10-Q/A 1 a82169ore10vqza.txt FORM 10-Q/A ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A -------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER: 000-28893 L90, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 95-4761069 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4499 GLENCOE AVENUE MARINA DEL REY, CALIFORNIA 90292 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (310) 751-0200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.001 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of November 6, 2001, L90, Inc. had 24,913,035 shares of its Common Stock, $0.001 par value per share, outstanding. ================================================================================ This Form 10-Q/A for the three and nine months ended September 30, 2001 is being filed for the purpose of amending and restating Items 1 and 2 of Part 1 of Form 10-Q. These items are being amended and restated for the purpose of recording transactions identified by the Audit Committee of our Board of Directors, which commenced an independent internal investigation into the matter that was prompted by an SEC investigation of the Company. To assist in this inquiry, the Audit Committee and the Company each engaged special counsel and a forensic accounting firm. As a result, certain of the Company's financial results for the year ended December 31, 2000 and for the three quarters ended September 30, 2001 are being restated. Note 10 - "Restatement of Financials" to the consolidated notes to the financial statements provides a reconciliation of the Company's previously reported unaudited balance sheet, statements of operations and cash flows as of and for the three and nine months ended September 30, 2001 with the restated financial statements. The adjustments relate to groups of transactions that were identified involving multiple vendors and service providers. These cash transactions substantially offset another when aggregated and appear to represent barter arrangements that do not meet the criteria for revenue recognition under accounting principles generally accepted in the United States. Additional revenue transactions have been reversed that involved these and other vendors and were subsequently written off as bad debts or generated concerns about the substance of the services provided. For the three and nine months ended September 30, 2001, these adjustments reflect a decrease in revenue of approximately $840,000 and $5 million, respectively, an increase in sales and marketing expense of $195,000 for the three months ended September 30, 2001 and a decrease in sales and marketing of approximately $2.2 million for the nine months ended September 30, 2001, a reduction in general and administrative of approximately $790,000 and $1.9 million, respectively. In addition, for the three and nine months ended September 30, 2001, other income increased by approximately $1 million and $1.6 million, respectively. L90, INC. TABLE OF CONTENTS

2 PART I ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS L90, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 3 L90, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 L90, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 L90, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements 6 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS L90, Inc. (together with its Subsidiary, the "Company") is primarily an Internet-based provider of marketing solutions for advertisers and Web publishers. The Company provides fully outsourced ad sales, direct marketing, list marketing and sweepstakes promotions. The Company develops targeted marketing campaigns that leverage the capabilities of the Internet. 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 consolidated financial statements for the three and nine month periods ended September 30, 2001 and 2000, have been prepared by the Company and are unaudited. The unaudited condensed consolidated 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 September 30, 2001, and the results of the Company's results of operations, stockholders equity, and cash flows for the three and nine months ended 2001 and 2000. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to these periods are unaudited. The results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results to be expected for any subsequent quarter or the entire fiscal year ending December 31, 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2000 as included in our annual report on Form 10-K/A. b. REVENUE RECOGNITION Revenue from media 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. The Company recognizes list revenues upon delivery and establishes reserves for potential adjustments. 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 are included in cost of revenue. Additionally, under service fee-based contracts, the Company must collect and bear the 7 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. c. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS The Company sells advertising space to its customers. For the quarter ended September 30, 2001, there were no advertising customers that comprised greater than 10 percent of revenue. For the quarter ended September 30, 2000, the largest advertising customer accounted for 10.3 percent of revenue. The Company, in some instances, purchases advertising space from its Web site partners and in other instances sells advertising space on behalf of its Web site partners. For the quarter ended September 30, 2001, no Web site partner comprised greater than 10 percent of revenue. For the quarter ended September 30, 2000, one Web site partner comprised 14.3 percent of revenue. d. CASH AND CASH EQUIVALENTS For purposes of the balance sheets and statements of cash flows, cash and cash equivalents include all cash instruments due on demand or with an original maturity of 90 days or less. The Company maintained its cash balances in six financial institutions during 2001 and 2000. The cash balances in each financial institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At September 30, 2001 and December 31, 2000, the Company's uninsured cash balances, including both restricted and unrestricted cash, totaled $60,799,069 and $75,172,026, respectively. e. RESTRICTED CASH Restricted cash consists of cash pledged under outstanding letters of credit. f. ACCOUNTS RECEIVABLE The Company has receivables due from advertisers and Web publishers resulting from the sales of ads, and from list owners resulting from the brokering of lists. 