<PAGE>
As filed with the Securities and Exchange Commission on July 27, 1999
Registration No. 333-80581
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LOOKSMART, LTD.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 7373 13-3904355
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Identification No.) Classification Number)
</TABLE>
LookSmart, Ltd.
487 Bryant Street
San Francisco, CA 94107-1316
(415) 597-4850
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Evan Thornley
Chief Executive Officer
LookSmart, Ltd.
487 Bryant Street
San Francisco, CA 94107-1316
(415) 597-4850
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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<S> <C>
Hank V. Barry, Esq. William H. Hinman, Jr., Esq.
Gail C. Husick, Esq. Danielle Carbone, Esq.
Kelly Ames Morehead, Esq. Shearman & Sterling
Wilson Sonsini Goodrich & Rosati 1550 El Camino Real
650 Page Mill Road Menlo Park, California 94025
Palo Alto, California 94304 (650) 330-2200
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") 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, please check the following
box and list the Securities Act registration 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
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<CAPTION>
Proposed
Maximum Proposed
Title of Each Class of Aggregate Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered(1) Per Share Offering Price Fee(2)
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<S> <C> <C> <C> <C>
Common Stock ($0.001 par
value)................ 13,800,000 $13.00 $179,400,000 $49,874
- ----------------------------------------------------------------------------------
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</TABLE>
(1) Includes 1,800,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Of this total, $41,700 was previously paid pursuant to Rule 457(o) under
the Securities Act. Estimated solely for the purpose of computing the
amount of the registration fee pursuant to Rule 457(a) under the Securities
Act.
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 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.
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<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
Subject to Completion. Dated July 27, 1999.
12,000,000 Shares
LookSmart, Ltd.
Common Stock
------------
This is an initial public offering of shares of common stock of LookSmart,
Ltd. All of the 12,000,000 shares of common stock are being sold by LookSmart.
Prior to this offering, there has been no public market for the common stock.
LookSmart expects that the initial public offering price will be between $11.00
and $13.00. Application has been made for quotation of the common stock on the
Nasdaq National Market under the symbol "LOOK".
See "Risk Factors" on page 7 to read about certain factors you should
consider before buying shares of the common stock.
------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................ $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to LookSmart.................. $ $
</TABLE>
To the extent that the underwriters sell more than 12,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,800,000 shares from LookSmart at the initial public offering price less the
underwriting discount.
------------
The underwriters expect to deliver the shares on , 1999.
Goldman, Sachs & Co.
BancBoston Robertson Stephens
Hambrecht & Quist
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Prospectus dated , 1999.
<PAGE>
DESCRIPTION OF ARTWORK
[LookSmart logo.]
[The gatefold includes a centered picture of a screen shot of LookSmart's
homepage with the heading, "a better way to look." On either side of the
picture are captioned statements and graphics illustrating LookSmart's
features. To the left of the centered picture, the captioned statements and
graphics are as follows]:
Find exactly what you're looking for: LookSmart's Categories contain 800,000
quality websites, and grow larger each day. Our staff of professional editors
scours the Internet for the best websites, then sorts them into a logical,
easy-to-use format. Our goal is to provide "all the good stuff on the Internet,
with none of the bad." Together, LookSmart Search, LookSmart Categories, and
LookSmart Live! ensure that one way or another your search will be successful.
[Picture of a screenshot of a link from LookSmart's homepage.]
Easy, intuitive, helpful categories: Even more impressive than the size and
quality of our directory is its clear, explicit organization. LookSmart
Categories make it easier to find the "best stuff." Our cascading menus help
quickly narrow your search. Plus you can see the path you've taken at any point
along the way.
[Boxed representation of editor web site summaries.]
Our editors help summarize each site: Most search engines deliver hundreds
(sometimes thousands) of website listings. With LookSmart, our editors actually
review the content of each selected website. This means every LookSmart result
comes with a succinct summary, so you can find what you're looking for quicker.
[To the right of the centered picture, the captioned statements and graphics
are as follows]:
What advertisers are looking for: A new study reveals that women are now the
driving force in the growth of Internet buying.* Users of looksmart.com skew
61% female.** That translates into a highly attractive audience for
advertisers, and a strong potential source of revenues for LookSmart.
* Nielsen/CommerceNet, April, 1999. ** NPD research, Winter, 1999.
[Picture of a screenshot of a link from LookSmart's homepage.]
An industry first--a personalized response: LookSmart Live! is the first
online search service of its kind. Now you can ask a very specific question,
and get a personalized answer via email. Each question is handled individually
by one of our search editors. It's people helping people find things on the
Internet.
Heading: looksmart Radio.
The talk of the Internet: looksmart Radio provides highly differentiated,
educational content focused on the daily Internet needs and interests of the
"New Media Family." Subjects include news, search tips, interviews with
celebrities and lifestyle experts, Internet stock reports, horoscopes, website
reviews and more. All in an easy to access, "always on" audio format.
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the following
summary together with the more detailed information regarding LookSmart and the
common stock being sold in this offering and our financial statements and notes
to those statements appearing elsewhere in this prospectus. Except as stated in
the financial statements or as specified in this prospectus, the presentation
of information in this prospectus reflects a three-for-two split of the
outstanding shares of common and preferred stock completed in July 1999,
assumes the conversion of all LookSmart's preferred stock into common stock as
of the date of closing of this offering and assumes that the underwriters do
not exercise the option issued to them by us to purchase additional shares in
the offering.
LookSmart
Our Business
We are a leading category-based Internet directory provider that has
assembled what we believe to be the largest collection of high-quality,
granular content on the Internet. Our LookSmart directory contains over 800,000
unique URLs in over 60,000 categories. Our directory is organized in an easy-
to-navigate format that is designed to appeal to both novice and sophisticated
Internet users. Additionally, we are an Internet navigation service provider
that chooses not to list pornographic or hate material.
We distribute our proprietary directory to a large number of Internet users
through LookSmart-owned Internet properties and through our strategic
alliances. Our Internet properties, including looksmart.com, target the rapidly
emerging user demographic of female household purchase decision-makers that we
call the New Media Family, and generate advertising and electronic commerce
revenues. We broaden the reach of the LookSmart directory through syndication
and licensing of our content. We currently provide our directory to leading
Internet portals, including The Microsoft Network, Netscape Netcenter,
Excite@Home and Alta Vista, and 220 Internet service providers, including
IBM.net and NetZero. In addition, users can access our content and services
through a network of over 600,000 website affiliates. In May 1999, more than 43
million individual Internet users accessed looksmart.com and the websites of
our licensing and syndication affiliates, according to Media Metrix.
Our Market Opportunity
As the amount of content on the Internet grows, users, advertisers, content
providers, navigation services, and on-line businesses face a growing challenge
of finding an organizing layer that can successfully match content producers
with end users. Our business provides solutions to the specific challenges of
each of these constituencies.
The Navigation Solution. Our category-based Internet directory helps users
find what they need by organizing what we believe to be the largest collection
of high-quality, granular content into an easy-to-use navigation format.
The Audience and Advertising Solution. Through looksmart.com, we seek to
package the LookSmart directory with other appropriate content and
functionality to provide a simple, compelling experience for the New Media
Family. Looksmart.com's benefits include intuitive navigation, an
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<PAGE>
inoffensive content environment and differentiated visual design, content,
commerce and community
functionality. By targeting the New Media Family, we offer advertisers a unique
opportunity to reach female household purchase decision-makers. In addition, we
offer advertisers the ability to place their advertisements on category and key
word search results pages.
The Business Solution. We offer content providers, navigation services and
online businesses a variety of solutions.
. We leverage our database by syndicating, licensing and distributing our
proprietary content to leading Internet portals, websites and other media
companies, and we provide Internet service providers with a full content
solution for their users.
. We offer services that help both new and existing businesses optimize
their online presence, including website enhancement services for
webmasters and seminars and services that enable small and mid-size
business owners to sell their products and services over the Internet.
. We offer a variety of websites that allow buyers and sellers to find each
other. These websites include rewardmall.com, an affinity Internet
shopping mall site, and "Buy it On the Web", an Internet shopping website
that promotes and sells over 20 "As Seen on TV" products.
Our Strategy
Our strategy is to be the leading category-based Internet directory service
for global and local information on the Internet and to derive multiple revenue
streams by leveraging our directory asset. Key elements to our growth strategy
include:
Expand Collection of High-Quality, Granular Content. We intend to expand both
the number of high-quality URLs included in our directory, as well as the
number of categories into which we classify the URLs by continually adding new
websites, communities and ecommerce environments, deleting outdated links and
updating editorial annotations.
Build the LookSmart Brand and Audience. To enhance business and consumer
awareness of our brand, we plan to pursue an extensive brand development
initiative through mass market and targeted advertising. Our consumer branding
investments will focus specifically on reaching our target New Media Family
audience.
Utilize LookSmart Content to Drive Multiple Revenue Streams. We intend to
leverage our unique assets--the LookSmart directory and the people and
processes that create it--and monetize them by generating revenues through
online advertising, syndication and licensing, Internet outsourcing and
ecommerce.
Pursue Strategic Acquisitions and Alliances. We plan to pursue acquisitions
and alliances to strengthen our technology, broaden our audience reach and
capture new distribution channels or open new revenue streams.
Expand into Select International Markets. As one of only a few companies that
have created a significant presence in the United States Internet market with
beginnings outside the United States, we believe we are well positioned to
enter major international markets in a locally-relevant, culturally-sensitive
manner.
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Corporate Information
We are a Delaware corporation with our principal executive offices located
at 487 Bryant Street, San Francisco, CA 94107-1316. Our telephone number is
(415) 597-4850. Our fiscal year ends on December 31. We maintain a world wide
website at www.looksmart.com. The reference to our world wide web address does
not constitute incorporation by reference of the information contained at this
website. The LookSmart logo is a registered trademark of LookSmart, and
LookSmart Live! and New Media Family are service marks of LookSmart. All other
brand names and trademarks appearing in this prospectus are the property of
their respective holders.
The Offering
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<C> <S>
Shares offered by LookSmart................ 12,000,000 shares
Shares outstanding after this offering(1).. 88,359,138 shares
Proposed Nasdaq National Market Symbol..... "LOOK"
Use of proceeds............................ General corporate purposes,
including working capital,
marketing and promotional
activities, new product
development, increased personnel
and potential acquisitions.
</TABLE>
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(1) Based on shares outstanding as of June 30, 1999, including 12,478,673
shares of common stock expected to be issued upon exercise of outstanding
warrants immediately prior to the closing of this offering. The following
shares are excluded from this number: 11,861,003 shares of common stock
issuable upon the exercise of options outstanding under our 1998 Stock Plan
and 3,516,661 shares of common stock issuable upon exercise and conversion
of outstanding warrants.
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Summary Consolidated Financial Information
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended Six Months Pro Forma Six Months
------------------------- Ended Year Ended Ended
December 31, December 31, June 30, December 31, June 30,
1997 1998 1999 1998(1) 1999(1)
------------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of
Operations Data:
Net revenues............ $ 949 $ 8,785 $ 18,058 $ 20,142 $ 21,921
Loss from operations.... (7,329) (11,898) (18,770) (18,389) (21,490)
Net loss................ (7,514) (12,858) (18,233) (19,351) (20,953)
Net loss per share,
basic and diluted..... $ (0.08) $ (0.68) $ (0.86) $ (0.91) $ (0.88)
Weighted average shares,
basic and diluted...... 91,589 18,790 21,265 21,340 23,815
Pro forma net loss per
share,
basic and diluted..... $ (0.31) $ (0.33) $ (0.43) $ (0.38)
Pro forma weighted
average shares, basic
and diluted............ 41,080 55,496 45,497 55,496
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
----------------------
Pro Forma
Actual As Adjusted(2)
Consolidated Balance Sheet Data: ------- --------------
<S> <C> <C>
Cash and cash equivalents.............................. $42,731 $177,288
Working capital........................................ 26,693 161,250
Total assets........................................... 89,360 223,917
Long-term debt and capital lease obligations, net of
current portion....................................... 322 322
Total stockholders' equity............................. $59,979 $194,536
</TABLE>
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(1) Pro forma financial information reflects the acquisition of BeSeen.com,
Inc. and the asset purchase transactions with Guthy-Renker Internet, LLC
and ITW NewCorp, Inc. See the unaudited pro forma combined financial
information and the notes thereto included elsewhere in this prospectus.
(2) As adjusted to reflect the sale of 12,000,000 shares of our common stock at
an assumed offering price of $12.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
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<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you could lose
all or part of your investment.
Risks Related to Our Business
We have a history of net losses and expect to continue to incur net losses
We have incurred net losses since our inception, including a net loss of
approximately $18.2 million for the six months ended June 30, 1999. As of June
30, 1999, we had an accumulated deficit of approximately $41.5 million. We
expect to have increasing net losses and negative cash flow for the foreseeable
future. The size of these net losses will depend, in part, on the rate of
growth in our advertisers, syndication and licensing revenues and on the level
of our expenses. We expect to spend significant amounts to build our brand
awareness through marketing and promotion, develop our international business,
fund new product development and enhance the content and features of our
website. As a result, we expect that our operating expenses will increase
significantly in the near term and, consequently, we will need to generate
significant additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
Our quarterly revenues and operating results may fluctuate due to the timing of
delivery of URLs under our Microsoft contract and other factors, which may
negatively affect our stock price
The terms of our agreement with Microsoft Corporation could cause our
quarterly revenues and operating results to fluctuate significantly. Under this
agreement, we license our database to Microsoft and we are obligated to
increase the number of unique URLs included in our database every six months by
pre-defined amounts. Microsoft has the right to determine the criteria for a
portion of these URLs. We recognize quarterly revenues under this agreement
based on the number of URLs added to our database during the quarter relative
to the total number of URLs we are required to add to our database during the
relevant six-month period. As a result, to the extent that we satisfy our
database update obligations unevenly, the revenues we recognize may be skewed
on a quarter-to-quarter basis. Because the six-month contractual measurement
periods end on June 5 and December 5 of each year, our second and fourth
quarters may include revenues from more than one six-month contractual
measurement period. This may result in additional quarter-to-quarter
fluctuations in revenues.
Our quarterly operating results may also fluctuate significantly as a result
of a variety of other factors that could affect our revenues or expenses in any
particular quarter. These factors include:
. the level of user traffic on our website and the demand for our Internet
navigation services;
. the level of demand for Internet advertising and changes in the
advertising rates we charge;
. the level and timing of our licensing and syndication activities;
. seasonality of our advertising revenues, as Internet usage is typically
lower in the first and third quarters of the year;
. timing of revenues recognition under long-term contracts;
. technical difficulties and systems downtime or failures; and
. costs related to acquisitions and integration of technologies or
businesses.
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We may, from time to time, make pricing, service or marketing decisions that
may adversely affect our profitability in a given quarterly or annual period.
Our expense levels are based in part on expectations of future revenues and, to
a large extent, are fixed. We may be unable to adjust spending quickly enough
to compensate for any unexpected revenues shortfall. In addition, we generate a
significant portion of our revenues from our contracts with advertisers, which
generally range from one to three months.
Due to the above factors, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful. You should not rely on
period-to-period comparisons as indicators of our future performance. If our
operating results in any future period fall below the expectations of
securities analysts and investors, the market price of our securities would
likely decline.
We may need additional capital in the future to support our growth and such
additional financing may not be available to us
We believe that the net proceeds from this offering, together with our
current cash balance, will provide adequate liquidity to fund our operations
and meet our other cash requirements for at least two years following this
offering. We cannot, however, assure you that such resources will be sufficient
for anticipated or unanticipated working capital and business development
requirements. We may seek to raise additional funds through public or private
debt or equity financings in order to:
. take advantage of favorable business opportunities, including geographic
expansion or acquisitions of complementary businesses or technologies;
. develop and upgrade our technology infrastructure;
. develop new service offerings;
. respond to competitive pressures; or
. take advantage of current favorable market conditions.
We cannot assure you that any additional financing we may need will be
available on terms favorable to us, or at all.
Our management and internal systems may be inadequate to handle the growth of
our business
Since January 1, 1998, our workforce has grown substantially, from 63
employees at that date to 465 employees on June 30, 1999. In addition, many
members of our management team have only recently been hired, including our
Chief Financial Officer, our Senior Vice President of Business Development and
our Senior Vice President of Marketing. These individuals do not have
significant experience working with LookSmart or the rest of our management
team. We anticipate that our Senior Vice President of Engineering will resign
prior to the end of 1999, and as a result, we will need to hire a replacement.
