Homayoun
`
`Reference 28
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 1
`
`
`
`Reference 28
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 1
`
`
`
`<html><head></head><body><pre style="word-wrap: break-word; white-space: pre-wrap;">-----
`BEGIN PRIVACY-ENHANCED MESSAGE-----
`Proc-Type: 2001,MIC-CLEAR
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`<SEC-DOCUMENT>0000912057-99-010346.txt : 19991223
`<SEC-HEADER>0000912057-99-010346.hdr.sgml : 19991223
`ACCESSION NUMBER:
`
`0000912057-99-010346
`CONFORMED SUBMISSION TYPE:
`S-1
`PUBLIC DOCUMENT COUNT:
`17
`FILED AS OF DATE:
`19991222
`
`FILER:
`
`COMPANY DATA:
`COMPANY CONFORMED NAME:
`CENTRAL INDEX KEY:
`STANDARD INDUSTRIAL CLASSIFICATION:
`IRS NUMBER:
`STATE OF INCORPORATION:
`FISCAL YEAR END:
`
`DIRECT HIT TECHNOLOGIES INC
`0001092756
` []
`043417999
`DE
`1231
`
`FILING VALUES:
`FORM TYPE:
`SEC ACT:
`SEC FILE NUMBER:
`FILM NUMBER:
`
`BUSINESS ADDRESS:
`STREET 1:
`STREET 2:
`CITY:
`STATE:
`ZIP:
`BUSINESS PHONE:
`
`MAIL ADDRESS:
`STREET 1:
`STREET 2:
`CITY:
`STATE:
`ZIP:
`</SEC-HEADER>
`<DOCUMENT>
`<TYPE>S-1
`<SEQUENCE>1
`<DESCRIPTION>FORM S-1
`<TEXT>
`
`S-1
`
`333-93377
`99778949
`
`888 WORCHESTER STREET
`SUITE 340
`WELLESLEY
`MA
`02181
`7812357570
`
`888 WORCESTER STREET
`SUITE 340
`WELLESLEY
`MA
`02482
`
`<PAGE>
` AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999
`
`REGISTRATION NO. 333-
`- --------------------------------------------------------------------------------
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 2
`
`
`
`- --------------------------------------------------------------------------------
`
` SECURITIES AND EXCHANGE COMMISSION
` WASHINGTON, D.C. 20549
` --------------------------
`
` FORM S-1
`
` REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
` --------------------------
`
` DIRECT HIT TECHNOLOGIES, INC.
` (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
`
`<TABLE>
`<S> <C>
`<C>
` DELAWARE 7375
`04-3417999
` (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
`(I.R.S. EMPLOYER
` OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
`IDENTIFICATION NUMBER)
`</TABLE>
`
` --------------------------
`
` DIRECT HIT TECHNOLOGIES, INC.
` 888 WORCESTER STREET, SUITE 340
` WELLESLEY, MASSACHUSETTS 02482
` (781) 235-7570
` (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
` AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
` --------------------------
`
` MICHAEL CASSIDY, PRESIDENT AND CHIEF EXECUTIVE OFFICER
` DIRECT HIT TECHNOLOGIES, INC.
` 888 WORCESTER STREET, SUITE 340
` WELLESLEY, MASSACHUSETTS 02482
` (781) 235-7570
` (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
` INCLUDING AREA CODE, OF AGENT FOR SERVICE)
` --------------------------
`
` COPIES TO:
`
`<TABLE>
`<S> <C>
` MARK J. MACENKA, ESQ. MARK L. JOHNSON, ESQ.
` JOHN M. MUTKOSKI, ESQ. RICHARD G. COSTELLO, ESQ.
` DANIEL L. FURMAN, ESQ. FOLEY, HOAG & ELIOT LLP
` TESTA, HURWITZ & THIBEAULT, LLP ONE POST OFFICE SQUARE
` 125 HIGH STREET BOSTON, MASSACHUSETTS 02109
` BOSTON, MASSACHUSETTS 02110 (617) 832-1000
` (617) 248-7000
`</TABLE>
`
` --------------------------
`
` APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
`practicable after this registration statement becomes effective.