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 8 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. g. 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. h. 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. i. DEFERRED REVENUE Deferred revenue primarily represents advertising campaign revenue to be recognized over the period of the campaign subsequent to the respective period-end. This revenue will be recognized ratably over the term of the advertising campaign, which usually ranges from one to twelve months. j. 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. 9 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS k. 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. l. STOCK-BASED COMPENSATION Companies are permitted under GAAP 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. m. 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. n. RECENT ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after September 15, 2000 as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in the earnings unless specific hedge accounting criteria are met. The Company did not have any derivative instruments as of December 31, 2000 and the adoption of SFAS No. 133 did not have a material impact on its financial statements. 10 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In September 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Based upon current levels of goodwill, the elimination of amortization of goodwill would result in a decrease in expenses of approximately $1.3 million on an annualized basis. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002, with early application encouraged and generally are to be applied prospectively. We do not expect the adoption of SFAS 143 to have a material impact on our financial condition and results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged and generally are to be applied prospectively. We do not expect the adoption of SFAS 144 to have a material impact on our financial condition and results of operations. o. PRINCIPLES OF CONSOLIDATION The Company's consolidated financials as of September 30, 2001 and December 31, 2000 and for the nine month periods ended September 30, 2001 and 2000, include the accounts of the Company and its subsidiary from its respective date of acquisition (see note 3). All significant intercompany transactions and balances have been eliminated in consolidation. p. CERTAIN RECLASSIFICATIONS Certain reclassifications were made to previously reported amounts in the accompanying condensed consolidated financial statements and the related notes to make them consistent with the current presentation format of the Company. 3. ACQUISITIONS On July 24, 2000, the Company acquired webMillion.com, Inc., a leading direct marketing promotions company. Pursuant to the Merger Agreement, the Company issued 1,901,381 shares of its Common Stock, $0.001 par value, to all the shareholders of webMillion. Holders of warrants of webMillion received, in the aggregate, the right to purchase from the Company 11 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 98,619 shares of Common Stock at a price per share of $1.9792. A total of 361,063 of the Merger Shares are being held in a three-year escrow as security for the indemnification obligations of webMillion's former shareholders pursuant to the Merger Agreement. The fair value purchase price in excess of the value of identified assets and liabilities assumed has been allocated to goodwill in the amount of $19.8 million. Goodwill is being amortized over its expected benefit, which is 20 years. The transaction was structured as a reverse triangular merger and has been accounted for through the purchase method of accounting. As a result of the tax-free purchase, webMillion now is a wholly owned subsidiary of the Company. On May 14, 2001 the Company purchased substantially all the assets of a list marketing business. Pursuant to the Asset Purchase Agreement the Company paid $1,790,603 in cash, issued 914,210 shares of the Company's common stock and incurred $702,576 in a note payable to the former shareholder of the company. The recorded purchase price excludes contingent increases associated with earn out provisions which could increase the purchase price by up to $1,000,000 if defined operating income provisions are met. The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the amount of $6.5 million and will be amortized over its expected benefit, which is 20 years. 4. 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. 5. 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, 2000 the 12 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Company had pledged $1,208,632 of cash as collateral for this outstanding letter of credit. Remaining principal payments due under the note are $125,152 and $524,976 for the years ending December 31, 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, 2000, 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 December 31, 2000, the Company had pledged $600,000 of cash as collateral for this outstanding letter of credit. On October 27, 2000, the Company obtained a standby letter of credit in the amount of $750,000. At December 31, 2000, the Company had pledged $750,000 of cash as collateral for this outstanding letter of credit. 6. COMMON STOCK WARRANTS 13 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 was only exercisable from January 29, 2001 through 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. This warrant was not exercised and expired on February 5, 2001. 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 April 2, 2001, EMI Communications Corp. filed a lawsuit against the Company in the Queen's Bench (Brandon Centre), Manitoba, Canada. The suit alleges breach of contract by the Company. The Company believes this suit is without merit and intends to vigorously defend itself against these claims. b. OFFICE LEASE The Company leases office space in the following locations: Marina Del Rey, CA, San Francisco, CA, Seattle, WA, Chicago, IL, Greenwich, CT, New York, NY, Valhalla, NY, Plymouth, MN and London, England. The Company entered into the following lease agreements during the 12 months ended December 31, 2000: On January 17, 2000, the Company entered into an agreement to lease office space in Chicago, IL through January 16, 2005. On February 28, 2000, the Company entered into an agreement to lease office space in San Francisco, CA through July 30, 2003. 