Implementation of our growth strategy requires that we hire additional highly-
qualified personnel in the near term, particularly in our engineering, product
development and sales operations.
Our growth has placed, and our anticipated growth will continue to place, a
significant strain on our management, our engineering and product development
staff, and our internal accounting, operational and administrative systems. To
manage future growth, we must continue to improve these systems and expand,
train, retain and manage our employee base. If our systems, procedures and
controls are inadequate to support our operations, our expansion could be
slowed. We cannot assure you that we will be able to manage our growth
effectively, and any failure to do so could harm our business.
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A failure to manage and integrate businesses we acquire could divert
management's attention and harm our operations
If we are presented with appropriate opportunities, we intend to make
additional acquisitions of, or significant investments in, complementary
companies, products or technologies to increase our technological capabilities
and expand our service offerings. Acquisitions may divert the attention of
management from the day-to-day operations of LookSmart. In addition,
integration of recently acquired companies and future acquisitions into
LookSmart could be expensive, time consuming and may strain our resources. In
particular, retaining key management and technical personnel during the
transition period following an acquisition may be difficult. For these reasons,
we may not be successful in integrating any acquired businesses or technologies
and may not achieve anticipated revenues and cost benefits.
Acquisitions may also result in dilution to our existing stockholders if we
issue additional equity securities and may increase our debt. We may also be
required to amortize significant amounts of goodwill or other intangible assets
in connection with future acquisitions, which would adversely affect our
operating results.
We derive a significant amount of our revenues from Microsoft, and if our
relationship with Microsoft suffers, our business could be harmed
In December 1998, we entered into an agreement with Microsoft Corporation
for the licensing of our database content, including regular database updates.
For the six months ended June 30, 1999, revenues from Microsoft under this
agreement accounted for 53.3% of our total revenues. A portion of the revenues
we receive under this agreement is subject to refund if we fail to provide the
stated number of URLs. Microsoft has the right to use our database during the
term of the agreement and, after the agreement is terminated, to continue to
use the content we delivered during the term of the agreement. Microsoft also
has the right to sublicense these rights to others, both during and for up to
two years after the term. Microsoft may not sublicense its rights to a
specified group of companies. We believe that this specified group includes all
of our current competitors. After June 8, 2000, our obligation to deliver
database updates to Microsoft under this agreement may be terminated by either
party for any reason on six months' notice.
Our revenues and income potential are unproven and our business model is
continuing to evolve
We were formed in July 1996 and launched looksmart.com in October 1996.
Because of our limited operating history, it is extremely difficult to evaluate
our business and prospects. You should evaluate our business in light of the
risks, uncertainties, expenses, delays and difficulties associated with
starting a new business, many of which may be beyond our control. In addition,
we compete in the relatively new and rapidly evolving Internet navigation
market, which presents many uncertainties that could require us to further
refine or change our business model.
Our success will depend on many factors, including our ability to:
. build and maintain brand awareness;
. increase the amount of traffic to looksmart.com;
. establish and maintain syndication and licensing relationships without
jeopardizing the LookSmart brand;
. attract and retain a large number of advertisers from a variety of
industries; and
. expand our service offerings, including ecommerce and LookSmart Live!SM.
Our failure to succeed in one or more of these areas may harm our business,
results of operations and financial condition.
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We may be unable to address capacity constraints on our software and
infrastructure systems in a timely manner
We have developed custom, proprietary software for use by our editors to
create the LookSmart directory and we also use proprietary software and
software developed by others to distribute the LookSmart directory and
associated pages, and to serve advertising to those pages. This software may
contain undetected errors, defects or bugs or may fail to operate with other
software applications. Demands on our software and infrastructure systems
resulting from substantial increases in editorial activity or the number of
URLs in our directory, customization of the database for syndication,
substantially increased traffic and the addition of new features or changes in
our directory structure could result in temporary capacity constraints and
technical difficulties with our website or with the websites of our syndication
partners. If we fail to address these constraints and difficulties in a timely
manner, our advertising, syndication and other revenues will decline and our
business will suffer.
We have developed a new structure for the presentation of data from the
LookSmart directory, and a new design for our website, which we introduced in
June 1999. This new software may have unforeseen errors, and users of the
website may interact with the directory in ways we have not anticipated,
causing fewer advertisements to be displayed or fewer clickthroughs on
advertisements that are displayed.
In addition, as we expand our service offerings and enter into new business
areas such as ecommerce, we may be required to significantly modify, enhance
and expand our software and infrastructure systems. If we fail to accomplish
these tasks in a timely manner, our business will suffer.
The operating performance of our systems is critical to our business and
reputation
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in the responsiveness of
our website could result in reduced user traffic, a decline in revenues and
damage to our reputation and brand name. In addition, our users and customers
depend on Internet Service Providers, or ISPs, online service providers and
other website operators for access to the LookSmart directories. Each of these
service providers has experienced significant outages in the past and could
experience outages, delays and other operating difficulties in the future due
to system failures.
In February 1999, we entered into an agreement with Frontier GlobalCenter to
house our hardware equipment at Frontier's Santa Clara, California facility. We
do not presently maintain fully redundant systems at separate locations, so our
operations depend on Frontier's ability to protect the systems in its data
center from earthquake, fire, power loss, water damage, telecommunications
failure, vandalism and similar events. Although Frontier provides comprehensive
facilities management services, Frontier does not guarantee that our Internet
access will be uninterrupted, error-free or secure. We have not developed a
disaster recovery plan to respond to system failures. We maintain property
insurance for our equipment, but do not maintain business interruption
insurance. We can not guarantee that our insurance will be adequate to
compensate us for all losses that may occur as a result of any system failure.
If our branding strategy is unsuccessful, we may be unable to increase future
revenues
We believe that increasing the recognition of the LookSmart brand is
critical to our success. We intend to invest a significant amount of our
resources to increase brand awareness, brand loyalty and
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brand equity through various media. We cannot assure you that our brand
awareness strategy will be successful or that our strategy of licensing or
syndicating all or part of our directory to others will not undermine our
efforts to establish the LookSmart brand.
We face risks related to expanding into new services and business areas,
particularly LookSmart Live! and ecommerce
To increase our revenues, we will need to expand our operations by promoting
new or complementary products and services and by expanding into new business
areas. In July 1999, we introduced an interactive Internet navigation
assistance service called LookSmart Live!, and we are continuing to develop and
implement various ecommerce services, including facilitating transactions and
providing ecommerce solutions for small to mid-sized businesses. These products
and services will require both modification of existing software and systems
and the creation or acquisition of new software and systems. We may lack the
managerial, editorial and technical resources necessary to expand our service
offerings. These initiatives may not generate sufficient revenues to offset
their cost. In addition, as we continue to expand our offerings in these and
other markets, we will require significant additional managerial and financial
resources that may strain our existing resources.
LookSmart Live! is capital and human resource intensive, which may make it
difficult for us to scale that service quickly. If we are unable for any reason
to expand the service in line with consumer demand, our reputation and business
could suffer. The costs of providing our LookSmart Live! service may exceed the
incremental advertising revenues, if any, that it generates. In addition, the
market for ecommerce is extremely competitive and we have limited experience in
this market.
If we are unable to compete effectively in the Internet navigation market, our
business and profitability will suffer
We compete in the Internet navigation market, which is relatively new and
highly competitive. We expect competition to intensify as the market evolves.
Many of our competitors have longer operating histories, larger user bases,
longer relationships with consumers, greater brand or name recognition and
significantly greater financial, technical and marketing resources than we do.
As a result of their greater resources, our competitors may be in a position to
respond more quickly to new or emerging technologies and changes in consumer
requirements and to develop and promote their products and services more
effectively than we do.
The barriers to entry into some segments of the Internet navigation market
are relatively low. As a result, new market entrants pose a threat to our
business. We do not own any patented technology that precludes or inhibits
competitors from entering the Internet navigation market. Existing or future
competitors may develop or offer technologies or services that are comparable
or superior to ours, which could harm our business.
We currently face direct competition from companies that provide directory
content, search algorithms, content aggregation and licensing, demographically
and content-targeted advertising, Internet outsourcing, and services that
enable online ecommerce capabilities. As we expand the scope of our Internet
services, we will compete directly with a greater number of websites and other
media companies across a wide range of different online services, including:
. subject-specific websites where competitors may have advantages in
expertise and brand recognition;
. services and software applications that allow a user to search the
databases of several directories and catalogs simultaneously;
11
<PAGE>
. database vendors that offer information search and retrieval
capabilities with their core database products;
. online merchant hosting services; and
. Internet-based email and instant messaging services.
To date, the Internet navigation market has been characterized by
competition for consumer traffic. One aspect of this competition has been the
payment of consumer referral fees to Internet browser companies and other
frequently used websites such as portals and ISPs. If these companies fail to
provide these referrals, or the market for these referrals becomes more
competitive so that navigation companies are required to pay more for these
referrals, our business and profitability could be harmed.
Recent acquisitions and strategic alliances involving our competitors could
reduce traffic to our website
Recently, a number of significant acquisitions and strategic alliances have
been completed or announced in the Internet navigation market involving some of
our competitors, including:
. Yahoo, Inc.'s acquisition of GeoCities;
. The Walt Disney Company's acquisition of a significant interest in
Infoseek Corporation;
. America OnLine, Inc.'s acquisition of Netscape Communications
Corporation;
. @Home Network's acquisition of Excite, Inc.;
. NBC Internet Inc.'s acquisition of an interest in Snap! LLC, a
subsidiary of CNET, and proposed merger with XOOM, Inc.; and
. CMGI's control of Alta Vista Company.
Although the effect of these acquisitions and strategic alliances on our
business cannot be predicted with certainty, these transactions could provide
our competitors with significant opportunities to increase traffic on their
websites and expand their service offerings, which could drive down traffic for
us. In addition, these transactions align some of our competitors with
companies, including television networks, that are significantly larger and
have substantially greater marketing and technical resources and name
recognition than LookSmart. As a result, these competitors may be in a position
to respond more quickly to new or emerging technologies and changes in consumer
requirements and to develop and promote their products and services more
effectively than we do.
The success of our business will depend, in part, on our ability to sell
advertising on our looksmart.com website and on the ability of our affiliates
to generate traffic
For the year ended December 31, 1998 and the six months ended June 30, 1999,
advertising revenues accounted for 63.3% and 31.1% of our total revenues. We
expect that revenues from advertising will continue to represent a significant
portion of our total revenues for the foreseeable future. Our ability to
generate advertising revenues will depend on a number of factors, including:
. the development of the Internet as an advertising medium;
. the level of traffic on our looksmart.com website;
. our ability to effectively manage our advertising inventory,
particularly our category-based advertising inventory; and
. our ability to achieve, measure and demonstrate to advertisers the
unique user demographic characteristics of visitors to our website.
12
<PAGE>
In addition, our ability to earn advertising revenues depends on the number
of advertising impressions per search and the number of clickthroughs. Because
we believe category searches result in a greater number of advertising
impressions per search and a higher number of click-throughs than are
characteristic of keyword searches, if users decide to use keyword searches
more frequently than category searches, our advertising revenues could decline.
We may be unable to execute our business model in international markets
A key component of our strategy is to expand our operations into selected
international markets, including Europe, Australia, Asia and Latin America. To
date, we have limited experience in developing and syndicating localized
versions of our service offerings in international markets, and we may be
unable to execute our business model in these markets. In addition,
international markets have experienced lower levels of Internet usage and
advertising compared to the United States. In pursuing our international
expansion strategy, we face several additional risks, including:
. uncertainty of market acceptance in new regions due to language,
cultural or other factors;
. difficulties in staffing and managing international operations;
. unexpected changes and differences in regulatory requirements,
particularly as applied to Internet services;
. export controls relating to encryption technology;
. foreign currency fluctuations;
. potentially adverse tax consequences; and
. ability to find and develop relationships with international partners.
Our failure to address these risks could inhibit or preclude our efforts to
expand our business in international markets.
Our future success depends on our ability to attract and retain key personnel
Our future success depends, in part, on the continued service of our key
management personnel, particularly Evan Thornley, our Chairman and Chief
Executive Officer, and Tracey Ellery, our President. Mr. Thornley and Ms.
Ellery are husband and wife. The loss of the services of either of these
individuals, or the services of other key employees, could adversely affect our
business. LookSmart does not have employment agreements with Mr. Thornley and
Ms. Ellery.
Our success also depends on our ability to identify, attract, retain and
motivate highly skilled technical, editorial and marketing personnel. In
particular, we are currently conducting a search for a senior technology
executive. Competition for such personnel, particularly in the San Francisco
Bay area, is intense, and we cannot assure you that we will be able to retain
our key employees or that we can identify, attract and retain highly skilled
personnel in the future.
Many of our customers are emerging Internet companies that represent credit
risks
We expect to derive an increasingly significant portion of our revenues from
the sale of advertising and other services and the syndication of our directory
and navigation services to other Internet companies, including website owners,
Internet portals and regional ISPs. In addition, we are targeting some of our
Internet and ecommerce enabling services to small and medium-sized businesses.
Many of these companies have limited operating histories, are operating at a
loss and have limited access to capital. If our customer base experiences
financial difficulties or fails to experience commercial success, our business
will suffer.
13
<PAGE>
Our business would suffer if we were held liable for information made available
on our website
We make information available on our looksmart.com website and on the
websites of our affiliates, including through our syndication and licensing
activities. The availability of this content through our website or other
websites linked from our website could subject us to claims for defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of the information made available. These types of claims
have been brought, sometimes successfully, against online service providers in
the past. Even if such claims do not result in liability to us, we could incur
significant costs in investigating and defending against them and in
implementing measures to reduce our exposure to this kind of liability. Our
insurance may not cover potential claims of this type or may not be adequate to
cover all costs incurred in defense of potential claims or to indemnify us for
all liability that may be imposed.
The Year 2000 Problem could significantly disrupt our operations, causing a
decline in revenues and cash flow and other difficulties
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these Year 2000 requirements. Our business
is dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. If our vendors' systems, including
those of our hosting services provider, are not Year 2000 compliant, or if our
efforts to make our systems Year 2000 compliant are not successful or if our
contingency plan fails, then our critical systems will fail and our business
will be harmed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure".
Our results will be negatively affected if we fail to adapt to rapid
technological change and evolving industry standards
To be successful, we must adapt to rapidly changing Internet technologies
and evolving industry standards. The introduction of new technologies,
including new or superior Internet navigation methods, or the emergence of new
industry standards and practices could render our systems and proprietary
software obsolete and unmarketable or require us to make significant
unanticipated investments to adapt to these changes. We must also enhance our
existing service offerings and introduce new products and services to address
the changing needs and demands of Internet users and our customers. If we are
unable to respond to any of these developments on a timely and cost-effective
basis, our business will be adversely affected.
We may face intellectual property infringement claims that may be costly to
resolve
The services we provide include custom-developed software and software
developed by others. Although we do not believe that our services infringe on
any proprietary rights of others, we cannot assure you that others will not
assert claims against us in the future or that these claims will not be
successful. We could incur substantial costs and diversion of management
resources to defend any claims relating to proprietary rights. These costs and
diversions could harm our business. In addition, we are obligated under some
agreements to indemnify other parties as a result of claims that we infringe on
the proprietary rights of others. If we are required to indemnify parties under
these agreements, our business could be harmed. If any party asserts a claim
against us relating to proprietary technology or information, we may be forced
to seek licenses to this intellectual property. We cannot assure you, however,
that we will be able to obtain licenses on commercially reasonable terms, or at
all. Any failure to obtain the necessary licenses or other rights could harm
our business.
14
<PAGE>
The anti-takeover provisions of Delaware's general corporation law and
provisions of our charter and bylaws may discourage a takeover attempt
Our Restated Certificate of Incorporation, Amended and Restated Bylaws and
provisions of Delaware law may deter or prevent a takeover attempt, including
an attempt that might result in a premium over the market price for our common
stock. See "Description of Capital Stock--Effect of Provisions of the
Certificate of Incorporation and Bylaws and the Delaware Anti-Takeover
Statute".
Risks Related to Our Industry
Our business prospects depend on the use of the Internet as an advertising
medium
Many potential advertisers and advertising agencies have only limited
experience advertising on the Internet and have not devoted a significant
portion of their advertising expenditures to Internet advertising. We expect
downward pressure on advertising prices in the industry generally due to the
often increasing amount of advertising inventory coming onto the Internet from
other sources. As the Internet evolves, advertisers may find Internet
advertising to be a less effective means of promoting their products or
services relative to traditional advertising media and may not continue to
allocate funds to Internet advertising. Acceptance of the Internet among
advertisers will depend, to a large extent, on the level of use of the Internet
by consumers and upon growth in the commercial use of the Internet. In
addition, advertising on the Internet is at an earlier stage of development in
international markets compared to the United States.