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 3
`
`
`
` 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. / /
`
` If this form is filed to register additional securities for an offering
`pursuant to Rule 462(b) 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(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,
`check the following box. / /
` --------------------------
`
` CALCULATION OF REGISTRATION FEE
`
`<TABLE>
`<CAPTION>
` PROPOSED MAXIMUM
` TITLE OF EACH CLASS OF AGGREGATE
`AMOUNT OF
` SECURITIES TO BE REGISTERED OFFERING PRICE (1)
`REGISTRATION FEE
`<S> <C>
`<C>
`Common Stock, $.001 par value............................... $57,500,000.00
`$15,180.00
`</TABLE>
`
`(1) Estimated solely for the purpose of calculating the registration fee in
` accordance with Rule 457(o) under the Securities Act of 1933, as amended.
` Includes the offering price attributable to shares that the underwriters
` have the option to purchase from the registrant solely to cover
` over-allotments, if any.
` --------------------------
`
` 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
`PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
`
`- --------------------------------------------------------------------------------
`- --------------------------------------------------------------------------------
`<PAGE>
` EXPLANATORY NOTE
`
` This registration statement contains two forms of prospectus: (a) one
`prospectus to be used in connection with an offering in the United States and
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 4
`
`
`
`Canada and (b) one prospectus to be used in connection with a concurrent
`offering outside of the United States and Canada. The U.S. prospectus and the
`international prospectus are identical in all respects except for the front
`cover page and the "Underwriting" section. The front cover page and the
`"Underwriting" section of the international prospectus are included immediately
`before Part II of this registration statement.
`
` 2
`<PAGE>
`THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
`NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
`SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
`TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
`SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
`<PAGE>
` SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999
`
` [DIRECT HIT TECHNOLOGIES, INC. LOGO]
`
` SHARES
`
` COMMON STOCK
`
` Direct Hit Technologies, Inc. is offering shares of its common stock.
`This is our initial public offering and no public market currently exists for
`our shares. We have applied to have our common stock approved for quotation on
`the Nasdaq National Market under the symbol "DHIT." We anticipate that the
`initial public offering price will be between $ and $ per share.
`
` ------------------------
`
` INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
` SEE "RISK FACTORS" BEGINNING ON PAGE 5.
`
` ---------------------
`
`<TABLE>
`<CAPTION>
` PER SHARE TOTAL
` --------- ---------
`<S> <C>
`<C>
`Public Offering Price....................................... $ $
`Underwriting Discounts and Commissions...................... $ $
`Proceeds to Direct Hit...................................... $ $
`</TABLE>
`
` THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
`NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
`IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
`OFFENSE.
`
` We have granted the underwriters a 30-day option to purchase up to an
`additional shares of common stock to cover over-allotments.
` ------------------------
`
`ROBERTSON STEPHENS
`
` THOMAS WEISEL PARTNERS LLC
`
` SOUNDVIEW TECHNOLOGY GROUP
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 5
`
`
`
` WIT CAPITAL CORPORATION
`
` The date of this prospectus is , 2000
`<PAGE>
` [DESCRIPTION OF ARTWORK]
`
`[Inside front cover of prospectus:
`
` The inside front cover includes a graphic representing our OEM
` customers. Our logo appears in the center of the graphic. Emanating from our
` logo are the logos of our OEM customers.]
`
`[Inside gatefold:
`
` The inside gatefold includes a graphic representing our technology and
` its application. The graphic is comprised of a symbol depicting our
` Popularity Engine with symbols for our three product categories layered
` above the Popularity Engine. These three product categories are our
` Popularity-based Search product, our Popularity-based Shopping product, and
` other products. Within our Popularity-based Search product are depicted our
` Internet Search Engine, Related Searches, Personalized Search, and
` Directory-based Search. A graphic of the Web and Web users is depicted above
` the product categories. We show a continuous circle of popularity data
` emanating from the Web and feeding back to our Popularity Engine.