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. On September 26, 2000, the Company entered into an agreement to lease office space in Greenwich, CT through July 31, 2005. 14 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On July 24, 2000, in conjunction with its acquisition of webMillion.com, Inc., the Company assumed the lease liability for office space in Boise, ID through September 30, 2001. The lease was terminated effective March 31, 2001. On September 26, 2000, the Company entered into an agreement to lease office space in Seattle, WA through September 30, 2003. On October 27, 2000, the Company entered into an agreement to lease office space for its corporate headquarters in Marina Del Rey, CA through December 31, 2005. In connection with this agreement, the Company was required to obtain a standby letter of credit in the amount of $750,000. This letter of credit expires on January 31, 2002 and is automatically extended for an additional period of one year through January 31, 2006. The Company has pledged $750,000 under this letter of credit. On May 14, 2001, the Company assumed a lease agreement for office space in Valhalla, NY and Minneapolis, MN, through July 2005 and December 2001, respectively. The minimum rental commitments required under operating leases are as follows:

8. INVESTMENTS On November 22, 2000, the Company purchased a 19% interest in Zondigo, Inc., a wireless technology company. The cash purchase price for the shares was equal to $1.95 million. Concurrent with the investment, the Company and Zondigo entered into a strategic alliance and cross-licensing agreement, pursuant to which both parties have agreed to grant each other licenses to certain of their respective technologies. This investment is being accounted for under the cost method of accounting. Frank Addante, the Company's former Chief Technology Officer, serves as the Chairman of Zondigo. Peter Sealey, one of the Company's board members, also serves on the board of Zondigo. During the quarter ended September 30, 2001, the Company wrote off its investment in Zondigo, which consists of $1,950,000 for the actual investment and $166,667 corresponding to the affiliated licensing agreement. Management has evaluated the carrying value of the investment and has concluded that it is impaired. 15 L90, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. RELATED PARTY TRANSACTIONS In November 2000, the Company received $1,480,000 in notes receivable for loans to officers. These notes bear interest at 5.0% per annum and mature at the occurrence of the fifth anniversary of the date of the note or upon demand by the Holder. The notes are secured by a security interest in the officers' stock, as well as, all other personal property of the officers. 10. RESTATEMENT OF FINANCIALS On February 1, 2002, the Company's Board of Directors authorized the Audit Committee of the Board of Directors to commence an independent internal investigation into the matter that was prompted by an SEC investigation of the Company. To assist in this inquiry, the Audit Committee and the Company each engaged special counsel and a forensic accounting firm. As a result, certain of the Company's financial results for the year ended December 31, 2000 and for the three quarters ended September 30, 2001 are being restated. The following statements provide a reconciliation of the Company's previously reported unaudited balance sheet and statements of operations and cash flows as of and for the three and nine months ended September 30, 2001 with the restated financial statements. The adjustments relate to the groups of transactions that were identified involving multiple vendors and service providers. These cash transactions substantially offset another when aggregated and appear to represent barter arrangements that do not meet the criteria for revenue recognition under accounting principles generally accepted in the United States. Additional revenue transactions have been reversed that involved these and other vendors and were subsequently written off as bad debts or generated concerns about the substance of the services provided. For the three and nine months ended September 30, 2001, these adjustments reflect a decrease in revenue of approximately $840,000 and $5 million, respectively, an increase of $195,000 and a decrease of approximately $2.2 million, respectively, of sales and marketing expense and approximately $790,000 and $1.9 million reduction to general and administrative expenses, respectively. Additionally, other income for the three months and nine months ended September 30, 2001, increased by approximately $1 million and $1.6 million, respectively. 16 CONSOLIDATED BALANCE SHEET:

17 STATEMENT OF OPERATIONS

STATEMENT OF OPERATIONS

18 STATEMENT OF CASH FLOWS

11. SUBSEQUENT EVENTS On October 2, 2001, the Company completed the sale of adMonitor, its ad serving technology software, and the technology underlying its ProfiTools solutions to DoubleClick Inc. in exchange for $6.84 million. As part of the sale, L90 entered into a 5-year non-exclusive ad serving agreement for DART, DoubleClick's ad serving technology, pursuant to which L90 will purchase a minimum of $3.5 million of DART services. The sale proceeds will be recognized ratably over the term of the DART agreement. On October 15, 2001, the Company forgave loans to officers totaling $508,113. Upon receipt of certain income tax refunds, the two officers have agreed to pay to the Company $859,225 in partial repayment of such loans. The Company will pay to the officers a total of $656,230 to tax protect such officers with respect to the forgiveness of debt described above. The balance of the loans will remain due from the officers pending further payments. SEC Investigation On January 25, 2002, the Securities and Exchange Commission issued a formal order of investigation in connection with non-specified accounting matters, financial reports, public disclosures and trading activity in the Company's securities. In connection with this investigation, the SEC has requested that the Company provide it with certain documents and other information. The Company is continuing to fully cooperate with the SEC in its investigation and is hopeful that it can resolve this investigation in an expeditious manner. In addition, in January 2002, the Company was notified