Intense competition for advertising revenues exists on high-traffic
websites, which has resulted in significant price competition. Currently, a
variety of pricing models for selling advertising on the Internet exists.
Several of the most widely used pricing models are based on the number of
impressions or clickthroughs, the duration over which the advertisement is
displayed or the number of keywords to which the advertisement will be linked.
It is difficult to predict which pricing model, if any, will emerge as the
industry standard. This uncertainty makes it difficult to project our future
advertising rates and revenues that we may generate from advertising. In
addition, filter software programs that limit or prevent advertising from being
displayed on a user's computer are available. It is unclear whether this type
of software will become widely accepted. If it does, it would negatively affect
Internet-based advertising.
Our business prospects depend on the continued growth in the use of the
Internet
Our business is substantially dependent upon continued growth in the use of
the Internet as a medium for obtaining information and engaging in commercial
transactions. Internet usage may decline and ecommerce may be inhibited for
various reasons, including:
. user inability or frustration in locating and accessing required
information;
. actual or perceived lack of security of information;
. limitations of the Internet infrastructure resulting in traffic
congestion, reduced reliability or increased access costs;
. inconsistent quality of service;
. governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of appropriate communications equipment.
15
<PAGE>
We believe that capacity constraints caused by growth in the use of the
Internet may, unless resolved, impede further growth in Internet use. Further,
the adoption of the Internet for commerce and communications, particularly by
those individuals and companies that have historically relied upon traditional
means of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information.
Companies that have already invested substantial resources to conduct commerce
and exchange information through other means may be particularly reluctant or
slow to adopt a new Internet-based strategy that may make their existing
personnel and infrastructure obsolete. If any of the foregoing factors affects
the continuing growth in the use of the Internet, our business could be harmed.
Government regulation and legal uncertainties could harm our business
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services, or
increase our cost of doing business, or both. Currently, there are a number of
laws and regulations that pertain to communications or commerce on the
Internet, and it is likely that the number of such laws and regulations will
increase. These laws or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation,
user privacy, taxation and the quality of products or services provided over
the Internet. Moreover, the applicability to the Internet of existing laws
governing intellectual property ownership and infringement, copyright,
trademark and trade secret is uncertain and developing.
Privacy related regulation of the Internet could adversely affect our business
Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states and
countries have been investigating some Internet companies regarding their use
of personal information. Any regulations imposed to protect the privacy of
Internet users may affect the way in which we currently collect and use
personal information.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data, guaranteeing citizens of European Union
member states various rights, including the right of access to their data, the
right to know where the data originated and the right to recourse in the event
of unlawful processing. We cannot assure you that this directive will not
adversely affect our activities in European Union member states.
As is typical with most websites, our website places information, known as
cookies, on a user's hard drive, generally without the user's knowledge or
consent. This technology enables website operators to target specific users
with a particular advertisement and to limit the number of times a user is
shown a particular advertisement. Some currently available Internet browsers
allow users to modify their browser settings to remove cookies at any time or
to prevent cookies from being stored on their hard drives. In addition, some
Internet commentators, privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. If this technology is reduced or
limited, the Internet may become less attractive to advertisers and sponsors.
We retain information about our users. If others were able to penetrate our
network security and gain access to, or in some other way misappropriate, our
users' information, we could be subject to liability. These claims could result
in litigation, our involvement in which, regardless of the outcome, could
require us to expend significant financial resources. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if any regulator chooses to investigate our privacy practices.
16
<PAGE>
New tax treatment of companies engaged in Internet commerce may adversely
affect the Internet industry and our company
Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New state tax regulations may subject us to additional state
sales, income and other taxes. A recently passed federal law places a temporary
moratorium on certain types of taxation on Internet companies. We cannot
predict the effect of current attempts to impose sales, income or other taxes
on commerce over the Internet; although, if imposed, such taxes would likely
increase our cost of doing business and may adversely affect our business and
results of operations.
Risks Related to this Offering
Directors, officers and significant stockholders will have substantial
influence over LookSmart after this offering, which could prevent or delay a
change in control
Immediately following this offering, our executive officers, directors, and
significant stockholders and the funds for whom they act as general partner,
collectively will own approximately 66% of the outstanding shares of our common
stock.
If these stockholders choose to act or vote together, they will have the
power to control matters requiring stockholder approval, including the election
of our directors, amendments to our certificate of incorporation and approval
of significant corporate transactions, including mergers or sales of all of our
assets. This concentration of ownership may have the effect of discouraging
others from making a tender offer or bid to acquire LookSmart at a price per
share that is above the then-current market price.
Management has broad discretion in spending the proceeds of this offering and
may do so in ways with which our stockholders disagree
We have no specific allocations for the net proceeds of this offering. We
intend to use the proceeds for general corporate purposes, including working
capital to fund anticipated operating losses, to add engineers, editorial and
marketing personnel and to expand our advertising efforts. We may also use a
portion of the proceeds to acquire or invest in other complementary businesses.
Consequently, management has broad discretion over the ways in which the
proceeds will be used. Because of the number and variability of factors that
determine our use of the net proceeds of the offering, we cannot assure you
that such uses will not vary substantially from our current intentions or that
stockholders will agree with the uses we have chosen.
Our stock price could be extremely volatile and investors may not be able to
resell their shares at or above the initial offering price
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been extremely volatile. These broad market and industry
fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. The initial public offering
price for the shares is determined by negotiations between us and
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. You may not be able to sell your shares at
or above the initial public offering price as a result of a number of factors
including:
. changes in the market valuations of other Internet companies;
. actual or anticipated quarterly fluctuations in our operating results;
. changes in financial estimates by securities analysts;
17
<PAGE>
. announcements of technological innovations or new products or services
by us or our competitors; or
. conditions or trends in the Internet.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in
substantial costs and the diversion of management's attention and resources.
Future sales of our common stock may cause our stock price to decline
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that such sales could occur. These sales or
the possibility that they may occur also could make it more difficult for us to
raise funds through future offerings of common stock. The number of shares of
common stock available for sale in the public market is limited by restrictions
under federal securities laws. In addition, LookSmart, our executive officers
and directors and all of our existing stockholders have agreed that they will
not sell any shares of common stock without the consent of Goldman, Sachs & Co.
for 180 days after the date of this prospectus. Goldman, Sachs & Co. may,
however, in their sole discretion and without notice, release all or any
portion of the shares from the restrictions in the lock-up agreements.
After this offering, we will have 88,359,138 shares of common stock
outstanding. These shares will become eligible for future sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date Eligible for Public Resale
--------- -------------------------------
<C> <S>
12,000,000 Date of this prospectus
5,161,547 180 days after the date of this prospectus
71,197,591 At various times thereafter
</TABLE>
We intend to register on Form S-8 registration statements under the
Securities Act a total of 21,600,000 shares of common stock reserved for
issuance under the 1998 Stock Plan and 1999 Employee Stock Purchase Plan. None
of these shares may be sold for a period of 180 days after the date of this
prospectus. As of the date of this prospectus, there were outstanding options
to purchase 11,861,003 shares of common stock, of which 854,500 were
exercisable. See "Management--Employee Benefit Plans" for a more complete
description of our employee benefit plans and the grants of options.
The holders of approximately 42,208,612 shares of outstanding common stock
and warrants to purchase 13,475,335 shares of common stock have rights to
require us to register those shares under the Securities Act beginning six
months after the closing of this offering. See "Description of Capital Stock--
Registration Rights".
You will suffer immediate and substantial dilution
The initial public offering price per share of our common stock will
significantly exceed our net tangible book value per share, or the value of our
assets after deducting our liabilities. Accordingly, investors purchasing
shares in this offering will suffer immediate and substantial dilution of their
investment. Any additional equity financing may cause investors to experience
dilution.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found
in the material set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Business", as well as in the
prospectus generally. We used words such as "believes", "intends", "expects",
"anticipates", "plans", and similar expressions to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons, including the risks
described above and elsewhere in this prospectus.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 12,000,000 shares of common
stock are estimated to be approximately $132,720,000 at an assumed initial
public offering price of $12.00 per share (approximately $152,808,000 if the
underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discounts and estimated offering expenses payable by us.
The net proceeds of this offering will be used for general corporate
purposes, including working capital, marketing and promotional activities, new
product development and increased personnel. In addition, we may, if
appropriate opportunities arise, use a portion of the net proceeds to acquire
or invest in complementary companies, product lines, products or technologies.
However, we have no present understandings, commitments or agreements with
respect to any potential acquisition or investment with any other party. We
have not determined the amounts we plan to spend on any of the uses described
above or the timing of these expenditures. Pending these uses, we will invest
the net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently intend
to retain all future earnings to finance the expansion of our business and do
not anticipate paying cash dividends on our common stock in the near future.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis as of such date to reflect the conversion upon the
closing of this offering of all outstanding shares of preferred stock
into 40,263,868 shares of common stock and the exercise of warrants to
purchase 12,478,673 shares of common stock immediately prior to the
closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering at an assumed initial public offering price of $12.00
per share, after deducting the estimated underwriting discounts and
offering expenses payable by us.
This information should be read in conjunction with LookSmart's financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
(unaudited)
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capital lease obligations,
current portion............................... $ 142 $ 142 $ 142
Long-term debt and capital lease obligations,
net of current portion........................ 322 322 322
Stockholders' equity:
Preferred Stock, $0.001 par value:
Series A, 11,888 shares authorized: 7,853
shares issued and outstanding, actual; none
authorized, issued and outstanding, pro
forma and pro forma as adjusted.............. 8 --
Series B, 14,328 shares authorized: 14,328
shares issued and outstanding, actual; none
authorized, issued and outstanding, pro
forma and pro forma as adjusted.............. 14 --
Series C, 12,590 shares authorized: 12,084
issued and outstanding, actual; none
authorized, issued and outstanding, pro
forma and pro forma as adjusted.............. 12 --
Series 1 Junior, 6,000 shares authorized:
6,000 shares issued and outstanding, actual;
none authorized, issued and outstanding, pro
forma and pro forma as adjusted.............. 6 --
Preferred Stock, $0.001 par value; 5,000
shares authorized, pro forma as adjusted; no
shares issued and outstanding, actual, pro
forma and pro forma as adjusted.............. --
Common Stock, $0.001 par value, 105,194
shares authorized; 23,615 issued and
outstanding, actual; 76,359 issued and
outstanding, pro forma; 200,000 shares
authorized; 88,359 issued and outstanding,
pro forma as adjusted(1)..................... 24 77 89
Additional paid-in capital.................... 105,146 112,088 244,808
Warrants...................................... 7,114 1,996 1,996
Unearned compensation......................... (10,811) (10,811) (10,811)
Cumulative translation adjustment............. (29) (29) (29)
Accumulated deficit........................... (41,505) (41,505) (41,505)
-------- -------- --------
Total stockholders' equity.................. 59,979 61,816 194,548
-------- -------- --------
Total capitalization...................... $ 60,443 $ 62,280 $195,012
======== ======== ========
</TABLE>
- --------
(1) The following shares at June 30, 1999 are excluded from the number:
11,861,003 shares of common stock issuable upon exercise of outstanding
options and 3,516,661 shares of common stock issuable upon the exercise of
warrants. See "Management--Benefit Plans" and "Description of Capital
Stocks--Warrants".
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DILUTION
On a pro forma basis after giving effect to the conversion of all
outstanding shares of preferred stock into shares of common stock in connection
with this offering, our pro forma net tangible book value as of June 30, 1999
was $33,100,000, or $0.43 per share, of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible assets reduced
by the amount of our total liabilities and divided by the total number of
shares of common stock outstanding and to be issued upon exercise of warrants
upon the closing of this offering, including reflecting the conversion of all
outstanding shares of preferred stock into shares of common stock upon the
closing of this offering. Without taking into account any other change in our
pro forma net tangible book value after June 30, 1999, other than to give
effect to the sale of 12,000,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $12.00 per share and
receipt of the estimated net proceeds therefrom, our pro forma net tangible
book value as of June 30, 1999 would have been approximately $165,820,000, or
$1.88 per share. This represents an immediate increase in the net tangible book
value of $1.45 per share to existing stockholders and an immediate dilution of
$10.12 per share to the new investors. If the initial public offering price is
higher or lower, the dilution to new investors will be, respectively, greater
or less. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share as of June 30,
1999,
before this offering........................................ $0.43
Increase per share attributable to new investors............. 1.45
-----
Pro forma net tangible book value per share after this
offering...................................................... 1.88
------
Dilution per share to new investors............................ $10.12
======
</TABLE>
The following table summarizes, as of June 30, 1999, on a pro forma basis to
reflect the adjustments described above, the differences between the existing
stockholders and the new investors with respect to the number of shares of
common stock purchased from us, the total consideration paid, or to be paid, to
us, and the average price per share paid, or to be paid, by existing
stockholders and by new investors at the assumed initial public offering price
of $12.00 per share, before deducting the estimated underwriting discounts and
offering expenses payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 76,359,138 86.4% $ 95,158,000 39.8% $ 1.25
New investors........... 12,000,000 13.6 144,000,000 60.2 $12.00
---------- ----- ------------ -----
Total................. 88,359,138 100.0% $239,158,000 100.0%
========== ===== ============ =====
</TABLE>
This table assumes that the underwriters do not exercise their over-
allotment options. This table also assumes that no options or warrants were
exercised after June 30, 1999. As of June 30, 1999, there were outstanding
options to purchase an aggregate of 11,861,003 shares of common stock at a
weighted average exercise price of $1.17 per share and warrants to purchase
3,516,661 shares of common stock at a weighted aggregate purchase price of
$1.88 per share. If all of these options and warrants had been exercised on
June 30, 1999, our net tangible book value on that date would have been
$186,316,000, or $1.80 per share, the increase in net tangible book value
attributable to new investors would have been $1.37 per share and the dilution
in net tangible book value to new investors would have been $10.20 per share.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statement of operations data for the period from July 19, 1996, inception, to
December 31, 1996 and for the years ended December 31, 1997 and 1998 and the
consolidated balance sheet data as of December 31, 1997 and 1998 are derived
from our Consolidated Financial Statements which have been audited by
PricewaterhouseCoopers LLP independent accountants, and are included elsewhere
in this prospectus. The consolidated statement of operations data for the six-
month period ended June 30, 1998 and 1999 and the consolidated balance sheet
data as of June 30, 1999 are derived from our unaudited consolidated financial
statements included elsewhere in this prospectus.
The unaudited selected pro forma financial data of Guthy-Renker Internet,
LLC, ITW NewCorp, Inc., and BeSeen.com, Inc. is derived from the unaudited
consolidated pro forma combined financial statements of Guthy-Renker Internet,
ITW NewCorp and BeSeen.com and should be read in conjunction with the pro forma
statements and notes to those statements, which are included elsewhere in this
prospectus.
The consolidated pro forma information is presented for illustrative
purposes only and is not necessarily indicative of future operating results or
financial position.