`
` One statement appears with the graphic as follows:
`
` Our Popularity Engine, which is the core of our solution, anonymously
` compiles and automatically captures and processes the activity of online
` users. We use our popularity-based technology to aggregate and organize
` online content to enable users to quickly find relevant and accurate
` information. We have targeted Internet search as the first application of
` our Popularity Engine. We have launched a Popularity-based Search product,
` including our Internet Search Engine, Related Searches, Personalized Search
` and Directory-based Search components, and a Popularity-based Shopping
` product. Our content-independent technology is well suited to provide
` accurate and relevant information to users of large, dynamic collections of
` information, such as the World Wide Web, and we intend to deploy our
` technology across other applications as well.]
`<PAGE>
` YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
`HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
`CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
`BUY, SHARES OF 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. IN THIS PROSPECTUS, "DIRECT HIT,"
`"WE," "US" AND "OUR" REFER TO DIRECT HIT TECHNOLOGIES, INC.
`
` ------------------------
`
` TABLE OF CONTENTS
`
`<TABLE>
`<CAPTION>
` PAGE
` --------
`<S> <C>
`Summary..................................................... 1
`Risk Factors................................................ 5
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 6
`
`
`
`Use of Proceeds............................................. 14
`Dividend Policy............................................. 14
`Capitalization.............................................. 15
`Dilution.................................................... 16
`Selected Financial Data..................................... 17
`Management's Discussion and Analysis of Financial Condition
` and Results of Operations................................. 18
`Business.................................................... 24
`Management.................................................. 36
`Certain Transactions........................................ 42
`Principal Stockholders...................................... 44
`Description of Capital Stock................................ 46
`Shares Eligible for Future Sale............................. 49
`Underwriting................................................ 51
`Legal Matters............................................... 53
`Experts..................................................... 53
`Additional Information...................................... 54
`Index to Financial Statements............................... F-1
`</TABLE>
`
` ------------------------
`
` Direct Hit, Personalized Search, Popularity-based Search, Popularity-based
`Shopping, Popularity Engine, Related Searches, our slogan "One Search Engine.
`Millions of Minds." and our logo are our trademarks. All other trademarks, trade
`names and service marks appearing in this prospectus are the property of their
`respective owners.
`
` i
`<PAGE>
` SUMMARY
`
` THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
`YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND
`OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. UNLESS OTHERWISE
`INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS WILL NOT
`EXERCISE THEIR OVER-ALLOTMENT OPTION AND REFLECTS THE CONVERSION OF ALL OF OUR
`OUTSTANDING PREFERRED STOCK INTO COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING
`OF THIS OFFERING.
`
` DIRECT HIT TECHNOLOGIES
`
`OUR BUSINESS
`
` Founded on April 27, 1998, Direct Hit is a leading provider of technology
`that aggregates and organizes online content to enable users to quickly find
`relevant and accurate information, products and services. The core of our
`solution, which we call our Popularity Engine, anonymously compiles information
`collected from the online activity of users. By automatically capturing the
`experience of online users and applying our popularity-based technology, our
`solution provides users with a list of information, products or services ranked
`according to the preferences of previous users. From online product catalogs to
`the World Wide Web, our proprietary technologies can be applied to a variety of
`online data sets either as stand-alone solutions or as core complements to
`existing technology. We have targeted Internet search as our first application
`for the Popularity Engine and we have launched an e-commerce product based on
`the Popularity Engine. We intend to expand the application of our
`popularity-based technology into such areas as corporate online databases, news
`feeds and yellow pages.