that the Nasdaq National Stock Market Listing Investigations requested certain documents and other information relating to certain transactions pursuant to Marketplace Rule 4330(c). The Company is cooperating fully with Nasdaq in its investigation. While the Company does not know the current status of either investigation or any possible actions that may be taken against it as a result, any regulatory action against it could harm the Company's business. On February 1, 2002, the Company's Board of Directors authorized the Audit Committee of the Board of Directors to commence an independent internal investigation into the matters that prompted the SEC investigation. The Audit Committee engaged special counsel and a forensic accounting firm to conduct a comprehensive examination of the Company's financial records. On May 6, 2002, the Company announced that the Audit Committee had concluded its internal investigation and determined that certain of the Company's financial results for the year ended December 31, 2000 and the three quarters ended September 30, 2001 would be restated. Securities Class Actions Beginning on March 21, 2002, following the announcement of the SEC investigation and the internal investigation of the Audit Committee of the Board of Directors, a number of securities class action complaints were filed against the Company and certain of its former officers and directors in the United States District Court for the Central District of California. The complaints have been filed as purported class actions by individuals who allege that they purchased the Company's common stock during the purported class period. The complaints generally allege that during 2000 and 2001 the Company, and the other named defendants, made false or misleading statements of material fact about the Company's financial statements, including its revenues, revenue recognition policies, business operations and prospects for the years 2000, 2001 and beyond. The complaints seek an unspecified amount of damages on behalf of persons who purchased the Company's common stock during the purported class period. The actions are still in the preliminary stages and the Company is unable to assess at this time the merits of the actions, therefore, it is not possible for the Company to quantify the extent of its potential liability, if any. Any unfavorable outcome in these actions could have a material adverse effect on the Company's business, financial condition and results of operations. Derivative Actions Beginning on March 22, 2002, the Company has been named as a nominal defendant in two derivative actions, purportedly brought on behalf of the Company, filed in the Superior Court of the State of California for the County of Los Angeles. The derivative complaints allege that certain of the Company's current and former officers and directors breached their fiduciary duties to the Company, engaged in abuses of their control of the Company, wasted corporate assets, and grossly mismanaged the Company. The plaintiffs seek unspecified damages on the Company's behalf from each of the defendants. Because of the nature of derivative litigation, any recovery in the action would inure to the Company's benefit. The actions are still in the preliminary stages and the Company is unable to assess at this time the merits of the actions. Nasdaq Delisting On April 16, 2002, the Company was notified that Nasdaq intended to initiate proceedings to delist the Company's common stock from the Nasdaq National Stock Market because of its failure to timely file with the SEC its annual report on Form 10-K for the year ended December 31, 2001. The Company has requested a hearing on the matter and has updated its financial statements, as of the date of this filing, prior to the hearing that is scheduled for May 17, 2002. However, the Company cannot assure you that its common stock will continue to be traded on the Nasdaq National Stock Market. 19 ITEM 2. 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 report. 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. RECENT FINANCIAL ACCOUNTING DEVELOPMENTS On February 1, 2002, the Company's Board of Directors authorized the Audit Committee of the Board of Directors to commence an independent internal investigation into the matter that was prompted by an SEC investigation of the Company. To assist in this inquiry, the Audit Committee and the Company each engaged special counsel and a forensic accounting firm. As a result, certain of the Company's financial results for the year ended December 31, 2000 and for the three quarters ended September 30, 2001 are being restated. Note 10 "Restatement of Financials" to the notes to the condensed financial statements provides a reconciliation of the Company's previously reported unaudited balance sheet, statements of operations and cash flows as of and for the three and nine months ended September 30, 2001 with the restated financial statements. The adjustments relate to groups of transactions that were identified involving multiple vendors and service providers. These cash transactions substantially offset another when aggregated and appear to represent barter arrangements that do not meet the criteria for revenue recognition under accounting principles generally accepted in the United States. Additional revenue transactions have been reversed that involved these and other vendors and were subsequently written off as bad debts or generated concerns about the substance of the services provided. For the three and nine months ended September 30, 2001, these adjustments reflect a decrease in revenue of approximately $840,000 and $5 million, respectively, an increase of $195,000 and a decrease of approximately $2.2 million, respectively, of sales and marketing expense and a approximately $790,000 and $1.9 million reduction to general and administrative expenses, respectively. Additionally, other income for the three months and nine months ended September 30, 2001 was approximately $1 million and $1.6 million, respectively. OVERVIEW References in this report to "L90," "we," "our" and "us" refer to L90, Inc. We are a leading provider of marketing services for marketers and Web publishers. We design and implement marketing campaigns for our marketing 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 marketing, and Web publishing clients to implement sophisticated marketing 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. On