<TABLE>
<CAPTION>
Period from
July 19,
1996 Pro Forma
(Inception) Year Ended Six Months Ended Pro Forma Six Months
to ------------------------- ----------------------- Year Ended Ended
December 31, December 31, December 31, June 30, June 30, December 31, June 30,
1996 1997 1998 1998 1999 1998(1) 1999(1)
------------ ------------ ------------ ----------- ----------- ------------ ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................ $ 3 $ 949 $ 8,785 $ 1,845 $ 18,058 $ 20,142 $ 21,921
Cost of revenues........ 90 430 1,586 495 2,754 8,247 5,169
-------- ------- -------- ------- -------- -------- --------
Gross profit (loss).... (87) 519 7,199 1,350 15,304 11,895 16,752
-------- ------- -------- ------- -------- -------- --------
Operating expenses:
Sales and marketing.... 1,115 3,668 10,848 3,085 16,189 14,109 17,149
Product development.... 915 2,605 4,427 1,144 9,567 4,517 9,651
General and
administrative........ 504 1,165 2,746 886 3,666 4,535 4,180
Amortization of
goodwill and
intangibles........... 205 410 605 205 1,858 6,652 4,468
Amortization of
unearned
compensation.......... -- -- 133 -- 2,794 133 2,794
Write-off of in-
process research and
development........... -- -- 338 -- -- 338 --
-------- ------- -------- ------- -------- -------- --------
Total operating
expenses............ 2,739 7,848 19,097 5,320 34,074 30,284 38,242
-------- ------- -------- ------- -------- -------- --------
Loss from operations.... (2,826) (7,329) (11,898) (3,970) (18,770) (18,389) (21,490)
Non-operating income
(expense), net......... (10) (19) (814) (567) 589 (816) 589
Income taxes............ (64) (166) (146) (76) (52) (146) (52)
-------- ------- -------- ------- -------- -------- --------
Net loss................ $ (2,900) $(7,514) $(12,858) $(4,613) $(18,233) $(19,351) $(20,953)
======== ======= ======== ======= ======== ======== ========
Basic and diluted net
loss per share......... $ (0.03) $ (0.08) $ (0.68) $ (0.25) $ (0.86) $ (0.91) $ (0.88)
======== ======= ======== ======= ======== ======== ========
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 115,947 91,589 18,790 18,326 21,265 21,340 23,815
======== ======= ======== ======= ======== ======== ========
Unaudited pro forma
basic and diluted net
loss per share(2)...... $ (0.31) $ (0.33) $ (0.42) $ (0.38)
======== ======== ======== ========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share..... 41,080 55,496 45,947 55,496
======== ======== ======== ========
<CAPTION>
December 31, December 31, December 31, June 30,
1996 1997 1998 1999
------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficit).............. $ (429) $(1,125) $ (6,507) $26,693
Total assets............ 2,825 2,275 14,090 89,360
Long-term debt and
capital lease
obligations, net of
current portion........ -- 1,500 1,500 322
Total stockholders'
equity (deficit)....... 2,091 (453) (1,261) 59,979
</TABLE>
- -------
(1) Pro forma financial information reflects the acquisition of BeSeen.com and
the asset purchase transactions with Guthy-Renker Internet and ITW NewCorp.
See the unaudited pro forma combined financial information and the notes
thereto included elsewhere in this prospectus.
(2) Unaudited pro forma net loss per share for the year ended December 31, 1998
is computed using the weighted average number of common shares outstanding,
adjusted to include the pro forma effects of the conversion of preferred
stock to common stock as if the conversion had occurred on January 1, 1998,
or at the date of original issuance, if later.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes to those statements which appear elsewhere
in this prospectus. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs, including without
limitation forward-looking statements regarding anticipated revenue growth,
trends in costs of revenues and operating expenses, international expansion and
introduction of additional services. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and elsewhere in this prospectus, particularly in "Risk
Factors".
Overview
LookSmart is a leading category-based Internet directory provider that has
assembled what it believes to be the largest collection of high quality,
granular content on the Internet. The LookSmart directory contains over 800,000
unique URLs in over 60,000 categories, organized in an easy-to-navigate format.
We distribute our proprietary directory to a large number of Internet users
through LookSmart-owned Internet properties and through our strategic
alliances. Our Internet properties, including looksmart.com, primarily target a
focused demographic of female household purchase decision-makers and generate
advertising and ecommerce revenues. We broaden the reach of the LookSmart
directory through syndication and licensing of our content. We currently
provide our directory to leading Internet portals, such as The Microsoft
Network, Netscape Netcenter, Excite@Home and Alta Vista, and to 220 ISPs,
including IBM.net and NetZero. In addition, users can access our content and
services through a network of over 600,000 website affiliates.
LookSmart was formed in July 1996 as a Delaware corporation under the name
of NetGet Ltd. to acquire the business and associated intellectual property of
HomeBase Directories Pty Ltd., an Australian company founded by Evan Thornley
and Tracey Ellery in October 1995. At that time, The Reader's Digest
Association purchased approximately 85% of our outstanding common stock, an
investment it held until October 1997 when it exchanged this stock for warrants
to purchase 9 million shares of our common stock and a $1.5 million promissory
note. We changed our name to LookSmart, Ltd. in October 1996. In July 1997, we
relocated our headquarters from Australia to San Francisco, California.
Prior to July 1997, revenues from our business were incidental and we were
primarily focused on investing in editorial resources and building our Internet
directory. Until October 1997, our cash requirements were satisfied primarily
by funds provided by The Reader's Digest Association and, to a lesser extent,
from advertising revenues from sales made through outside sales forces. Our
advertising revenues continued to increase during the fourth quarter of 1997
and the first quarter of 1998.
During 1998, we entered into several key operational relationships designed
to increase traffic to our website and to expand our directory. In May 1998, we
raised a total of approximately $8.3 million in our Series A and Series B
preferred stock financings, marking the beginning of our strategic relationship
with Cox Interactive Media in developing web directories for key local United
States markets. This infusion of capital allowed us to significantly increase
the resources devoted to editorial and product development, establish our own
advertising sales force and significantly strengthen our management team.
Also in May 1998, we entered into a one-year traffic contract with Netscape,
which has been renewed through July 2000. Under this arrangement, Netscape
periodically directs user search traffic to LookSmart for a fixed cost per
thousand impressions.
24
<PAGE>
In October 1998, we acquired BeSeen.com, Inc., a leading provider of tools
to webmasters, for 6 million shares of our Series 1 Junior preferred stock. The
primary purpose of this transaction was to generate traffic and website
relationships for LookSmart to increase advertising sales.
In December 1998, we entered into a five-year contract with Microsoft. Under
this agreement, we license our database to Microsoft, and we are obligated to
increase the number of unique URLs included in our database every six months by
pre-defined amounts. Microsoft has the right to determine the criteria for a
portion of these URLs. Microsoft paid us an initial non-refundable license fee
and committed to a fixed schedule of additional payments for updates. A portion
of each update payment is subject to refund if we fail to provide the stated
number of URLs. Generally, the difference between any cash received under the
contract and revenues recognized is carried as deferred revenues. At June 30,
1999, deferred revenue associated with the Microsoft contract was $20.7
million. Either party may terminate the contract following the second
anniversary of the contract upon six-months notice.
The terms of our agreement with Microsoft could cause our quarterly revenues
and operating results to fluctuate significantly. We recognize quarterly
revenues under this agreement based on the number of URLs added to our database
during the quarter relative to the total number of URLs we are required to add
to our database during the relevant six-month contractual measurement period.
As a result, to the extent that we satisfy our database update obligations
unevenly, the revenues we recognize may be skewed on a quarter-to-quarter
basis. Because the six-month contractual measurement periods end on June 5 and
December 5 of each year, our second and fourth quarters may include revenues
from more than one six-month contractual measurement period. This may result in
additional quarter-to-quarter fluctuations in revenues.
In March 1999, we raised approximately $60 million in our Series C preferred
stock round of financing. The proceeds from this financing are being used to
increase working capital, to fund operating losses and to enter into potential
strategic relationships and acquisitions.
In April 1999, we acquired lines of business and other rights from Guthy-
Renker Internet, LLC as part of a strategic alliance between our two companies
for $5 million in cash and 2.55 million shares of LookSmart common stock.
Through the acquired business, we provide Internet development seminars and
services that are targeted to small business owners. We also receive revenues
from Guthy-Renker Corporation's "As Seen on TV" products that are sold online
and promoted through television infomercials, and we are entitled to place
LookSmart advertising on Guthy-Renker Corporation infomercials.
On June 9, 1999, LookSmart acquired substantially all of the assets of ITW
NewCorp, Inc., in exchange for $5 million and warrants to purchase 420,000
shares of LookSmart common stock. Through this asset purchase, we provide
Internet bulletin board services which generate advertising revenue.
In June 1999, we entered into five agreements with three PBS-related
entities under which we agreed to sponsor five programs on PBS. The programs
are Mystery!, Chefs of Cucina Amore, Great Food, MasterChef USA and Sesame
Street. The terms of four of the agreements are for five years, with either
party having the right to terminate the agreements after three years. The term
of the fifth agreement is for three years and gives LookSmart a right of first
refusal for years four and five. During the terms, none of our directory
competitors will have the right to sponsor any of the listed programs.
LookSmart is committed to pay a total of $19.25 million during the contract
periods to the PBS-related entities if all five agreements remain effective
throughout their terms. These payments will be recorded as sales and marketing
expense, and generally will be spread equally over the terms of the contracts.
The PBS-related entities, in return, have agreed to promote LookSmart on their
respective websites. Specifically, the arrangement provides that LookSmart's
website is provided a direct link to the PBS website www.pbs.org.
25
<PAGE>
In June 1999, we entered a three-year licensing agreement with Excite@Home.
Under this agreement, we will license our database and share advertising
revenues with Excite@Home.
Revenues
From inception through mid-1998, we derived substantially all of our
revenues from the sale of advertising on our website. In the second half of
1998, we began the licensing and syndication of our database to other Internet-
based businesses. We plan to continue to seek additional sources of revenues
from the use of our Internet directory, including international sources,
premium usage fees and additional ecommerce activities.
Advertising. We generally provide advertisers with one to three-month
agreements to serve a minimum number of banner impressions over the term of the
agreement. In several cases, we have entered into lengthier agreements. We
offer advertisers the ability to specify the category of traffic for their
banner advertisements, and we are able to charge premiums on some categories
based on advertisers' perception of economic value, including the placement of
the advertisement on the page, the demographics of the users who view the page
and the size of the audience requesting the page.
We expect advertising revenues to continue to account for a significant
portion of our revenues for the foreseeable future. Our ability to maintain
current levels of advertising revenue will depend on our ability to re-sign or
replace existing advertisers as their contracts expire. We expect downward
pressure on advertising prices in the industry generally due to the increasing
amount of advertising inventory coming onto the Internet from other sources.
Therefore, we expect that any future increases in advertising revenues will
depend on our ability to effectively manage our advertising inventory by
leveraging our targeted category-based model to charge premium rates and on our
ability to grow the inventory availability by increasing traffic to our
Internet properties.
We recognize advertising revenues as impressions are delivered over the term
of the contract. Prepayments are deferred until the impressions are delivered.
Because advertising revenues are often received from advertising agencies that
wait until receipt of payment from their own clients before forwarding payment
to LookSmart, associated cash flow may lag by as much as one quarter.
In our limited operating history, we have experienced seasonality in
advertising revenues with typically weaker demand from advertisers in the first
and third quarters. We expect that advertising revenues will continue to be
subject to seasonality. In particular, the rate of growth, if any, between the
last quarter of one year and the first quarter of the next year tends to be
less than the rate of growth experienced between other consecutive quarters.
This may be due in part to the fact that the fourth quarter contains increased
advertising spending in anticipation of the holiday season.
Because advertising revenues represent a significant portion of our
business, fluctuations in advertising revenues due to pricing pressures, the
timing of contracts, inventory management, seasonality or other factors can be
expected to have a significant effect on our overall operating results. Some of
our costs are variable, and therefore would track increases or decreases in
advertising revenues. However, other costs are fixed, at least in the short
term, and cannot be expected to track fluctuations in advertising revenues. To
the extent that costs do not track changes in advertising revenues,
fluctuations from this revenues source will have a disproportionately large
impact on net income.
Syndication and Licensing. We generate revenues from syndication agreements
by sharing with our syndication partners advertising sales revenue associated
with traffic referred between the partners and LookSmart. In some cases, our
syndication partner receives gross revenues from the advertiser and then makes
a payment to LookSmart for our share of those revenues. In other cases, we
receive the gross revenues from the advertiser, as described above, and then
forward a portion
26
<PAGE>
of these revenues to the applicable syndication partner. We work with our ISP
partners to "co-brand", or create partner-specific home pages which have the
"look and feel" a partner desires and which provides the ISP subscriber fully-
functional access to the LookSmart database. In these cases, LookSmart receives
advertising sales revenues from the traffic generated by the ISP partner and
compensates the partner, typically on a per impression basis, for this traffic
referral. We also license our content database to a number of parties,
including Microsoft as described above and Excite@Home. We expect revenues from
syndication and licensing to fluctuate from period to period because the
revenues from our syndication activities are dependent upon the level of future
traffic, the revenues from our licensing activities are dependent upon the
particular terms of our licensing arrangements, and the revenues from both
syndication and licensing are dependent upon the expiration, renewal and
addition of agreements with our partners.
The extent to which fluctuations in syndication and ecommerce revenues will
affect our overall operating results will depend on the magnitude of the
fluctuations, their underlying cause and their size relative to other sources
of revenues. For example, to the extent that such fluctuations are due to
changes in the level of traffic, they may magnify the effect of fluctuations in
advertising revenues, which is also dependent upon traffic levels. To the
extent that they are due to other factors, such as the loss or addition of
major contracts, their effect on overall operating results will depend on their
timing and size relative to other sources of revenues, which is difficult to
predict.
Ecommerce. We began generating ecommerce revenues with our purchase of the
business operations of Guthy-Renker Internet in April 1999. Our ecommerce
revenue sources include assistance in the development of ecommerce websites, an
operational hosting service and placement on the LookSmart Choice Mall virtual
shopping mall. We also receive fees from Guthy-Renker Corporation's "As Seen on
TV" merchandise that is sold online. While this is a relatively new portion of
our business, we expect that it may be seasonal and may fluctuate from period
to period. We launched our Rewardmall service in July 1999. This Internet
shopping mall features over 25 merchants. We will also offer "Reward Points"
for purchases made through this service. Because ecommerce is a relatively new
part of our business, we cannot yet accurately predict how fluctuations in this
area will affect our overall operating results. Based on our limited experience
to date, however, we expect that ecommerce activities may generate lower
margins than advertising, syndication and licensing activities.
International. To date, non-United States revenues have comprised less than
2% of our total revenues in any period. These international revenues have been
derived exclusively from advertising sales, primarily in Australia and to a
lesser extent the United Kingdom. To the extent that our international revenues
begin to constitute a larger portion of our total revenues, our financial
results may be subject to more volatility. Furthermore, we may incur
substantial expenses in expanding our international operations, and increases
in associated revenues, if any, may substantially lag behind such expenses.
Expenses
Cost of Revenues. The principal components of cost of revenues are direct
costs of hosting ecommerce development seminars and product costs paid in
connection with our "As Seen on TV" merchandise sales. These costs will
fluctuate with the level of these activites.
Other components of cost of revenues are agency commissions paid to outside
advertising sales organizations, personnel costs of our in-house advertising
operations employees, equipment depreciation and other expenses relating to
hosting advertising operations. We expect these aggregate costs to increase
over time in absolute dollars.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and associated costs of employment, overhead and facilities for our
sales force, including those personnel responsible for advertising sales, ISP
agreements and other business-to-business relationships. These costs are fixed
in the short term. In the second and third quarters of 1998, we
27
<PAGE>
experienced a substantial increase in sales and marketing expenses as we began
to transition from reliance on outside advertising sales forces, which are
accounted for in cost of revenues, to reliance on our in-house advertising
sales force, which is accounted for in sales and marketing expenses.
Sales and marketing expenses also include payment to portals, ISP partners
and other traffic providers who direct online users to our LookSmart database.
Traffic payments can exhibit significant fluctuations from period to period
depending on the volume of traffic purchases and the contracted rates. Further,
traffic payments as a percentage of revenues can vary significantly depending
on the structure of the payment arrangements between us and our affiliates.
When a traffic arrangement is structured so that we simply receive a payment
from our affiliate, who collects the gross advertising revenues, we record as
revenues only the portion of the gross advertising revenues forwarded to us and
little or no sales and marketing expense is directly associated with that
revenue stream. On the other hand, when a traffic arrangement is structured so
that we collect the gross advertising revenues and forward a portion to our
affiliate, we record as revenues the entire amount of the gross advertising
revenues, and the portion forwarded to the partner is recorded as sales and
marketing expense.
Sales and marketing expenses also include the costs of advertising, trade
shows and public relations activities. Due to the one-time nature of these
expenditures, sales and marketing expenses will be subject to significant
fluctuations from period to period. We plan to conduct a consumer branding
campaign shortly after this offering that will result in a significant increase
in overall sales and marketing costs, both in absolute dollars and as a
percentage of revenues. Thereafter, we expect to continue to incur sales and
marketing expenses at a greatly increased level as we attempt to establish a
dominant brand. Sales and marketing costs have been expensed as incurred.
Product Development. Product development expenses include the editorial
development costs of building our content database, the costs associated with
the development and licensing of additional website features and engineering
costs associated with activities such as improving the development environment,
including our proprietary Editorial Support System tool. These costs include
salaries and associated costs of employment, overhead and facilities. Software
licensing and computer equipment depreciation related to supporting product
development functions are also included in product development expenses. These
costs are fixed in the short term. Product development costs, including
Research and development costs have been expensed as incurred.