`
`OUR MARKET
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 7
`
`
`
` While the Internet is attracting new users at a rapid pace, the volume and
`diversity of information, products and services available over the Internet is
`also increasing dramatically. International Data Corporation predicts that the
`number of Web pages will grow from 925 million in 1998 to 13 billion by 2003,
`including separate Web pages within individual Web sites. At the same time,
`Internet users are increasingly seeking information from multiple online sources
`such as e-commerce sites, news sites, corporate sites, archives and specialty
`vertical sites. As a result, users are now spending more time at Web search
`sites than at almost any other Web site category. According to Media Metrix, the
`average Internet user spent approximately 90 minutes at search engine sites in
`October 1999, second to 110 minutes at news, information and entertainment
`sites.
`
` Traditional methods for aggregating and organizing online information for
`user navigation often fail to meet users' needs. Word-matching techniques, which
`generally compare the keywords in the search request with words found in a
`database, often yield an overwhelming volume of irrelevant search results and
`are subject to manipulation by Web site authors. Editor-based methods, which
`require a staff of editors to manually review and categorize online content in a
`database, often result in incomplete and outdated information covering only a
`small portion of the content available online. Even when used in tandem, these
`methods often generate an unmanageably large set of irrelevant results or
`incomplete and outdated information.
`
` 1
`<PAGE>
`OUR PRODUCTS
`
` We provide a popularity-based solution that enables users of online content
`to find more relevant information, products and services more easily across a
`wide variety of sources. Each of our products is powered by our proprietary
`Popularity Engine to determine the relevancy ranking of online content. Our
`Popularity Engine is:
`
` - extremely responsive to new and changing information, keeping listings
` current based on changing user preferences;
`
` - content independent, enabling our products to organize many types of data,
` including multiple languages, still images, video and music;
`
` - scalable to accommodate large collections of online information and
` millions of users;
`
` - capable of reflecting user preferences based on age, gender and geographic
` location; and
`
` - easy to use, since it does not require users to acquire any new skills or
` employ complex query techniques.
`
` Our Popularity-based Search product was selected as FORBES' Favorite Search
`Engine in September 1999. Our products have also earned recognition in industry
`awards received by our OEM customers, including CNET 1999 Editors' Choice
`awarded to HotBot in April 1999 and PC MAGAZINE 1999 Editors' Choice awarded to
`HotBot in September 1999.
`
`OUR CUSTOMERS
`
` Our popularity-based solution may be found on our OEM customers' Web sites
`and on our Web site. The following is a list of our 22 OEM customers as of
`November 30, 1999:
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 8
`
`
`
`About.com
`Apple Computer
`AT&T WorldNet
`Catcha.com
`GeneralSearch.com
`Go2Net
`HotBot (Wired Digital/Lycos)
`ICQ (AOL)
`Infoseek
`InfoSpace.com
`LookSmart
`
`Lycos
`mainCampus.com
`Microsoft (MSN)
`Pinault-Printemps-Redoute
`Punto (Portal Srl)
`SavvySearch
`Scandinavia Online
`SimpleSearch
`UKMax.com (Hollinger Digital)
`Zap
`ZDNet
`
`OUR ADDRESS
`
` Our executive offices are located at 888 Worcester Street, Suite 340,
`Wellesley, Massachusetts 02482, and our telephone number is (781) 235-7570. Our
`Web site is located at WWW.DIRECTHIT.COM. The information on our Web site is not
`part of this prospectus.
`
` 2
`<PAGE>
` THE OFFERING
`
`<TABLE>
`<S> <C>
`Common stock offered by Direct Hit........ shares
`Common stock to be outstanding after the
` offering................................ shares
`Use of proceeds........................... For sales and marketing and research and
` development expenditures, and for
`working
` capital and other general corporate
` purposes.
`Proposed Nasdaq National Market symbol.... DHIT
`</TABLE>
`
` The number of shares of common stock outstanding after this offering is
`based on shares of common stock outstanding as of November 30, 1999. This
`calculation:
`
` - includes 10,942,676 shares of common stock to be issued upon the
` conversion of our shares of preferred stock outstanding as of
` November 30, 1999; and
`
` - excludes 1,252,646 shares of common stock issuable upon exercise of all
` options outstanding under our 1998-A Stock Option Plan as of November 30,
` 1999 with a weighted average exercise price of $1.60 per share.
