amount of $400,000, made June 7, 1999 by the
Registrant in favor of The Roman Arch Fund II L.P.
10.21* Warrant No. PP-99-1 dated June 7, 1999 issued to The Roman Arch Fund L.P.
10.22* Warrant No. PP-99-2 dated June 7, 1999 issued to The Roman Arch Fund II L.P.
10.23* Warrant No. IPO-99-1 dated June 7, 1999 issued to The Roman Arch Fund L.P.
10.24* Warrant No. IPO-99-2 dated June 7, 1999 issued to The Roman Arch Fund II L.P.
10.25* Assignment and Assumption Agreement dated September 17, 1999.
10.26* Assignment and Assumption Agreement dated September 17, 1999.
10.27* Form of Indemnification Agreement entered into between the Registrant and each of its
directors and executive officers.
10.28* Employment Agreement entered into between the Registrant and John C. Bohan.
10.29* Employment Agreement entered into between the Registrant and Christopher J. Cardinali.
10.30* Employment Agreement entered into between the Registrant and Mark D. Roah (as
amended).
10.31* Employment Agreement entered into between the Registrant and Frank A. Addante (as
amended).
10.32* Employment Agreement entered into between the Registrant and Thomas A. Sebastian.
10.33* Severance Agreement entered into between the Registrant and Thomas A. Sebastian.
10.34* Warrant No. W-WB1 dated January 27, 2000, issued to Entertaindom, Inc., previously filed
with the Commission as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999, which is incorporated herein by reference.
10.35* Payment Schedule Contract dated November 30, 1999 between L90 and Oracle Credit
Corporation, previously filed with the Commission as Exhibit 10.34 to L90's Annual Report
on Form 10-K for the year ended December 31, 1999, which is incorporated herein by
reference.
10.36* Master Lease Agreement dated January 5, 1999 between L90 and Sun Microsystems Finance,
previously filed with the Commission as Exhibit 10.35 to L90's Annual Report on Form 10-K
for the year ended December 31, 1999, which is incorporated herein by reference.
10.37* Agreement and Plan of Merger dated July 7, 2000 among L90, WM Acquisition Corp.,
webMillion.com, Inc., Anthony Hauser and Kenneth Adcock, previously filed with the Commission
on L90's Current Report on Form 8-K on July 28, 2000, which is incorporated herein by reference.
</TABLE>
87
<PAGE>
<TABLE>
<C> <S>
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
24.1* Powers of Attorney (See Signature Page on Page II-6).
27.1* Financial Data Schedule.
27.2* Financial Data Schedule.
</TABLE>
____________
* Previously filed.
(b) Financial Statement Schedules.
Schedule I Valuation and Qualifying Accounts (see page S-1).
Item 17. Undertakings
(a) The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time the Commission declared it
effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
88
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on July 27,
2000.
L90, INC.
By: /s/ John C. Bohan
-------------------
John C. Bohan
President and Chief Executive Officer
89
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ John C. Bohan President, Chief Executive Officer and Director July 27, 2000
---------------------------------- (Principal Executive Officer)
John C. Bohan
* Chief Financial Officer and Senior Vice President July 27, 2000
---------------------------------- (Principal Financial and Accounting Officer)
Thomas A. Sebastian
* Chairman of the Board July 27, 2000
---------------------------------- and Director
William M. Apfelbaum
* Senior Vice President of Business Development July 27, 2000
---------------------------------- and Director
Mark D. Roah
* Vice President of Northwestern Sales July 27, 2000
---------------------------------- and Director
Christopher J. Cardinali
* Director July 27, 2000
----------------------------------
Peter G. Diamandis
* Director July 27, 2000
----------------------------------
Peter E. Ligeti
* Director July 27, 2000
----------------------------------
Peter Sealey
* Director July 27, 2000
----------------------------------
Glenn S. Meyers
* Director July 27, 2000
----------------------------------
G. Bruce Redditt
*By: /s/ John C. Bohan July 27, 2000
--------------------------
John C. Bohan
Attorney-in-Fact
</TABLE>
90
<PAGE>
SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance at to Costs Balance at
Beginning and End of
Description of Period Expenses Deductions Period
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
For the Period Ending March 31, 2000
Allowance for doubtful accounts receivable ...................... $142,952 $ 824,031 $ (298,972) $ 668,011
======== ========== =========== ==========
For the Period Ending December 31, 1999
Allowance for doubtful accounts receivable ...................... $668,011 $1,813,439 $(1,124,018) $1,357,432
======== ========== =========== ==========
For the Year Ending December 31, 1998
Allowance for doubtful accounts receivable ...................... $ 69,860 $ 142,952 $ (69,860) $ 142,952
======== ========== =========== ==========
For the Period Ending December 31, 1997
Allowance for doubtful accounts receivable ...................... $ 7,029 $ 69,860 $ (7,029) $ 69,860
======== ========== =========== ==========
</TABLE>
91
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
--------- -------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Agreement of Merger dated September 15, 1999.
3.1* Amended and Restated Certificate of Incorporation previously filed
as Exhibit 3.1 to L90's Annual Report on Form 10-K for the year
ended December 31, 1999, which is incorporated herein by reference.