We expect product development costs to continue to increase as we increase
the size and reach of our database, add more website features and expand our
international operations. We also expect that the launch and maintenance of
additional services, including the recently launched LookSmart Live!, which may
be significantly more resource intensive than many other aspects of our
business, may result in increased product development costs.
General and Administrative. General and administrative expenses include
corporate overhead costs such as executive management, human resources,
finance, legal, investor relations and facilities personnel. These costs
include salaries and associated costs of employment, overhead and facilities.
General and administrative expenses include consulting and professional service
fees which are subject to variability over time. We expect to incur additional
general and administrative expenses in the future as required to support an
increasing number of employees and expanding international operations, and as a
result of becoming a public company.
Unearned Compensation. We have recorded aggregate unearned compensation of
approximately $13.7 million. These amounts were booked in connection with the
grant of stock options to employees and directors and represent the difference
between the deemed fair value for accounting purposes of the common stock
subject to the options at the dates of grant and the exercise price of the
related options. The unearned compensation is amortized over the vesting period
of the applicable option, typically four years. Amortization of unearned
compensation
28
<PAGE>
was $133,000 for the year ended December 31, 1998, and $2.8 million for the six
months ended June 30, 1999. We expect to amortize additional unearned
compensation expenses of $3.6 million in the remainder of 1999, $4.2 million in
2000, $2.1 in 2001, $738,000 in 2002 and $60,000 in 2003.
Amortization of Goodwill and Intangibles. We recorded goodwill of
approximately $2.1 million, which primarily represented intellectual property
acquired in connection with the acquisition of the predecessor company in 1996,
as described above. This amount is being amortized over a five-year period on a
straight-line basis. In connection with the acquisition of BeSeen.com, which
was completed in the fourth quarter of 1998, we recorded goodwill and
intangible assets of approximately $3.9 million. In connection with the April
1999 and June 1999 asset purchase transactions with Guthy-Renker Internet and
ITW NewCorp, we booked goodwill and intangible assets of $16.5 million and $9.3
million. These amounts are being amortized over periods from one to five years.
We began amortizing the BeSeen.com amount in the fourth quarter of 1998, and
the Guthy-Renker Internet and ITW NewCorp amounts in the second quarter of
1999. We expect to amortize approximately $3.4 million of the remainder in
1999, $6.5 million in 2000, $6.2 million in 2001, $5.6 million in 2002, $5.5
million in 2003, and $1.5 million in 2004. Part of our growth strategy is to
make additional acquisitions as we identify attractive opportunities. As a
result, we expect additional amortization of goodwill and intangibles to occur
in future periods.
Income Taxes
Although we have not yet shown profitability on a consolidated basis, tax
charges will be incurred in connection with our operations in foreign
jurisdictions. We expect that foreign taxes will become more significant with
continued overseas expansion.
Results of Operations
The following table sets forth, for the periods indicated, line items from
LookSmart's consolidated statements of operations as percentages of revenues:
<TABLE>
<CAPTION>
Year
Ended Six Months
December Ended
31, June 30,
----------- -------------
1997 1998 1998 1999
---- ---- ----- -----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues......................................... 100 % 100 % 100 % 100 %
Cost of revenues................................. 45 18 27 15
---- ---- ----- -----
Gross margin................................. 55 82 73 85
Operating expenses:
Sales and marketing............................ 387 123 167 90
Product development............................ 274 50 62 53
General and administrative..................... 123 31 48 20
Amortization of goodwill and intangibles....... 43 7 11 10
Amortization of unearned compensation.......... -- 2 -- 16
Write-off of in-process research and
development................................... -- 4 -- --
---- ---- ----- -----
Total operating expenses..................... 827 217 288 189
---- ---- ----- -----
Loss from operations............................. (772) (135) (215) (104)
Non-operating income (expense), net.............. (2) (10) (31) 3
---- ---- ----- -----
Loss before income taxes......................... (774) (145) (246) (101)
Income taxes..................................... (18) (1) (4) --
---- ---- ----- -----
Net loss......................................... (792)% (146)% (250)% (101)%
==== ==== ===== =====
</TABLE>
29
<PAGE>
Percentage comparisons relating to 1996 are not meaningful because
operations in 1996 were focused primarily on building the database and not
generating revenues.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Revenues
Our revenues increased 879% to $18.1 million in the six months ended June
30, 1999 compared to $1.8 million in the same period of 1998. The largest
portion of the increase was due to new revenues of $9.6 million from licensing
in the first half of 1999, principally under the Microsoft contract, and new
ecommerce revenues of $2.8 million resulting from the Guthy-Renker Internet
asset purchase transaction in April 1999. In the first six months of 1999,
advertising revenues increased by $3.8 million as a result of increased traffic
and better inventory management.
Cost of Revenues
Cost of revenues increased 456% to $2.8 million for the six months ended
June 30, 1999 from $495,000 for the same period in 1998. A substantial portion
of the increase in cost of revenues for the first half of 1999 was attributable
to seminar costs and product costs paid as a result of "As Seen on TV"
merchandise sales. These costs are a result of the Guthy-Renker Internet asset
purchase transaction in April 1999. We have also invested in computer hardware
and software and have hired additional advertising operations personnel to
manage the traffic and the advertising serving process. The resulting
depreciation on the capital expenditures as well as the salaries and benefits
costs of additional headcount in advertising operations have contributed to the
overall increase in cost of revenues when comparing the six months ended June
30, 1999 to the same period for 1998.
As a percentage of revenues, cost of revenues decreased to 15% for the six
months ended June 30, 1999 compared to 27% for the same period in 1998. This
decrease can be primarily attributed to economies of scale associated with
higher traffic volume and higher yields on saleable traffic and the impact of
high margin licensing revenues. To a lesser extent, this decrease was
influenced by the shift from reliance on an outside advertising sales force,
which is accounted for in cost of revenues, to an in-house sales force, which
is accounted for as a sales and marketing expense. As a result of this shift,
the overall increase in cost of revenues was partially offset by a decrease in
fees paid to the outside advertising agency. Partially offsetting this decrease
in cost of revenue as a percentage of revenues is the impact of the inclusion
of the Guthy-Renker Internet operations in the results of operations beginning
in April 1999. These activities typically operate at lower margins compared to
advertising, syndication and licensing.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 425% to $16.2
million for the six months ended June 30, 1999 from $3.1 million for the same
period in 1998. As a percentage of revenues, sales and marketing expenses
decreased to 90% for the six month period ended June 30, 1999 from 167% for the
same period in 1998. The dollar increase in sales and marketing expenses is
attributable to a number of factors. Traffic costs increased approximately $4.4
million for the first half of 1999 as compared to the same period in 1998 as
the result of the growth of our ISP partner program and the impact of our May
1998 traffic agreement with Netscape. Advertising sales costs contributed
approximately $2 million to the increase in sales and marketing as a result of
our addition of an advertising sales staff in the second half of 1998 discussed
above. Additionally our industry brand marketing campaign, which focused on
syndication affiliates and the advertising trade, was launched in 1999,
resulting in an increase in marketing expense of approximately $3 million.
30
<PAGE>
Product Development. Product development expenses increased 736% to $9.6
million for the six months ended June 30, 1999 from $1.1 million for the same
period in 1998. As a percentage of revenues, product development expenses
decreased to 53% for the six month period ended June 30, 1999 from 62% for the
same period in 1998. The dollar increase in product development costs is
primarily due to a significant increase in editorial, engineering and product
design personnel necessary to support our efforts to expand our database.
General and Administrative. General and administrative expenses increased
314% to $3.7 million for the six months ended June 30, 1999 from $886,000 for
the same period in 1998. As a percentage of revenue, general and administrative
expenses decreased to 20% for the six month period ended June 30, 1999 from 48%
for the same period in 1998. The dollar increase in general and administrative
expenses is primarily due to additional personnel and professional services
costs incurred to support the growth of the company, while the decrease as a
percentage of revenue was a function of the increased revenue base.
Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998 and the Guthy-
Renker Internet and ITW NewCorp asset purchase transactions in April 1999 and
June 1999 further described above. Amortization of these assets increased 806%
to $1.9 million for the six months ended June 30, 1999 from $205,000 for the
same period in 1998. The dollar increase was due primarily to the fact that
1999 included the incremental impact of the BeSeen.com acquisition and the
Guthy-Renker Internet and ITW NewCorp asset purchase transactions.
Amortization of Unearned Compensation. Amortization of deferred compensation
was $2.8 million for the six months ended June 30, 1999. There was no unearned
compensation for the same period in 1998. We began recording unearned
compensation in the second half of 1998.
Non-operating Income (Expense), Net. Interest income (expense), net includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents. We recorded net interest income of
$597,000 for the six months ended June 30, 1999 compared to net interest
expense of $443,000 for the same period in 1998. The change from net interest
expense to net interest income between the two periods is primarily the result
of larger cash balances on hand during the six months ended June 30, 1999.
Other income (expense), net includes foreign exchange gains and losses
arising from the change in the value of foreign currencies, primarily the
Australian dollar, relative to the United States dollar. We recorded other
expenses, net, of $8,000 for the six months ended June 30, 1999 compared to
other expenses, net, of $124,000 for the same period in 1998.
Income Taxes
We recorded income tax expense of $52,000 for the six months ended June 30,
1999, primarily associated with our Australian operations, compared to $76,000
for the same period in 1998.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenues
Our revenues increased 826% to $8.8 million in the year ended December 31,
1998 from $949,000 in the same period of 1997. The largest portion of the
increase was due to an additional $4.6 million of advertising revenues as
compared to the 1997 period as a result of increased traffic
31
<PAGE>
and better advertising inventory management. Also contributing significantly to
the increase were new revenues of $3.2 million from licensing in the last half
of 1998. Before the third quarter of 1998, database content licensing was not a
significant element in our business model.
Cost of Revenues
Cost of revenues increased 269% to $1.6 million for the year ended December
31, 1998 from $430,000 for the same period in 1997. As a percentage of
revenues, cost of revenues decreased to 18% for the year ended December 31,
1998 compared to 45% for the same period in 1997. Agency commissions paid to
outside advertising sales organizations and a one-time finder's fee related to
a licensing agreement accounted for a significant portion of the absolute
dollar increase. Also contributing to the dollar increase was our addition of
advertising operations personnel and depreciation on related ad serving
software and hardware beginning in the second half of 1998, discussed above.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 196% to $10.8
million for the year ended December 31, 1998 from $3.7 million for the same
period in 1997. As a percentage of revenues, sales and marketing decreased to
123% for the year ended December 31, 1998 from 387% for the same period in
1997. The dollar increase in sales and marketing expenses is primarily
attributable to a $4.9 million increase in traffic costs as a result of our
agreements with Netscape and Alta Vista, which became effective in the second
quarter of 1998, and the overall growth of our ISP partner program. Also
contributing to this dollar increase was our addition of an advertising sales
staff in the second half of 1998.
Product Development. Product development expenses increased 70% to $4.4
million for the year ended December 31, 1998 from $2.6 million for the same
period in 1997. As a percentage of revenues, product development expenses
decreased to 50% for the year ended December 31, 1998 from 274% for the same
period in 1997. The dollar increase in product development costs is primarily
due to a significant increase in editorial and engineering personnel to
accelerate the addition of URLs to our database and due to an increase in
product design personnel to add features to our website. The decrease as a
percentage of revenues is primarily due to the increased revenue base.
General and Administrative. General and administrative expense increased 136%
to $2.7 million for the year ended December 31, 1998 from $1.2 million for the
same period in 1997. As a percentage of revenues, general and administrative
expenses decreased to 31% for the year ended December 31, 1998 from 123% for
the same period in 1997. The dollar increase in general and administrative
expenses is primarily due to additional personnel and professional services
costs incurred to support our growth.
Amortization of Goodwill and Intangibles. Amortization increased 48% to
$605,000 for the year ended December 31, 1998 from $410,000 for the same period
in 1997. The dollar increase in amortization of goodwill and intangibles is the
result of the amortization expenses associated with the October 1998
acquisition of BeSeen.com.
Amortization of Unearned Compensation. Amortization of unearned compensation
was $133,000 for the year ended December 31, 1998. There was no unearned
compensation for 1997. We began recording unearned compensation in the second
half of 1998.
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<PAGE>
Write-off of In-process Research and Development. In connection with the
BeSeen.com acquisition in October 1998, we recorded a $338,000 one-time charge
representing the fair value of acquired in-process research and development.
Non-operating Income (Expense), Net. We recorded net interest expense of
$675,000 for the year ended December 31, 1998 compared to net interest expense
of $16,000 for the same period in 1997. The increase in net interest expense
between the two periods is primarily the result of interest expense related to
the issuance of warrants with debt, and interest accruals on larger debt
balances outstanding in 1998 compared to 1997.
We recorded other expenses, net, of $139,000 for the year ended December 31,
1998 compared to other expenses, net, of $3,000 for the same period in 1997.
Income Taxes
We recorded income tax expense of $146,000 for the year ended December 31,
1998, primarily associated with our Australian operations, compared to $166,000
for the same period in 1997.
Year Ended December 31, 1997 Compared with the Period from July 19, 1996
(inception) through December 31, 1996
Revenues
Our revenues increased to $949,000 in the year ended December 31, 1997 from
$3,000 for the period July 19, 1996 (inception) through December 31, 1996. This
increase is the result of the launch of our website in late 1996 and the
commencement of advertising revenues in 1997.
Cost of Revenues
Cost of revenues increased to $430,000 for the year ended December 31, 1997
from $90,000 for the period from July 19, 1996 (inception) through December 31,
1996. Sales commissions to outside sales forces contributed to the increase in
cost of revenues when comparing the year ended December 31, 1997 to the period
from July 19, 1996 (inception) through December 31, 1996. This increase
reflects of the commencement of advertising revenues in 1997.
Operating Expense
Sales and Marketing. Sales and marketing expenses increased to $3.7 million
for the year ended December 31, 1997 from $1.1 million for the period from July
19, 1996 (inception) through December 31, 1996. The dollar increase in sales
and marketing expenses is attributable to a full year of operations in 1997
compared to approximately five months of operations in 1996, as well as
increased business development expenses and traffic costs in 1997.
Product Development. Product development expense increased to $2.6 million
for the year ended December 31, 1997 from $915,000 for the period from July 19,
1996 (inception) through December 31, 1996. The dollar increase in product
development expenses is attributable to a full year of operations in 1997
compared to approximately five months in 1996, as well as an increase in
editorial and engineering personnel for the purpose of developing the LookSmart
database.
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<PAGE>
General and Administrative. General and administrative expenses increased to
$1.2 million for the year ended December 31, 1997 from $504,000 for the period
from July 19, 1996 (inception) through December 31, 1996. The dollar increase
in general and administrative expenses is primarily due to a full year of
operations in 1997 and additional personnel and professional services costs
incurred to support the growth of the Company.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles increased to $410,000 for the year ended December 31, 1997 from
$205,000 for the period from July 19, 1996 (inception) through December 31,
1996. The dollar increase in amortization of goodwill and intangibles is the
result of a full year of amortization in 1997 versus approximately six months
of amortization in 1996.
Non-operating Income (Expense), Net. We recorded net interest expense of
$16,000 for the year ended December 31, 1997 compared to net interest income of
$9,000 for the period from July 19, 1996 (inception) through December 31, 1996.
We recorded other expenses, net of $3,000 for the year ended December 31, 1997
compared to other expenses, net of $19,000 for the period from July 19, 1996
(inception) through December 31, 1996.
Income Taxes
We recorded income tax expense of $166,000 for the year ended December 31,
1997, primarily associated with our Australian operations, compared to $64,000
for the period from July 19, 1996 (inception) through December 31, 1996.