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 9
`
`
`
` 3
`<PAGE>
` SUMMARY FINANCIAL DATA
` (IN THOUSANDS, EXCEPT PER SHARE DATA)
`
` The following tables set forth summary financial data for our company. The
`summary balance sheet data as of September 30, 1999 are presented on:
`
` - an actual basis,
`
` - on a pro forma basis to give effect to the conversion of our preferred
` stock upon completion of this offering, and
`
` - on a pro forma as adjusted basis to give effect to our sale of
` shares of common stock in this offering at an assumed initial public
` offering price of $ per share, after deducting the estimated
` underwriting discounts and commissions and offering expenses payable by
` us.
`
` You should read this information together with the financial statements and
`the notes to those statements appearing elsewhere in this prospectus and the
`information under "Selected Financial Data" and "Management's Discussion and
`Analysis of Financial Condition and Results of Operations."
`
`<TABLE>
`<CAPTION>
` PERIOD FROM
` INCEPTION
` (APRIL 27, 1998) NINE
`MONTHS
` THROUGH
`ENDED
` DECEMBER 31, 1998 SEPTEMBER
`30, 1999
` ----------------- ----------
`--------
`<S> <C>
`<C>
`STATEMENT OF OPERATIONS DATA:
`Revenues:
`OEM....................................................... $ 175 $
`805
`Advertising............................................... --
`57
` Total revenues........................................ 175
`862
`Gross profit.............................................. 124
`501
`Operating loss............................................ (820)
`(3,189)
`Net loss.................................................. (792)
`(2,930)
`Basic and diluted net loss per common share............... $(0.45) $
`(0.88)
`Shares used to compute basic and diluted net loss per
` common share............................................ 1,773
`3,330
`Pro forma basic and diluted net loss per common share..... $(0.12) $
`(0.26)
`Shares used to compute pro forma basic and diluted net
` loss per common share................................... 6,705
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 10
`
`
`
`11,092
`</TABLE>
`
`<TABLE>
`<CAPTION>
` SEPTEMBER 30, 1999
` ----------------------------
`------
` PRO
`FORMA
` ACTUAL PRO FORMA AS
`ADJUSTED
` -------- --------- -----
`------
`<S> <C>
`<C> <C>
`BALANCE SHEET DATA:
`Cash and cash equivalents................................... $16,427 $16,427
`Working capital............................................. 25,869 25,869
`Total assets................................................ 28,049 28,049
`Total convertible preferred stock........................... 29,651 --
`Total stockholders' equity.................................. 27,037 27,037
`</TABLE>
`
` 4
`<PAGE>
` RISK FACTORS
`
` AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
`CAREFULLY CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH
`THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO
`BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
`BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. THIS
`COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE, AND COULD CAUSE YOU
`TO LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
`
` RISKS RELATED TO OUR BUSINESS
`
`OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
`HISTORY AND FACE DIFFICULTIES ENCOUNTERED BY EARLY STAGE COMPANIES.
`
` We were organized in April 1998 and first sold our products in August 1998.
`Our limited operating history makes it difficult for investors to evaluate our
`future prospects. Additionally, investors must consider the challenges, risks
`and uncertainties frequently encountered by early-stage companies using new and
`unproven business models in new and rapidly evolving markets. These challenges
`include our ability to:
`
` - generate sufficient revenues to achieve and maintain profitability;
`
` - manage growth in our operations;
`
` - attract and retain customers cost-effectively;
`
` - attract and retain key personnel;
`
` - develop and renew strategic relationships;
`
` - access additional capital when required; and
`
` - increase brand recognition.
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 11
`
`
`
` We cannot be certain that we will successfully address these and other
`challenges, risks and uncertainties or that our business model will be
`successful.
`
`WE ANTICIPATE OUR HISTORY OF LOSSES WILL CONTINUE, WHICH MAY DECREASE THE VALUE
`OF OUR COMMON STOCK.