October 2, 2001, we sold our adMonitor technology to DoubleClick. Since inception, the majority of our revenue has been derived from online advertising sales. We offer advertisements primarily priced on a cost per every thousand ads viewed, or CPM, basis. We also offer direct marketing programs, which may be priced on a cost per action basis, such as cost for each new user registration. In January 1999, we began to charge our customers for the use of our adMonitor technology. For the nine months ended September 30, 2001, media sales accounted for 79.5% of our revenue and fees generated by our adMonitor technology accounted for 20.5% of our revenue. For the three months ended September 30, 2001, media sales accounted for 84.4% of our revenue and fees generated by our adMonitor technology accounted for 15.6% of our revenue. Revenue from media sales is earned under commission-based and service fee-based contracts. For commission-based contracts, we receive commissions from Web and list 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 for web publishers ratably over the term of a marketing campaign, which typically ranges from one to twelve months. The Company recognizes list publishers commissions upon delivery of lists and establishes reserves for potential adjustments. 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 marketers for ads sold. Consequently, revenue earned from service fee-based contracts reflects the full value of the ads sold. 20 Because 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 marketing clients under our 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 nine months ended September 30, 2001, service fee-based contracts accounted for 86.1% of our revenue, and commission based contracts accounted for 13.9% of our revenue. For the nine months ended September 30, 2000, service fee-based contracts accounted for 97.2% of our revenue, and commission-based contracts accounted for 2.8% 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. Additionally, cost of revenue includes contest fees and insurance expense related to direct marketing promotions. We expect cost of revenue to increase on an absolute dollar basis in future periods as our revenue increases. 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 and they tend to place more advertisements during the fourth quarter. Additionally, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, as well as budgeting and buying patterns. RESULTS OF OPERATIONS For the three months and nine months ended September 30, 2001 and 2000 REVENUE. Revenue decreased 43.6% to $7.6 million for the three months ended September 30, 2001 from $13.4 million for the three months ended September 30, 2000. This decrease was primarily due to the cyclically down advertising marketplace as well as the overall reduction in marketing spending by Internet-related clients. The decrease was also partially due to a change in our sales mix, whereby we entered into more commission based contracts as a percentage of total revenues compared to the same period in the prior year. On a year to date basis, revenue for the nine months ended September 30, 2001 was $22.2 million, a decrease of $12.1 million or 35.2% over the nine months ended September 30, 2000. 21 COST OF REVENUE. Cost of revenue was $3.1 million for the three months ended September 30, 2001 and $8.9 million for the three months ended September 30, 2000. The decrease in cost of revenue was due to the growth in and conversion to commission based revenue from service based revenue as a percentage of total revenues as well as an increase in website commission rates. On a year to date basis, cost of revenue was $11.1 million for the nine months ended September 30, 2001 and $22.5 million for the nine months ended September 30, 2000. SALES AND MARKETING. Sales and marketing expenses include salaries, commissions, travel, advertising, trade show costs and marketing materials expense. Sales and marketing expenses decreased to $4.1 million, or 54.5% of revenue, for the three months ended September 30, 2001, compared to $4.5 million or 33.5% of revenue, for the three months ended September 30, 2000. Sales and marketing expenses increased to $12.2 million or 55.0% of revenue, for the nine months ended September 30, 2001, compared to $10.9 million or 31.8% of revenue, for the nine months ended September 30, 2000. This increase was primarily due to the retention of an appropriate number of sales and marketing personnel to service an anticipated increase in revenues. Our sales and marketing organization has increased to 120 employees as of September 30, 2001 from 115 employees as of September 30, 2000. 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 increased to $4.2 million, or 49.5% of revenue, for the three months ended September 30, 2001, compared to $3.4 million, or 23.1% of revenue, for the three months ended September 30, 2000. Research and development expenses increased to $11.3 million, or 41.4% of revenue, for the nine months ended September 30, 2001, compared to $8.8 million, or 24.7% of revenue, for the nine months ended September 30, 2000. This increase was due primarily to the development and enhancement of our adMonitor technology and includes $531,000 in non-recurring charges related to the settlement of a licensing dispute. Following the sale of our adMonitor technology and our transition to a new ad serving and tracking platform, we expect our research and development expenses to decrease. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of compensation and professional service fees. General and administrative expenses decreased to $3.5 million, or 46.4% of revenue, for the three months ended September 30, 2001, compared to $4.5 million, or 33.6% of revenue, for the three months ended September 30, 2000. General and administrative expenses increased to $10.1 million, or 45.8% of revenue, 22 for the nine months ended September 30, 2001, compared to $12.0 million, or 35.0% of revenue, for the nine months ended September 30, 2000. The net increase was primarily due to a decrease in overall costs offset by an increase in bad debt reserve to reflect a general downturn in the economy and includes $831,000 in non-recurring charges related to the write down of accounts receivable. OTHER INCOME. Other income for the three months ended September 30, 2001 was approximately $1.0 million as compared to $814,000 for the three months ended September 30, 2000, an increase of $230,000. Other income for the nine months ended September 30, 2001 was $1.6 million as compared to $815,000 for the nine months ended September 30, 2000, an increase of approximately $775,000. Other income consists primarily of legal settlements and customer transactions that did not meet the criteria to be recognized as revenue under generally accepted accounting principles. INTEREST INCOME. 