Quarterly Results of Operations
The following table sets forth unaudited quarterly statements of operations
results for each of the eight quarters ended June 30, 1999. We believe that
this information reflects all adjustments consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
(unaudited)
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 102 $ 555 $ 805 $ 1,040 $ 1,723 $ 5,217 $ 6,580 $ 11,478
Cost of revenues........ 93 183 250 245 226 865 318 2,436
------- ------- ------- ------- ------- ------- ------- --------
Gross margin......... 9 372 555 795 1,497 4,352 6,262 9,042
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing.... 1,067 821 1,124 1,961 3,317 4,446 6,422 9,767
Product development.... 874 478 529 615 1,186 2,097 3,884 5,683
General and
administrative........ 323 220 362 524 671 1,189 1,615 2,051
Amortization of
goodwill and
intangibles........... 103 103 103 102 103 297 395 1,463
Amortization of
unearned compensation
...................... -- -- -- -- 19 114 789 2,005
Write-off of in-
process research and
development........... -- -- -- -- -- 338 -- --
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses............ 2,367 1,622 2,118 3,202 5,296 8,481 13,105 20,969
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (2,358) (1,250) (1,563) (2,407) (3,799) (4,129) (6,843) (11,927)
Non-operating income
(expense), net......... 5 (29) (64) (503) (2) (245) 19 570
------- ------- ------- ------- ------- ------- ------- --------
Loss before income
taxes.................. (2,353) (1,279) (1,627) (2,910) (3,801) (4,374) (6,824) (11,357)
Income taxes............ (41) (30) (45) (31) (18) (52) (52) --
------- ------- ------- ------- ------- ------- ------- --------
Net loss............. $(2,394) $(1,309) $(1,672) $(2,941) $(3,819) $(4,426) $(6,876) $(11,357)
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
34
<PAGE>
Revenues increased from $1.7 million for the quarter ended September 30,
1998 to $5.2 million for the quarter ended December 31, 1998 and to $6.6
million for the quarter ended March 31, 1999. The increase is attributable to a
significant database content licensing agreements that we entered into in the
third and fourth quarters of 1998. Revenues increased to $11.5 million for the
quarter ended June 30, 1999 as a result of continued advertising sales growth,
licensing revenues and the inclusion of new ecommerce revenues from the Guthy-
Renker Internet asset purchase transaction. In addition, revenues increased
each quarter for the six quarters ended December 31, 1998 as a result of
continuing increases in advertising and syndication revenues. Advertising
revenues were higher in the fourth quarter of 1998 than the first quarter of
1999, reflecting the seasonality of our advertising sales, which are typically
higher during the holiday season.
Cost of revenues on a quarterly basis remained relatively steady throughout
1998 and the first quarter of 1999, with the exception of the quarter ended
December 31, 1998, which includes a one- time finders fee associated with a
major licensing agreement. The large increase in cost of revenues for the
quarter ended June 30, 1999 is primarily the result of the Guthy-Renker
Internet asset purchase transaction. We expect cost of revenues to increase in
the future with the introduction of new services.
Sales and marketing expenses increased significantly for each of the last
four quarters as we entered into traffic purchase agreements with our ISP
partners and other major portals, increased our trade marketing efforts, built
our sales force and continued to expand our business development team. Product
development expenses increased significantly for each of the last four quarters
due to significant increases in editorial and engineering personnel for the
purpose of developing our databases. General and administrative expenses have
continued to increase over the past four quarters due primarily to an increase
in personnel and the development of a corporate infrastructure to support our
growth.
Amortization of the goodwill and intangibles increased to $297,000 for the
three months ended December 31, 1998 from $103,000 for the three months ended
September 30, 1998 due to the amortization of goodwill relating to the
acquisition of BeSeen.com in October 1998. Amortization of goodwill and
intangibles increased to $394,000 for the three months ended March 31, 1999 and
to $1.5 million for the three months ended June 30, 1999 as a result of
recording three full months of amortization of goodwill related to the October
1998 acquisition in the first and second quarters of 1999, and the commencement
of amortization related to the Guthy-Renker Internet and ITW NewCorp asset
purchase transactions in the second quarter of 1999.
Amortization of unearned compensation increased in each of the four quarters
ended June 30, 1999, primarily as a result of an increase in the number of
options outstanding.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors. These factors include:
. the timing of specification of and delivery against URL targets in our
agreement with Microsoft that may lead to significant variations in
revenues earned;
. the level of user traffic on our website and the demand for our Internet
navigation services;
. the level of demand for Internet advertising and changes in the
advertising rates we charge;
. the addition or loss of relationships with advertisers;
. the level and timing of our licensing and syndication activities;
. the mix of types of advertising we sell as targeted advertising
generally has higher rates;
. seasonality of our advertising revenues, as Internet usage is typically
lower in the first and third quarters of the year;
35
<PAGE>
. the amount and timing of other costs relating to the expansion of our
operations;
. the capital and human resources costs of providing our recently launched
interactive Internet navigation assistance service, LookSmart Live!;
. the introduction of new products or services by us or our competitors;
. technical difficulties and systems downtime or failures; and
. costs related to acquisitions and integration of technologies or
businesses.
We may from time to time make pricing, service or marketing decisions that
may adversely affect our profitability in a given quarterly or annual period.
Our expense levels are based in part on expectations of future revenue and, to
a large extent, are fixed. We may be unable to adjust spending quickly enough
to compensate for any unexpected revenue shortfall. In addition, we generate a
significant portion of our revenues from advertising once our contracts with
advertisers are generally for a period of one to three months.
Liquidity and Capital Resources
Since our inception, we have funded our cash requirements primarily through
the issuance of common and convertible preferred stock and through revenues
from licensing and advertising sales.
As of June 30, 1999, we had working capital of $26.7 million. Current assets
included $42.7 million in cash and cash equivalents and current liabilities
included $17.2 million in deferred licensing revenues. Deferred revenues
primarily reflects payments in excess of the revenues we have recognized under
our agreement with Microsoft. We have an equipment financing line of
$2.0 million of which $1.5 million was available on June 30, 1999.
Our operations used cash of $6.4 million for 1997, $1.9 million for 1998 and
$5.7 million for the six months ended June 30, 1999. Net cash used in
operations in 1997 was principally the result of the net loss. Net cash used in
operations for 1998 and the first half of 1999 resulted primarily from the net
losses for the period and increases in accounts receivable, prepaid expenses
and other assets partially offset by increases in accrued liabilities and
deferred revenues related to our agreement with Microsoft.
Our investing activities used cash of $336,000, $2.5 million and $14.6
million for the years ended December 31, 1997 and 1998, and for the six months
ended June 30, 1999. Investing activity in each period reflects purchases of
fixed assets and, in 1998, also includes the acquisition of BeSeen.com. In
1999, investing activities includes the Guthy-Renker Internet and ITW NewCorp
asset purchase transactions. We plan to consolidate our five San Francisco
offices into one facility later in 1999, and will incur substantial leasehold
improvement and other fixed asset outlays related to the occupancy of the new
facility.
We have entered into a lease on that facility under which we will be
required to make aggregate rent payments of approximately $44.0 million over
the ten year term of the lease. We have the right to sublease.
Our financing activities provided cash of $6.5 million, $7.9 million and
$59.4 million for the years ended December 31, 1997 and 1998, and for the six
months ended June 30, 1999. In 1997, we received a $4.9 million cash
contribution from our stockholder. In 1998, we received cash proceeds of $5.5
million from the issuance of Series B convertible preferred stock. In the first
quarter of 1999, we received cash proceeds of $60.3 million from the issuance
of Series C convertible preferred stock.
36
<PAGE>
Our capital requirements depend on numerous factors, including market
acceptance of LookSmart services, the amount of resources we invest in
directory content, site development, sales and marketing and brand promotions.
We have experienced a substantial increase in expenditures since inception
consistent with growth in operations and staffing. We anticipate that this will
continue for the foreseeable future. Additionally, we plan to expand our sales
and marketing programs, conduct more aggressive brand promotions and continue
to evaluate possible investments in complementary businesses and technologies.
We believe that the net proceeds from this offering and our current cash
balance will provide adequate liquidity to meet cash requirements for at least
two years following this offering. We may need to seek additional financing if
investment plans for our business change. We cannot assure you that such
financing will be available on reasonable terms when and if required. If we
raise additional funds through the issuance of equity or convertible debt
securities, our existing stockholders will experience dilution of their
holdings.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standard Board issued Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, and No. 133, Accounting for Derivative Instruments and
Hedging Activities, which are effective for the year ending December 31, 1999.
We do not believe that the adoption of these pronouncements will have a
material effect on our consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1), which provides guidance for
determining whether computer software is internal-use software and for
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended December 31, 1999, also provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. We do not expect the adoption of SOP 98-1 to have a
material effect on our consolidated financial statements.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5 (SOP 98-5), Reporting on the Costs of
Start-Up Activities, which provides guidance on the financial reporting of
start-up costs. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Because we have
not capitalized such costs, the adoption of SOP 98-5 will not have an impact on
our consolidated financial statements.
Year 2000 Readiness Disclosure
The Year 2000 problem may adversely affect our business. The Year 2000
problem is the potential for system and processing failures of date-related
data arising from the use of two digits by computer-controlled systems, rather
than four digits, to define the applicable year. We believe that our internal
software and hardware systems will function properly with respect to dates in
the year 2000 and thereafter, but we cannot assure you that this will be the
case. In addition, Year 2000 problems of our suppliers or partners could affect
our systems or operations.
Year 2000 Assessment and Looksmart's State of Readiness. In 1999, we
initiated a Year 2000 assessment and planning effort to review both our
relevant operating, financial and administrative information technology, or IT,
and non-IT systems. We also formed our Y2K Committee to plan for and supervise
the remediation of those systems where necessary. We have
37
<PAGE>
retained outside consultants to assist us in the Y2K Committee's review of our
systems and planning for remediation efforts. Our consultants have determined
that due to the absence of "legacy" systems in our business, we have little
remediation exposure. We have conducted tests and expect to conduct additional
tests of our systems as part of our Year 2000 efforts. Our consultants have
determined that our non-IT exposure is limited to parts of the physical
premises of our office space. Our consultants also determined that our non-IT
exposure will be eliminated by December 31, 1999.
Our consultants will develop contingency plans for critical individual
information technology systems to address Year 2000 risks as a complementary
part of our Year 2000 program. We believe we will have identified all of our
critical hardware and software systems and will have sought confirmations from
the providers of these systems that they are Year 2000 compliant by the
completion of Compliance Review Phase III.
Our Year 2000 assessment and contingency planning effort is divided into
four phases as illustrated by the following table:
Year 2000 Tasks and Milestone Status--Relevant Systems
<TABLE>
<CAPTION>
Milestone Task Status or Estimated Completion Date
- ----------------------------------------------------------------------------------------------
<S> <C>
Discovery Phase I Completed June 4, 1999
PC Desktop/Workstation System Inventory and
Identification
. Y2K Inventory Tool Evaluation
Perform testing of Clicknet Y2K
inventory software
Make acquisition decision
. Physical Y2K Inventory
Acquire Clicknet Y2K software for
enterprise
Install and complete Y2K system
inventory
(All Macintosh and Intel-based
platforms)
. Complete inventory reporting for Y2K
Team
- ----------------------------------------------------------------------------------------------
Y2K Compliance Review--Phase I Finalized Action Plan--Scheduled for completion
July 30, 1999
Status Assessment and Review Status Assessment and Review Completed June
1999
. Business Criticality (core flow
identification)
. COTS (commercial off-the-shelf products)
. Internally developed/maintained systems
. Hardware/network components
Y2K Action Plan Delivered July 20, 1999
Review of Action Plan Completed July 22, 1999
Finalization of Key Milestones, Timelines &
Deliverables
- ----------------------------------------------------------------------------------------------
Y2K Compliance Review--Phase II Scheduled for completion September 1, 1999
Y2K Detail Compliance Review
. COTS
. Internally developed/maintained systems
. Business partners/interfaces
. Hardware/network components
Y2K Compliance Strategy
. Product upgrades/patches
. Product replacements
. Internal software upgrade analysis
- ----------------------------------------------------------------------------------------------
Y2K Compliance Review--Phase III Scheduled for completion November 1, 1999
Remediation
. Internal Systems (scan, modify,
component test)
. External Systems (install, apply
upgrades/patches component test)
Y2K Compliance
. Confirmation or Compliance test (end to
end Y2K rollover and leap year tests)
Test results signoff and Test Summary
package
Re-implementation of compliance upgrades
</TABLE>
38
<PAGE>
State of Readiness of Our Vendors' and Suppliers' Systems. Our main external
supplier is our internet service provider, Frontier. We are currently
consulting with Frontier's senior executives to determine whether Frontier will
be Year 2000 compliant. We expect to receive written assurances from Frontier
as to its readiness for the Year 2000 prior to August 31, 1999.
We have communicated with other significant suppliers and vendors to
determine the extent to which they are vulnerable to Year 2000 issues. We have
acquired Year 2000 readiness statements from a majority of our significant
suppliers and vendors. We have not yet received sufficient information on Year
2000 remediation plans of the remaining vendors in order to predict the outcome
of their efforts. If we do not timely receive sufficient information on Year
2000 remediation plans from the remainder of our significant suppliers and
vendors, we will continue to contact them or meet with them as we deem
appropriate.
We plan independent verification and validation by means of "roll-over"
testing for the following vendors: Engage Technologies, Great Plains,
Cerridian, Goldmine, eGain, IBM, Microsoft and Sun Microsystems. "Roll-over"
testing involves testing a system's Year 2000 compliance by manually setting
its clock to a date after December 31, 1999. We do not currently plan
independent testing of systems provided to us by Cisco and 3Com, and instead
rely on statements from each company's respective public websites indicating
that the systems they each provide to us are Year 2000 compliant.
Year 2000 Risks. We are not currently aware of any Year 2000 compliance
problems relating to our software or our IT or non-IT systems that would have a
material adverse effect on our business, results of operations and financial
condition. We cannot, however, assure you that we will not discover Year 2000
compliance problems in our software that will require substantial revisions or
replacements.
Despite our plans and our assessment of current hardware and software, our
assessment of our Year 2000 compliance may not be fully accurate. In some
cases, we may have to rely in good faith on the representations and warranties
regarding Year 2000 compliance provided to us by vendors of hardware and
software and the advice and assessment of our consultants, which we may not be
able to independently verify. These representations and warranties may not be
accurate in all material respects, and the advice or assessments of our
consultants may not be reliable. If our vendors are not able to make their
systems Year 2000 compliant in a timely manner, our business could suffer.
In addition, we cannot assure you that the software, hardware or services of
others incorporated into our material IT and material non-IT systems will not
need to be revised or replaced, which could be time consuming and expensive.
Our failure to fix our software, if necessary, or to fix or replace the
software, hardware or services of others, if necessary, on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in
our IT and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
A worst case scenario would be that governmental agencies, utility
companies, Internet access companies, such as Frontier, service providers and
others outside our control will not be Year 2000 compliant. The failure by
these entities to be Year 2000 compliant could result in a systematic failure
beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could prevent us from operating our website and could
have a material adverse effect on our business.
39
<PAGE>
We have not developed any contingency plans. Our Year 2000 simulation
testing when completed and the responses received from vendors and service
providers will be taken into account in determining the need for and nature and
extent of any contingency plans.
Costs. Costs associated with Year 2000 compliance matters have been
approximately $38,000 to date and we anticipate additional costs of
approximately $265,000. Most of our expenses have related to, and are expected
to continue to relate to, the evaluation and testing process and Year 2000
compliance matters generally. These costs, if higher than anticipated, could
have a material adverse effect on our business, results of operations and
financial condition. Monies paid for Year 2000 compliance are allocated to our
general operating budget and are to be applied against our revenues. Based on
the steps being taken and progress to date, we estimate that the expenses for
ensuring Year 2000 compliance of our computer products and systems will not
harm our operations or earnings, and can be financed out of cash flow from
operations. We do not track Year 2000 readiness expenses separately from other
expenses. No IT projects have been delayed as a result of our expenditures on
Year 2000 compliance.
Estimated Year 2000 Compliance Costs
(in thousands)
<TABLE>
<CAPTION>
Replacement Remediate Auditing and Total
Systems Software Verification Costs
----------- --------- ------------ -----
<S> <C> <C> <C> <C>
Total estimated cost................ $43 $50 $210 $303
Spent as of July 22, 1999........... 13 -- 25 38
--- --- ---- ----
Remaining budget.................... $30 $50 $185 $265
=== === ==== ====
</TABLE>
40
<PAGE>
BUSINESS
Overview
LookSmart is a leading category-based Internet directory provider that has
assembled what it believes to be the largest collection of high-quality,
granular content on the Internet. The LookSmart directory contains over 800,000
unique URLs in over 60,000 categories, organized in an easy-to-navigate format.
Our directory is designed to appeal to an audience of novice as well as
sophisticated Internet users. Additionally, LookSmart is an Internet navigation
service provider that chooses not to list pornographic or hate material.