3.2* Amended and Restated Bylaws.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of
Incorporation and Bylaws of the Registrant defining the rights of holders of Common Stock
of the Registrant.
4.2* Stock Purchase and Stockholders Agreement dated September 14, 1998.
4.3* Registration Agreement dated August 6, 1999.
4.4* Series C Registration Agreement dated September 22, 1999.
5.1* Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1* 1999 Stock Incentive Plan.
10.2* Stock Purchase and Stockholders Agreement dated September 14, 1998. See Exhibit 4.2
10.3* Sublease dated May 21, 1999 between Widom, Wein, Cohen, O'Leary, Terasawa and
Latitude 90.
10.4* Representation Agreement dated April 24, 1997 between AdNet Strategies, Inc. and Four11
Corporation.
10.5* Representation Agreement dated September 12, 1997 between John Bohan & Associates,
L.L.C. and N2K, Inc.
10.6* National Sales Representation Agreement dated March 10, 1998 between Zip2 Corp. and
AdNet Strategies, Inc.
10.7* Representation Agreement dated December 31, 1998 between Latitude 90, Inc. and Go2Net,
Inc.
10.8* Advertising Sales Agency Agreement dated January 1, 1999 between Latitude 90, Inc. and
Bell Atlantic Electronic Commerce Services, Inc.
10.9* Equipment Lease dated December 2, 1998 between AdNet Strategies, Inc. and Premier
Capital Corporation.
10.10* Shareholders Agreement dated August 6, 1999 (as amended).
10.11* Amended and Restated Shareholders Agreement dated September 22, 1999.
10.12* Series B Preferred Stock Purchase Agreement dated August 6, 1999 between the Registrant
and the holders of Series B preferred stock (as amended).
10.13* Series C Preferred Stock Purchase Agreement dated September 22, 1999 between the
Registrant and the holders of Series C preferred stock.
10.14* Warrant dated September 16, 1998 issued to William Apfelbaum.
10.15* Stock Purchase Warrant dated August 16, 1999 issued to DigaComm, L.L.C.
10.16* Stock Purchase Warrant dated August 16, 1999 issued to William Apfelbaum.
10.17* Stock Purchase Warrant dated September 22, 1999 issued to Development Ventures (Two)
Inc.
10.18* Stock Purchase Warrant dated September 22, 1999 issued to Rare Medium Group, Inc.
10.19* Promissory Note in the original principal amount of $600,000, made June 7, 1999 by the
Registrant in favor of The Roman Arch Fund L.P.
10.20* Promissory Note in the original principal amount of $400,000, made June 7, 1999 by the
Registrant in favor of The Roman Arch Fund II L.P.
10.21* Warrant No. PP-99-1 dated June 7, 1999 issued to The Roman Arch Fund L.P.
10.22* Warrant No. PP-99-2 dated June 7, 1999 issued to The Roman Arch Fund II L.P.
</TABLE>
92
<PAGE>
<TABLE>
<S> <C>
10.23* Warrant No. IPO-99-1 dated June 7, 1999 issued to The Roman Arch Fund L.P.
10.24* Warrant No. IPO-99-2 dated June 7, 1999 issued to The Roman Arch Fund II L.P.
10.25* Assignment and Assumption Agreement dated September 17, 1999.
10.26* Assignment and Assumption Agreement dated September 17, 1999.
10.27* Form of Indemnification Agreement entered into between the Registrant and each of its
directors and executive officers.
10.28* Employment Agreement entered into between the Registrant and John C. Bohan.
10.29* Employment Agreement entered into between the Registrant and Christopher J. Cardinali.
10.30* Employment Agreement entered into between the Registrant and Mark D. Roah (as
amended).
10.31* Employment Agreement entered into between the Registrant and Frank A. Addante (as
amended).
10.32* Employment Agreement entered into between the Registrant and Thomas A. Sebastian.
10.33* Severance Agreement entered into between the Registrant and Thomas A. Sebastian.
10.34* Warrant No. W-WB1 dated January 27, 2000, issued to Entertaindom, Inc., previously filed
with the Commission as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999, which is incorporated herein by reference.
10.35* Payment Schedule Contract dated November 30, 1999 between L90 and Oracle Credit
Corporation, previously filed with the Commission as Exhibit 10.34 to L90's Annual Report
on Form 10-K for the year ended December 31, 1999, which is incorporated herein by
reference.
10.36* Master Lease Agreement dated January 5, 1999 between L90 and Sun Microsystems Finance,
previously filed with the Commission as Exhibit 10.35 to L90's Annual Report on Form 10-K
for the year ended December 31, 1999, which is incorporated herein by reference.
10.37* Agreement and Plan of Merger dated July 7, 2000 among L90, WM Acquisition Corp.,
webMillion.com, Inc., Anthony Hauser and Kenneth Adcock, previously filed with the Commission
on L90's Current Report on Form 8-K on July 28, 2000, which is incorporated herein by reference.
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
24.1* Powers of Attorney (See Signature Page on Page II-6).
27.1* Financial Data Schedule.
27.2* Financial Data Schedule.
</TABLE>
_______________
* Previously filed.
93