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 approximately $508,000 and $1.4 million for the three months ended September 30, 2001 and 2000, respectively. The decrease in interest income resulted primarily from the use of cash proceeds from our initial public offering of common stock as working capital to fund normal business operations and the reduction of interest rates in general. On a year to date basis, net interest income for the nine months ended September 30, 2001 was $2.1 million, compared to $3.9 million for the nine months ended September 30, 2000. LOSS ON SALE OF EQUIPMENT. Loss on sale of equipment consists of a non-recurring write down of technology related assets following our decision to sell our adMonitor technology to DoubleClick. The Company's non-recurring charges for the three months ended September 30, 2001, consists of $2.1 million related to the write down of the investment in Zondigo, $900,000 related to the write down of technology related assets, $531,000 related to the settlement of a licensing dispute and $831,000 related to the write down of accounts receivable. 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 approximately $12.0 million for the nine months ended September 30, 2001, and approximately $10.3 million for the nine months ended September 30, 2000. Cash used in operating activities for the nine months ended September 30, 2001 resulted from a net loss of approximately $21.7 million, as well as approximately a $5.3 million net decrease in accounts receivable and prepaid expenses and other assets, offset by approximately a $3.7 million decrease in accounts payable and accrued expenses, a $500,000 increase in deferred revenue, $4.8 million in depreciation and amortization and $2.1 million in a non-cash charge for the write off of an investment. Cash used in operating activities for the nine months ended September 30, 2000 resulted from a net loss of approximately $15.2 million, as well as approximately a $6.8 million increase in accounts receivable, partially offset by $7.5 million increase in accounts payable and accrued expenses, a $410,000 23 decrease in prepaids and other current assets and a $595,000 increase in deferred revenue. Net cash used in investing activities was $1.7 million for the nine months ended September 30, 2001, and $12.6 million for the nine months ended September 30, 2000. Cash used in investing activities for the nine months ended September 30, 2001 was primarily related to $1.8 million for the purchase of the net assets of a business. Cash used in investing activities for the nine months ended September 30, 2000 was primarily related to purchases of property and equipment related to research and development. Net cash used in financing activities was $671,000 for the nine months ended September 30, 2001. Net cash provided by financing activities was $105.6 million for the nine months ended September 30, 2000. Cash used in financing activities for the nine months ended September 30, 2001 resulted primarily from payments under capital lease obligations. Cash provided by financing activities for the nine months ended September 30, 2000 resulted primarily from the receipt of proceeds from the initial public offering of the Company's common stock. 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. ACQUISITIONS On July 24, 2000, we completed the merger with webMillion.com. Pursuant to the Merger Agreement, we issued 1,901,381 shares of our common stock to all the shareholders of webMillion. Holders of warrants of webMillion received, in the aggregate, the right to purchase from us 98,619 shares of our common stock at a price per share of $1.9792. A total of 361,063 of the merger shares are being held in a three-year escrow as security for the indemnification obligations of webMillion's former shareholders pursuant to the Merger Agreement. A majority of outstanding voting securities of webMillion were owned by Messrs. Hauser and Adcock. The transaction was structured as a reverse triangular merger and will be accounted for through the purchase method of accounting. As a result of the tax-free purchase, webMillion now is our wholly owned subsidiary. There is no material relationship between Messrs. Hauser and Adcock, us, our affiliates, any of our directors or officers, or any associate of any such director or officer. On May 14, 2001 the Company purchased substantially all the assets of a list marketing business. Pursuant to the Asset Purchase Agreement the Company paid $1,790,603 in cash, issued 914,210 shares of the Company's common stock and incurred $702,576 in a note payable to the former shareholder of the Company. The acquisition has been accounted for using the purchase method of accounting. 24 RISK FACTORS RELATING TO OUR BUSINESS AND OPERATIONS 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; - 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 attributable to common stockholders of approximately $8.8 million for the three months ended September 30, 2001 and $5.7 million for the three months ended September 30, 2000. Our accumulated deficit from inception, as of September 30, 2001, was approximately $51.0 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. 