We distribute our proprietary directory to a large number of Internet users
through LookSmart-owned Internet properties and through our strategic
alliances. Our Internet properties, including looksmart.com, target primarily a
focused demographic of female household purchase decision-makers and generate
advertising and ecommerce transaction revenue. We broaden the reach of the
LookSmart directory through syndication and licensing of our content. We
currently provide our directory to leading Internet portals, including The
Microsoft Network, Netscape Netcenter, Excite@Home and Alta Vista, and 220
ISPs, including IBM.net and NetZero. In addition, users can access our content
and services through a network of over 600,000 website affiliates. In May 1999,
more than 43 million individual Internet users accessed looksmart.com and the
websites of our licensing and syndication affiliates, according to Media
Metrix.
Industry Background
The emergence and wide acceptance of the Internet has fundamentally changed
how millions of people worldwide share information, communicate and conduct
business. International Data Corporation estimates that the number of Internet
users worldwide will increase from approximately 142 million in 1998 to
approximately 399 million by the end of 2002. IDC expects the total number of
URLs to grow from 925 million in 1998 to 8 billion by 2002. This includes
"suffixed" pages, which are separate URLs within individual websites. We
believe this increase is leading to a greater amount of highly-specific content
on the Internet. Major factors driving this growth in Internet usage and
content include the increasing familiarity with and acceptance of the Internet
by businesses and consumers, the growing number of personal computers in homes
and offices, the ease, speed and lower cost of Internet access and improvements
in network infrastructure. These factors make the Internet accessible to
inexperienced users as well as the technologically sophisticated. The growth in
the number of Internet users has also led to the emergence of the Internet as a
powerful advertising and commerce medium. Forrester Research estimates that
total spending on Internet advertising in the United States will grow from $1.5
billion in 1998 to nearly $11 billion in 2002.
The Navigation Challenge
The massive volume and growth of granular content on the Internet has
created the need for an organizing layer that can successfully match content
producers with end users. This organizational challenge, which we call the
"navigation challenge", has led to the development of several Internet
services, including directories, search engines and portals, designed to help
users locate information. These services also seek to enable content producers,
including website owners, Internet communities, advertisers and vendors, to
reach their target audiences.
We believe that most Internet organization efforts to date have failed to
fully meet the "navigation challenge". Traditional Internet directories often
lack focused and relevant category structures, have limited content and contain
many "dead", outdated, irrelevant and offensive links. Search engines, which
use software to locate websites based on user-entered key words, often generate
large sets of results but typically cannot determine website quality. Search
engines also
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have limited capacity to determine the relevancy of websites to a query, have
poor "ranking algorithms" to order results, often do not contain recently
published websites and fail to respond to "dynamic" or frequently changing
material. Users of these services also often receive irrelevant or offensive
material, such as pornography. Internet users are demanding smarter search
capabilities and better organized content that will allow them to find
granular, deeply specialized and local content.
The Audience and Advertising Challenge
New Media Family. We believe that current Internet navigation services do
not meet the particular needs of a rapidly emerging user demographic that we
call the New Media Family. This group consists primarily of female household
purchase decision-makers, many of whom are new Internet users. Because most
major Internet search services were designed and "packaged", in terms of
graphic and interface design, color scheme and editorial "voice", for the early
technically-oriented adopters of the Internet, these Internet search services
have not created an atmosphere and community that appeals to inexperienced
Internet users.
Advertisers. According to a November 1997 Advertising Age article, women
influenced 80% of all purchase decisions. This has made women an increasingly
attractive target for advertisers. Many advertisers, however, cannot accurately
target this audience using the Internet because they lack sufficiently precise
targeting data, including, demographic, psychographic and behavioral data. In
addition, few websites offer advertisers access to concentrated groups of
female users. Given the lack of focus on women and new users among websites and
traditional navigation services, it is particularly difficult for advertisers
to reach these influential purchase decision-makers.
The Business Challenge
While the Internet has emerged as an effective and powerful commercial
medium for buyers and sellers to consummate transactions, businesses still face
many challenges in utilizing the Internet to its full potential.
Internet Service Providers, Portals and Vertical Websites. As the amount and
specificity of Internet content has grown, the editorial challenge for ISPs,
portals and vertical websites of maintaining high quality directories has grown
proportionately. We believe that as these companies invest more heavily in
adding functionality to their websites, they will have fewer resources to
devote to the categorization and maintenance of relevant and focused directory
services. Therefore, many Internet portals and vertical websites have a need
for outsourced services to provide their search, directory and content
solutions.
Buyers and Sellers. The rapid emergence of ecommerce has created challenges
for both buyers and sellers. Many companies that hope to tap ecommerce
opportunities have little understanding of how to use the Internet to reach
their target customers, and find it difficult to obtain the resources and
expertise necessary to create an effective online presence. Businesses that are
online often find it difficult to generate qualified visitor traffic. Lastly,
would-be buyers find it difficult to locate specific, often local, businesses
through the Internet.
The LookSmart Solution
LookSmart has assembled what it believes to be the largest collection of
high-quality, granular content on the Internet, organized in a categorical,
easy-to-navigate directory format and underlying database. In doing so, we
believe we are creating a highly scalable asset that can be distributed to a
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large number of Internet users through our Internet properties, including
looksmart.com, and through other online licensees and syndicators, including
major Internet portals, ISPs and destination websites. In the process, we seek
to address many of the key challenges faced by users, content providers,
advertisers and vendors.
The Navigation Solution
We provide a directory that includes "all of the useful stuff and none of
the junk" and is organized in order to enable users to choose between an
intuitive category search path or a key word query.
Comprehensive Content. The LookSmart directory currently contains over
800,000 unique URLs in over 60,000 categories. Through a partnership with Cox
Interactive Media, the LookSmart directory contains what we believe to be the
most comprehensive collection of high-quality local websites in 65 United
States markets. We have also developed specialized directory services for the
United Kingdom, Canada and Australia.
High-Quality Content. We focus on including only authoritative, up-to-date,
categorized content in our directory, while excluding pornographic and other
offensive material. Our team of over 180 editors includes taxonomists, copy
editors, assignment editors, subject specialists, maintenance editors and
generalist editors. Our editors use proprietary software products that help
find, categorize, index, rate, compare and check whether a website is
available.
Easy-to-Navigate Content. The LookSmart directory is organized to provide
relevant navigation results for both category-based and key word navigation.
Our navigation interface allows a user to follow a search path into sub-
categories and sub-sub-categories visually on the screen, enabling the user to
see not only which path was chosen, but also those which were not. We believe
that this is a critical element in the trial and error process that most users
undertake to find material. Our key word search brings users directly to
website results. All of our navigation results include a brief description of
each website to help guide users. The LookSmart directory also facilitates
searches of local content, white pages and email directories, yellow pages,
discussion/news groups and shopping prices.
The Audience and Advertising Solution
Looksmart.com: Uniquely Packaged Content. Looksmart.com, launched in October
1996, is the flagship site for our LookSmart directory. Looksmart.com seeks to
package the LookSmart directory with other appropriate content and
functionality to provide a simple, compelling experience for the New Media
Family. Looksmart.com's benefits include:
. Intuitive Navigation. Looksmart.com combines the superior navigation
functionality of the underlying directory with the benefits of the
website's easy-to-use user interface.
. Inoffensive Content Environment. Looksmart.com does not list
pornographic or hate material in its directory.
. Differentiated Visual Design. Looksmart.com has been designed using
colors, color photographs and other design elements that differentiate
the offering and, we believe, makes our website more attractive to
users.
. Content, Commerce and Community Functionality. Looksmart.com provides
access to additional content and functionality on its home page,
including free email, current news, stock and finance information,
weather, maps, horoscopes and chat groups. Each of these services has
been designed to appeal to the New Media Family.
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. LookSmart Live!. In July 1999, we introduced a service that enables
users to directly contact our editors to get assistance with their
Internet search and related activities. This feature has been developed
in response to consistent data from our qualitative research that
suggests that our target audience often "gets stuck" and would greatly
value assistance. We believe that this is the first large scale
implementation of such a service on the Internet.
Access for Advertisers to the New Media Family. We offer advertisers the
opportunity to reach female household purchase decision-makers in large scale.
During the last four quarters, Looksmart.com's audience was 58% female, on
average, as measured by the NPD, the majority owner of Media Metrix. LookSmart
is able to provide advertisers with highly targeted reach driven by particular
subject categories or keyword search terms. By offering advertisers the ability
to place their advertisements on category and keyword results pages,
advertisers are able to find their target audience more effectively.
The Business Solution
We believe that our ability to categorize and organize highly granular
content allows us to offer a variety of business solutions.
Outsourcing Solution for Content and ISPs. We leverage our database by
syndicating, licensing and distributing our proprietary content to leading
Internet portals, websites and other media companies, including Microsoft,
Netscape, Alta Vista, Excite@Home, Blue Mountain Arts, Go2Net, Lycos/HotBot,
Macromedia and IDC. Each affiliate is able to package our content in unique
ways to meet the particular needs of its core audience without expending
resources and expertise to develop and maintain a comprehensive Internet
directory. Through our LookSmart Network, we also provide ISPs with a full
content solution for their users. The LookSmart Network has 220 member ISPs and
a customer retention rate of approximately 90% over its two-year history.
Dedicated Services for New and Existing Online Businesses. LookSmart offers
services that help both new and existing businesses optimize their online
presence. Our website enhancement services provide content and applications for
webmasters to help them meet their users' needs and to encourage them to become
affiliated with LookSmart. Our Internet access services provide small and mid-
size business owners with seminars and services that enable them to sell their
products and services over the Internet. In addition to helping businesses
establish a presence on the Internet, LookSmart offers new arrivals visibility,
the advantages of a place in the LookSmart directory and positioning in our
ChoiceMall shopping site.
Ecommerce Solutions That Match Buyers and Sellers. LookSmart also offers a
variety of websites that allow buyers and sellers to find each other. In June
1999, LookSmart launched rewardmall.com, an affinity Internet shopping mall
site that is accessible through both looksmart.com and our partners' Internet
properties. We also operate an Internet shopping site entitled Buy it On the
Web which promotes and sells over 20 "As Seen on TV" products ranging from
music videos to beauty and health products, through an exclusive license
agreement with Guthy-Renker Corporation.
The LookSmart Strategy
Our strategy is to establish LookSmart as the leading category-based
Internet directory service for global and local information on the Internet and
to derive multiple revenue streams by leveraging our directory asset. The key
elements of our growth strategy include the following:
Expand Collection of High-Quality, Granular Content
We intend to expand both the number of high-quality URLs included in our
directory as well as the number of categories into which we classify the URLs.
Our mission to be the largest provider of
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granular information on the Internet requires us to continually improve the
content in our existing categories by including new websites, communities and
commerce environments, deleting outdated links and updating editorial
annotations. In order to extend our directory, we plan to increase the number
of Internet editors that we have both domestically and internationally, and to
support those editors with advanced productivity tools.
Build the LookSmart Brand and Audience
To enhance business and consumer awareness of our brand, we plan to pursue
an extensive brand development initiative through mass market and targeted
advertising. We believe that building a strong brand name will help build a
loyal base of users. In addition, we believe that a strong brand will help to
attract additional advertisers and ecommerce partners and will better enable us
to syndicate and license our directory to additional business partners. Our
consumer branding investments will focus specifically on reaching our target
New Media Family audience through radio, television, print and online
advertising media.
Utilize LookSmart Content to Drive Multiple Revenue Streams
Our goal is to leverage our unique assets--the LookSmart directory and the
people and processes that create it--and monetize them in several ways. We are
targeting the convergence of three large market opportunities: online
advertising, syndication and licensing, Internet outsourcing and ecommerce. We
will continue to seek to monetize these assets through these revenue
opportunities, as well as create additional revenue streams, including from
international sources, premium usage fees and enterprise services.
Pursue Strategic Acquisitions and Alliances
We plan to pursue acquisitions and alliances to strengthen our technology,
broaden our audience reach, capture new distribution channels or open new
revenue streams. In addition, we plan to focus on further expanding our
syndication, licensing, Internet enabling and ecommerce services.
Expand into Select International Markets
As one of only a few companies that have created a significant presence in
the United States Internet market with beginnings outside the United States, we
believe we are well positioned to enter major international markets in a
locally-relevant, culturally-sensitive manner. We plan to build our editorial
operations and our business operations in Europe, Asia and Latin America.
The LookSmart Database
LookSmart content has been structured to include "all of the useful stuff
and none of the junk". The database is organized in order to enable users to
follow intuitive category and sub-category "paths" to find their desired
content or to retrieve it by typing in a keyword.
LookSmart creates this directory database using a combination of proprietary
software and a highly structured Internet editorial team. Our editorial teams
are located in San Francisco, Melbourne, Montreal and Amsterdam. Our
proprietary software includes systems that find, categorize, index and check
whether the website is available and provide editors with a sophisticated desk-
top tool set to efficiently review, categorize, describe, rate and compare the
websites. The systems we have developed enable our editors to perform five core
processes:
Find the Content
Our editors use a range of automated search technologies, other websites,
website submissions from website owners/builders, off-line data sources and
other methodologies to find the content our users may require.
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Select the Content
In finding useful content, our editors also encounter a lot of "junk",
material that is unlikely to be useful to our users. For example, a user
searching through traditional Internet directories for material on surgery for
breast cancer is likely to come across material that is either commercial
material, material related to cosmetic surgery, pornographic material, or
material from sources with limited medical authority. Our editors select and
place content for each of over 60,000 categories according to parameters that
our taxonomy team maintains. The editors will also often order the websites to
enable the user to find the most generally useful or authoritative source first
and view the more specialized or marginal sources later.
Organize the Content
Our team of full-time taxonomists, primarily library science and information
science specialists, create and frequently modify our category taxonomy to
ensure that it is logical, current and intuitive.
Describe the Content
The end product that users are seeking from a navigation service is a list
of website links. Our copy editors provide succinct, 15 words or fewer,
descriptions of every website listed to assist users in determining which
websites contain content most relevant to their search.
Maintain the Content
Our editors regularly review user requests and content availability to add
new categories and new websites for existing categories. We also use a
combination of software and editorial intervention to minimize inactive links
in the database. Websites in each category are reviewed according to a schedule
that is appropriate to the subject matter. For example, we update our
collection of material related to the current news much more frequently than we
update our material on historical subjects.
Looksmart.com and Related Properties
Looksmart.com packages the LookSmart directory with other appropriate
content and functionality to provide a simple, compelling experience for the
New Media Family. Some of the principal aspects of the service are as follows:
Intuitive Navigation
The LookSmart directory content is available through an intuitive interface
that enables a user to follow a category path into sub-categories and sub-sub-
categories visually on the screen, enabling the user to see not only which path
was chosen, but also those which were not, a critical element in the trial and
error process most users undertake to find the material they require. In
addition to the 60,000 categories listed on its home page, LookSmart offers
keyword search functionality, which searches the LookSmart database first and
then the Alta Vista database if additional results are required.
Inoffensive Content Environment
Looksmart.com does not list pornographic or hate material in its directory.
We believe that the New Media Family desires an Internet navigation environment
that does not provide links to offensive material in response to benign
queries. We believe that no other major Internet navigation company has made a
commitment not to list this material and, while we cannot provide an absolute
guarantee against access to this material through looksmart.com, we believe
that it is unlikely that a user of looksmart.com will inadvertantly come across
offensive material.
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Content, Commerce and Community Functionality
Looksmart.com also provides access to additional content and functionality
on its home page, including free email, current news, stock and finance
information, weather, maps, horoscopes, and chat groups. By providing access to
these services, LookSmart seeks to meet the community and communications needs
of its users.
Localized Content
Through a partnership with Cox Interactive Media, the LookSmart directory
contains what we believe to be the most comprehensive collection of high-
quality local websites in 65 United States markets. Looksmart.com offers up-to-
the-minute news, weather and traffic reports, information on movies and family
activities and thousands of links to local businesses, services and community
activities.
Syndication
Syndication and Licensing of the Directory Database
We currently generate revenues from our proprietary content by licensing it
to portals, websites and other media companies and by making it available to
ISPs through our LookSmart network. We have syndication relationships with
Microsoft, NetZero, Excite@Home, Alta Vista, Blue Mountain Arts and IBM.net.
Many of these businesses are focused on extending their user reach and
increasing the length and frequency of user visits and are continually adding
services to make their offering more compelling. These companies typically may
not have the resources, expertise or desire to internally develop and maintain
a comprehensive Internet directory and instead choose to outsource this
navigation service from LookSmart.