`
` Since we began operations, we have incurred substantial operating losses in
`every fiscal period. We believe that we will continue to incur operating losses
`for the foreseeable future and that the rate at which we will incur such losses
`will increase significantly from current levels. As of September 30, 1999, we
`had an accumulated deficit of $3.7 million. We incurred net losses of
`$2.9 million for the nine months ended September 30, 1999. We intend to
`substantially increase our costs and operating expenses related to:
`
` - employing additional personnel as our business expands;
`
` - researching and developing new products;
`
` - developing new and expanding existing customer relationships; and
`
` - intensifying our brand development efforts through advertising and other
` marketing activities.
`
` Because we will spend these amounts before we receive any incremental
`revenues from these efforts, our losses will be greater than the losses we would
`incur if we developed our business more slowly. In addition, we may find that
`these efforts are more expensive or less effective than we currently anticipate,
`which would further increase our losses.
`
` 5
`<PAGE>
`DISAPPOINTING QUARTERLY REVENUES OR OPERATING RESULTS COULD CAUSE OUR STOCK
`PRICE TO FALL.
`
` Our quarterly revenues and operating results are difficult to predict and
`may fluctuate significantly from quarter to quarter. If our quarterly revenues
`or operating results fall below the expectations of securities analysts or
`investors, the price of our common stock could fall substantially. Our quarterly
`revenues and operating results have fluctuated significantly in the past and may
`fluctuate significantly in the future due to a variety of factors, including:
`
` - fluctuations in the number of visitors to the Web sites of our customers
` and our Web site;
`
` - the uncertainty and timing of closing major new accounts;
`
` - the timing and effectiveness of our advertising and promotions;
`
` - the amount and timing of our operating costs and capital expenditures;
`
` - introductions by our competitors of new or enhanced products, services or
` Web sites; and
`
` - changes in our management team and key personnel.
`
` Most of our expenses, including employee salaries and rent, are relatively
`fixed. In addition, our expense levels are based, in part, on our expectations
`of future revenue increases. As a result, any shortfall in revenues in relation
`to our expectations could cause a significant decline in our operating results
`
`PATENT OWNER DIRECTSTREAM, LLC
`EX. 2140, p. 12
`
`
`
`from quarter to quarter.
`
`OUR CURRENT AND EXPECTED METHODS OF GENERATING REVENUES ARE RELATIVELY NEW AND
`LARGELY UNTESTED.
`
` Substantially all of our total revenues for the period from inception
`(April 27, 1998) through December 31, 1998, and 93% of our total revenues for
`the nine months ended September 30, 1999, were generated through revenues from
`OEM customers, which include per-query fees and advertising revenue sharing
`arrangements with OEM customers. In addition, although we have not generated any
`revenues through the facilitation of e-commerce, we expect to generate a portion
`of our future revenues through the facilitation of e-commerce. We facilitate
`e-commerce by directing shoppers to e-commerce merchants, some of whom
`compensate us for the referral. These methods of revenue generation are new and
`untested.
`
` Revenues from Internet advertising will make up a significant amount of our
`revenues for the foreseeable future. Since the Internet advertising market is
`new and rapidly evolving, we cannot yet gauge its effectiveness as compared to
`traditional advertising media. Advertisers that have traditionally relied on
`other advertising media may be reluctant to advertise on the Internet if they
`believe that Internet advertising is less effective than traditional advertising
`media for promoting their products and services. Consequently, they may allocate
`only limited portions of their advertising budgets to Internet advertising. Our
`business could be materially harmed if Internet advertising does not continue to
`grow or if we are unsuccessful in increasing our advertising revenues.
`
`WE MAY FAIL TO COMPETE EFFECTIVELY IN OUR MARKETS, WHICH COULD RESULT IN LOWER
`REVENUES OR LOSS OF MARKET SHARE.
`
` Our markets are new, rapidly evolving and intensely com
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