25 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 Our revenue and some of our operating costs may be unpredictable. This unpredictability will likely result in significant fluctuations in our quarterly results. Therefore, you should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance. Because of our limited operating history and the emerging nature of our industry, we anticipate that securities analysts may have difficulty in accurately forecasting our results. If our operating results are below market expectations, the price of our common stock will likely decline. The following are among the factors that could cause significant fluctuations in our operating results: - market acceptance of the Internet as an advertising medium; - delay or cancellation of advertising contracts; - expiration or termination of contracts with Web publishers; - introduction of new or enhanced services by us or our competitors; - system outages, delays in obtaining new equipment or problems with upgrades; - disruption or impairment of the Internet; - changes in our pricing policies or those of our competitors; - 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. OUR REVENUES FROM ADVERTISEMENTS AND ADVERTISING SERVICES TEND TO BE CYCLICAL AND DEPENDENT ON THE ECONOMIC PROSPECTS OF ADVERTISERS AND THE ECONOMY IN GENERAL. A CONTINUED DECREASE IN EXPENDITURES BY ADVERTISERS OR A CONTINUED DOWNTURN IN THE ECONOMY COULD CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY IN ANY GIVEN PERIOD. We derive, and expects to continue to derive for the foreseeable future, all of our revenues from the sale and placement of advertisements on Web sites and through online and offline direct mailings. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. In recent quarters, the advertising market has experienced increasing softness of demand, lower prices for advertisements, the reduction or cancellation 26 of advertising contracts, an increased risk of uncollectible receivables from advertisers and the reduction of marketing and advertising budgets. As a result, advertising spending across traditional media, as well as the Internet, has decreased. We cannot assure you that further reductions in advertising spending will not occur. We also cannot assure you that if economic conditions improve, marketing budgets and advertising spending will increase from current levels. As a result, our revenues from advertisements and advertising services may decline significantly in any given period. OUR CUSTOMERS CONTINUE TO EXPERIENCE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS. Our customers, in particular Internet-related companies, have experienced and may continue to experience difficulty raising capital and supporting their current operations and implementing their business plans and, therefore, may elect to reduce the resources they devote to advertising. Many other companies in the Internet industry have ceased operations or filed for bankruptcy protection. These customers may not be able to discharge their payment and other obligations to us. The non-payment or late payment of amounts due to us from our customers could negatively impact our financial condition. If the current environment for Internet advertising and for Internet-related companies does not improve, our business, results of operations and financial condition could be materially harmed. THE OCCURRENCE OF EXTRAORDINARY EVENTS, SUCH AS THE ATTACK ON THE WORLD TRADE CENTER AND THE PENTAGON AND THE THREAT OF BIOLOGICAL AGENTS SPREAD THROUGH THE MAIL SYSTEM, MAY SUBSTANTIALLY DECREASE THE USE OF AND DEMAND FOR ADVERTISING OVER THE INTERNET AND THROUGH MAILINGS, WHICH MAY SIGNIFICANTLY DECREASE OUR REVENUES. Following the attack on the World Trade Center and the Pentagon and the Anthrax attack through the mail system, some advertisers cancelled their advertising purchases, online and offline. Any additional occurrences of terrorist attacks or other extraordinary events that capture significant attention worldwide may result in similar reductions in the use of and demand for advertising on the Internet and through direct mailings and may significantly decrease our revenue for an indefinite period of time. ADVERTISERS MAY BE RELUCTANT TO DEVOTE A PORTION OF THEIR BUDGETS TO INTERNET ADVERTISING AND DIGITAL MARKETING SOLUTIONS. Companies doing business on the Internet, including us, must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers' total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to Internet advertising if they perceive 27 the Internet to be a limited or ineffective marketing medium. Any shift in marketing budgets away from Internet advertising spending could materially harm our business, results of operations or financial condition. 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; - 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. 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. 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 28 Trade Commission has begun investigations of, and several attorneys general have instituted legal proceedings against, certain Internet companies related to online privacy. United States legislators and various state governments 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 currently being considered. 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. 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. 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. 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. FROM TIME TO TIME, A SMALL NUMBER OF WEB PUBLISHERS MAY ACCOUNT FOR A SIGNIFICANT 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 three months ended September 30, 2001, no web publisher accounted for more than 10% of our revenue. Our contracts with Web publishers are generally one year in duration and can be terminated by either party with as little as 30 days notice. We cannot assure you that any of our Web publishers will continue their relationships with us. Additionally, we may lose Web publishers as a result of acquisitions or as a result of the discontinuation of operations of any of our Web publishers. 29 FROM TIME TO TIME, A LIMITED NUMBER OF MARKETERS MAY ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUE AND A LOSS OF ONE OR MORE OF THESE MARKETERS COULD CAUSE OUR RESULTS OF OPERATIONS TO SUFFER. For the three months ended September 30, 2001, revenue from no marketer accounted for more than 10 percent of our revenue. Marketers typically purchase advertising under short-term purchase order agreements. We cannot assure you that our top marketers or our other marketers will continue their relationships with us. The loss of one or more of the marketers 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 marketers. Accordingly, the non-payment or late payment of amounts due to us from a significant marketer could cause our financial condition to suffer. 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. 30 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 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 MARKETERS AND WEB PUBLISHERS AND TO ATTRACT NEW MARKETERS AND WEB PUBLISHERS The markets for online advertising and direct marketing are intensely competitive. We compete with television, radio, cable and print for a share of marketers' 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 marketers. In addition, we compete with various Internet advertising networks, such as DoubleClick. 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 marketers. 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 31 aggressive pricing policies and make more attractive offers to potential employees, strategic partners, marketers 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. We cannot assure you that we will be able to identify acquisition or investment candidates. Even if we do identify 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. 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 applications for several trademarks internationally and in the United States. We cannot assure you that any of our trademark applications will be approved. Even if these applications are approved, the trademarks may be successfully challenged by others or invalidated. In addition, despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. We may not have adequate remedies for any breach of confidentiality agreements, and our trade secrets may otherwise become known or independently developed by competitors. WE MAY BE LIABLE FOR CONTENT AVAILABLE OR POSTED ON THE WEB SITES OF OUR PUBLISHERS We may be liable to third parties for content in the advertising we serve if the music, artwork, text or other content involved violates the copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory. Any claims or counterclaims could be time-consuming, result in costly litigation or divert management's attention. 32 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 knowledge of our CEO and president, John C. Bohan. 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. FUTURE SALES OF OUR COMMON STOCK MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of September 30, 2001, we had 24,913,035 shares of common stock outstanding, excluding 1,149,554 shares subject to exercisable options outstanding as of such date under our stock option plans that are exercisable at prices ranging from $1.20 to $27.75 per share. Additionally, certain holders of our common stock have registration rights with respect to their shares. We may be required to file one or more registration statements in compliance with these registration rights. We cannot predict the effect, if any, that future sales of common stock or the availability of shares of common stock for future sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales could occur, may materially and adversely affect prevailing market prices for 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. 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. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO OPERATE OUR BUSINESS AND WE MAY EXPERIENCE DIFFICULTY IN OBTAINING THIS ADDITIONAL CAPITAL 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. 33 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. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of its debt. INTEREST RATE RISK The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in money market funds. 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 performed by us as of December 31, 2000. We did not hold derivative financial instruments as of September 30, 2001, and have never held these instruments in the past. FOREIGN CURRENCY Currently the majority of our sales and expenses are denominated in U.S. dollars and as a result we have experienced no material foreign exchange gains and losses to date. While we do expect to effect some transactions in foreign currencies during 2001, we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging activities to date. Our international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors. 34 PART II ITEM 1. LEGAL PROCEEDINGS On April 2, 2001, EMI Communications Corp. filed a lawsuit against the Company in the Queen's Bench (Brandon Centre), Manitoba, Canada. The suit alleges breach of contract by the Company. The Company believes this suit is without merit and intends to vigorously defend itself against these claims. We periodically may become subject to other legal proceedings in the ordinary course of our business. We are not currently involved in any proceedings, which we believe will materially and adversely affect us. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS USE OF PROCEEDS The effective date of the registration statement related to our initial public offering of shares of common stock was January 28, 2000 (SEC Registration No. 333-87607). Through our initial public offering in February 2000, we sold 7,475,000 shares of our common stock, inclusive of the underwriters' over allotment, at an initial public offering price of $15.00 per share. Our initial public offering was managed by SG Cowen Securities Corporation, Banc of America Securities LLC, CIBC Oppenheimer Corp. and Wit Capital Corporation. The initial public offering resulted in gross proceeds of approximately $112.1 million, approximately $7.8 million of which was applied toward the underwriting discount and commission. Expenses related to the offering totaled approximately $1.7 million. Our net proceeds from the offering were approximately $102.6 million. From the time of receipt through September 30, 2001, these net proceeds have been applied toward general corporate purposes. Pending these uses, the net proceeds have been invested in short-term, investment grade, interest-bearing securities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS. The following exhibits were previously filed as part of the original Report. 10.1 Asset Purchase Agreement dated October 2, 2001 by and between DoubleClick, Inc. and L90, Inc. 10.2 DoubleClick Master Services Agreement dated October 2, 2001 by and between DoubleClick, Inc. and L90, Inc.

35 ~~10.3 Dart Service Attachment for Publishers dated October 2, 2001 by and between DoubleClick, Inc. and L90, Inc.~~

b. REPORTS ON FORM 8-K We did not file any reports on Form 8-K during the quarter ended September 30, 2001. 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. L90, INC. Dated: June 7, 2002 By: /s/ Mitchell Cannold ------------------------------- Name: Mitchell Cannold Title: President & Chief Executive Officer Dated: June 7, 2002 By: /s/ Steven M. Kantor ------------------------------- Name: Steven M. Kantor Title: Vice President, Finance 37

L90 INC 10-Q/A