We offer these businesses a wide and flexible range of business terms and
technology solutions. For example, in some cases LookSmart serves the pages
and/or sells the advertising; in other cases, the partner does one or both. In
some cases, LookSmart pays or receives a share of the advertising revenues. In
other cases, the partner pays LookSmart a pre-determined license or
subscription fee for ongoing access to the database updates.
Syndication of Full Navigation Functionality to ISPs
We provide ISPs with our navigation and directory content solution, enabling
them to offer a complete Internet service to their users. Outsourced solutions
like ours allow small and medium-sized ISPs to compete with larger, more
powerful companies like America Online. In most cases, LookSmart provides a
complete solution to the ISP where we design a unique page, host the service,
sell the advertising and share a percentage of advertising revenue with the
ISP. While we have agreements with some of the major ISPs, such as IBM.net and
NetZero, we have also concentrated on reaching the mid-sized regional ISP
market. The LookSmart network has 220 member ISPs and a customer retention rate
of approximately 90% over its two-year history.
Business Services
LookSmart has built a portfolio of business services that help businesses
understand the Internet and its implications for their business, including:
. seminars to educate business owners and vendors on how best to establish
an online presence and tap potential ecommerce opportunities;
. internet design and website building;
. integration of ecommerce enabling tools into websites, including
shopping carts and online ordering;
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. website hosting and technical support; and
. placement in LookSmart's Choice Mall and Rewardmall services.
Our choicemall.com service provides an online shopping environment for our
merchant customers. Our vendors' websites are also listed in the appropriate
sections of the LookSmart database for distribution through looksmart.com and
our related websites. Together, these services create the opportunity for
smaller vendors to understand and tap the potential of the Internet as a
marketing and commerce vehicle for their products and services.
Content and Applications
We seek to provide a wide range of content services and software
applications for webmasters to help them better serve their users' needs in a
cost-effective manner. These services include:
. navigation/content offerings such as SmartLinks, which are links into
the part of the category structure of LookSmart that is relevant to
their website's focus;
. a "Search My Site" utility enabling users to conduct key word searches
of the webmaster's website and then the Internet;
. community offerings such as guest books, chat rooms and private club
environments;
. vendor offerings such as Rewardmall and transaction-enabling services
through our Choice Mall offering; and
. other utilities such as hit counters and one-for-one banner exchanges.
All of these services adopt a self-marketing approach whereby any user,
including other website owners, who clicks on a product can download products
to enhance his or her own website. These services require a simple "cut and
paste" operation to become operative on a website. This approach has enabled
the network of affiliate websites to grow very rapidly at very low cost to
LookSmart. We currently have over 600,000 affiliated websites.
Rewardmall
In June 1999, we launched an Internet shopping mall called rewardmall.com,
which features over 25 brand name merchants, as well as smaller specialty
merchants. The Rewardmall is accessible by a direct link from the looksmart.com
home page as well as by several links throughout our website. In addition, the
Rewardmall is syndicated to our ISP partners and through our co-branded
websites. Internet shoppers are able to find products and services by using the
Rewardmall directory or by searching the Rewardmall by merchant, product or
product category. In the future we also plan to offer shoppers customized
"Rewardmall Deals", which will appear throughout the Rewardmall. We receive a
percentage of the sales purchased through the Rewardmall, including products
sold through Rewardmall Deals.
We will also offer shoppers "RewardPoints" for purchases made through the
Rewardmall. We will allocate a portion of the proceeds we receive from the
purchases made through the Rewardmall to offer merchandise to online shoppers
that can be purchased with RewardPoints. Online shoppers will be able to redeem
these RewardPoints for products, services and miles in affiliated frequent
flier programs.
Buy It On The Web
We maintain an Internet shopping website entitled Buy It On The Web that
promotes and sells over 20 "As Seen on TV" products ranging from music videos
to beauty and health products. As Seen on TV products are products that have
been or are currently promoted through infomercials and other television
advertising, and are often endorsed by celebrities. Currently, all of the
products
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available through Buy It On The Web are products marketed and distributed by
Guthy-Renker Corporation. We are the primary Internet distributor for all of
Guthy-Renker Corporation's products, including Anthony Robbins' programs and
Victoria Principal cosmetics. We receive a percentage of all sales revenues
from these products sold through the Internet.
International
LookSmart has established international operations to meet worldwide demand
for improved navigation and content on the Internet. Central to our
international efforts is our ability to localize our database for individual
markets in order to create a more culturally-relevant offering. We currently
have editorial teams located in San Francisco for our United States based
service, Melbourne for our Australian, British and New Zealand services,
Montreal for our Canadian services and Amsterdam for non-English European
services. Looksmart.com.au was rated the number one navigation service in the
Australian market in April 1999 by Top 100.
Strategic Relationships
LookSmart has actively pursued strategic relationships and sees these
relationships as key drivers of growth in traffic and revenue. We have
relationships with companies for content, distribution, advertising sales,
technology and marketing.
Cox Interactive Media
We have a strategic alliance with Cox Interactive Media relating to local
websites, local navigation services and local content. LookSmart's US Internet
directory is prominently placed on all 23 of Cox's local city sites, e.g.,
www.accessatlanta.com, and Cox Interactive Media, using its own editorial
staff, provides the local content for 65 city markets for LookSmart's United
States directory database using a licensed copy of our proprietary Editorial
Support System.
Microsoft
We entered into a five year licensing agreement with Microsoft in December
1998 under which Microsoft licensed our directory database for use on the
msn.com website and other properties. See "Risk Factors--Our quarterly revenues
and operating results may fluctuate due to the timing of delivery of URLs under
our Microsoft contract and other factors, which may negatively affect our stock
price", "--We derive a significant amount of our revenues from Microsoft and if
our relationship with Microsoft suffers, our business could be harmed" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Guthy-Renker Corporation
In April 1999, we acquired the website presence building businesses of
Guthy-Renker Internet to begin our services for the small business market. We
also acquired the online sales rights to Guthy-Renker Corporation's "As Seen on
TV" products. We receive media support from Guthy-Renker Corporation in the
form of advertising in Guthy-Renker Corporation infomercials.
PBS
In June 1999, we entered into five agreements with three PBS related
entities under which we agreed to sponsor five programs on PBS. The programs
are Mystery!, Chefs of Cucina Amore, Great Food, MasterChef USA and Sesame
Street. Four of the agreements have five-year terms, however either party has
the right to terminate the agreements after three years. The fifth agreement
has a three-year term and gives LookSmart a right of first refusal for years
four and five.
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Excite@Home
In June 1999, we entered a three-year licensing agreement with Excite@Home
Corporation under which Excite@Home licensed our directory databases for use on
the excite.com website and other properties. LookSmart agrees to update the
database periodically and to share advertising revenues.
Competition
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We compete on the basis of several factors, including the
quality of content and the ease of use of online services. In the licensing
market, there are additional factors such as performance, scalability, price,
and relevance of results. The number of companies and websites competing for
users, Internet advertisers' and ecommerce marketers' spending has increased
significantly. With no substantial barriers to entry in these markets, we
expect this competition to continue to increase. Competition may also increase
as a result of industry consolidation.
We face direct competition from companies that provide several types of
Internet services, as illustrated in the following table.
<TABLE>
<CAPTION>
Category Focus Example Competitors
- ---------------------------------------------------------------------------------
<C> <C> <S>
Internet content Internet navigation, content AOL, Yahoo!, Snap!,
retrieval aggregation, content Infoseek, Inktomi, Lycos
licensing and Netscape Open
Directory
Internet advertising Demographically targeted and Internet destinations
content-targeted advertising with similar
demographics like
iVillage and women.com;
Internet navigation
firms with similar
content targeting
capabilities like AOL,
Yahoo!, InfoSeek and
Lycos
Internet outsourcing Outsourcers of Internet Inktomi, InfoSpace.com,
navigation, Internet portal Snap.com, Lycos,
or website enhancement PlanetDirect.com and
content XOOM.com
Online commerce enabling Small vendors Internet and TicketMaster-CitySearch,
companies transaction enabling AOL's Digital Cities,
Sidewalk, Go2Net, iMall
and Hypermart
</TABLE>
See "Risk Factors--If we are unable to compete effectively in the Internet
navigation market, our business and profitability will suffer".
Infrastructure
Technology
One of our principal assets is our internally-developed software for
creating and distributing the LookSmart directory. In addition, we use a
variety of hardware and communications technologies to distribute and maintain
our business.
Editorial Support System. We have developed a proprietary software
application, the Editorial Support System, used by our editors to discover,
edit, and catalog websites into the LookSmart database. This system undergoes
frequent revision and upgrade and over 200 editors can use the application
simultaneously. In addition to the Editorial Support System, we have developed
several
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proprietary algorithms which enable us to extract data from the database,
publish this data in various editions of the directory and perform routine
maintenance on the database, such as deadlink checking.
The Editorial Support System also provides various statistical and reporting
functions, including editorial productivity levels and work quality, and
identifies trends in user preferences. We have recently enhanced the system to
include multi-language capabilities.
Taxonomy and Search. We publish our data in a proprietary and unique set of
categories in a specific taxonomy. This taxonomy has over 60,000 categories. We
have developed proprietary search technology to search this database and return
relevant answers to users.
Server Architecture. We believe we have developed a proprietary, dynamic and
scalable server software architecture that allows us to support our ISP
partners by serving custom versions of the ISP's home page or any other page on
the ISP's website as part of our distribution of our directory content. In
January 1999, we signed a license agreement with Engage Technologies to license
their Accipiter advertising server technology. We converted our advertising
serving functionality from an internal proprietary application to the Accipiter
technology effective in March of this year.
Frontier. In February 1999, we signed an agreement with Frontier to provide
co-location, Internet connectivity, and maintenance of our hardware equipment
at Frontier's Santa Clara, California facility. Frontier provides comprehensive
facilities management services, including human and technical monitoring of all
production servers, 24 hours per day, seven days per week.
Sales
Our advertising sales were handled through Softbank Interactive Marketing
until October 1997 and by DoubleClick, Inc. from October 1997 through mid-1998.
In an effort to maintain stronger relationships and loyalties with our
advertisers and to reduce advertising sales costs as a percentage of revenues,
in mid-1998 we created our own sales organization, including a national sales
team of 20 personnel located in San Francisco, New York, Detroit and Austin. We
plan to expand the size of the team and the location of the offices
commensurate with traffic expansion.
Advertising
The following is a list of some of the advertisers that have recently
advertised on our looksmart.com website: Amazon.com, Apple, Baby Center, Bell
Atlantic, Budget Rent-A-Car, Capital One, Chrysler, Compaq, Discover, eBay,
Farmers Insurance, JC Penney, Jenny Craig, Microsoft, Mitsubishi, NationsBank
and Office Depot.
Marketing
We believe that marketing and brand promotion activities will be important
in our efforts to build traffic and attract additional advertisers and
ecommerce partners. We have initiated a multi-tiered marketing and advertising
strategy. The trade segment of our marketing strategy targets:
. the ISP community, focusing on turn-key branded opportunities;
. advertising agency media planners and the vendor advertising community,
focusing on LookSmart's ability to deliver the New Media Family; and
. Internet industry marketing executives to reach and sell our roster of
top 100 websites that have adopted our search directory.
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We plan to launch a broad, national consumer advertising campaign in early
fall of 1999. The campaign may involve television, online, print, radio, cable,
or outdoor marketing media. All of our advertising and messaging is based on
focus group and quantitative research. Our marketing strategy also employs
selective trade show and public relations promotional efforts.
Legal Proceedings
On October 5, 1998, Hollinger Digital, Inc. filed a complaint against us in
New York Supreme Court (Case No. 604797/98). The complaint alleges that we
breached an agreement to sell 2,039,865 (pre-split) shares of our Series C
preferred stock to Hollinger for $3.50 per share. The complaint also asserts
claims for promissory and equitable estoppel. On the same day it filed its
complaint, Hollinger sought preliminary injunctive relief to prevent us from
taking any action that would interfere with Hollinger's alleged right to
purchase the Series C preferred stock. The Court denied Hollinger's motion for
preliminary injunction. On December 1, 1998, we filed a motion to dismiss
Hollinger's complaint. On March 17, 1999, the Court issued an order granting
our motion and dismissed Hollinger's complaint with prejudice. On May 4, 1999,
Hollinger filed a Notice of Appeal. We believe that Hollinger's complaint is
without merit and we will continue to vigorously defend the lawsuit.
Except for the Hollinger litigation, we are not a party to any material
legal proceedings.
Employees
We had 184 employees at the end of 1998, and 465 as of June 30, 1999. We
have never had a work stoppage, and none of our employees is represented by a
labor union. We consider our relations with our employees to be good.
Facilities
Our headquarters are located in 9,884 square feet of leased office space in
San Francisco, California. The lease term for our headquarters extends to May
31, 2003. We also lease space at four other locations in San Francisco,
including 20,000 square feet of office space that has a lease term extending to
October 31, 1999 and 17,000 square feet of space that has a lease term
extending to November 29, 2000. We have recently leased an additional 134,847
square feet of office space, which will be available in October 1999 and will
allow us to consolidate our operations and continue to expand our business. The
lease term for this additional space provides us with an option to renew the
lease for two additional five-year periods after the initial lease term of ten
years expires. We also lease 3,750 square feet of office space in New York that
has a lease term extending to August 31, 2000. We also lease facilities
overseas. In particular, we have a three-year lease on a 4,800 square foot
property in Melbourne, Australia. The Melbourne lease extends until August
2001. Also, we have a smaller 2,650 square foot property in Sydney, Australia,
which has a lease term extending until May 2002. We also plan to enter into
leases for other smaller facilities that provide for additional storage space.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Our current directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position with LookSmart
--------------------------- --- ---------------------------------------------
<C> <C> <S>
Chairman, Chief Executive Officer, Co-Founder
Evan Thornley.............. 34 and Director
Tracey Ellery.............. 36 President, Co-Founder and Director
Patricia Cole.............. 49 Chief Financial Officer
David Neylon............... 52 Senior Vice President, Engineering
Brian Cowley............... 40 Senior Vice President, Global Sales
Martin Hosking............. 38 Senior Vice President, Distribution
Val Landi.................. 54 Senior Vice President, Marketing
Chris Tucher............... 38 Senior Vice President, Business Development
Timothy Pethick............ 37 Vice President, International and CEO,
LookSmart International Pty Ltd.
Ned Brody.................. 35 Vice President, eCommerce
Martha Clark............... 45 Vice President, Human Resources
Anthony D. Castagna(2)..... 52 Director
Paul Riley(1).............. 34 Director
Robert J. Ryan(2).......... 51 Director
Scott Whiteside(1)......... 48 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Evan Thornley co-founded LookSmart and has served as its Chairman and Chief
Executive Officer and a director since July 1996. From July 1996 to June 1999,
Mr. Thornley also served as President. From 1991 to 1996, Mr. Thornley was a
consultant at McKinsey & Company, a global consulting company, in their New
York, Kuala Lumpur and Melbourne offices. Mr. Thornley holds a Bachelor of
Commerce and a Bachelor of Laws from the University of Melbourne, Australia.
Mr. Thornley is married to Ms. Ellery.
Tracey Ellery co-founded LookSmart and has served as President since June
1999. Ms. Ellery has served as one of our directors since September 1997, and
as our Senior Vice President of Product from July 1996. From 1991 to 1994, Ms.
Ellery was Chief Executive Officer of Student Services Australia, an Australian
college publishing/retail company. Ms. Ellery studied Drama and Legal Studies
at Deakin University, Australia. Ms. Ellery is married to Mr. Thornley.
Patricia Cole has served as our Chief Financial Officer since February 1999.
From September 1995 to February 1999, Ms. Cole served as Chief Financial
Officer of Fair, Isaac and Company, a credit scoring company. From 1992 to
September 1995, Ms. Cole served as Vice President, Controller at Qwest
Communications International Inc., a telecommunications company. Ms. Cole is a
C.P.A., Chartered Accountant in England, and holds a B.A. in economics from the
University of Manchester, England, an M.B.A. from Cranfield Business School,
England, and a Masters of Business Taxation from the University of Southern
California.
David Neylon has served as our Chief Operating Officer since November 1998
and Senior Vice President of Engineering from June 1999. From March 1995 to
February 1998, Mr. Neylon was Senior Vice President at World Play
Entertainment, a network games and entertainment company. From 1987 to February
1995, Mr. Neylon held a variety of positions in AT&T Corp., including Vice
President of ImagiNation Network, a subsidiary of AT&T, from 1993 to 1995.
Mr. Neylon holds a B.A. in Economics from Drew University and an M.B.A. in
finance and marketing from Rutgers University.
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<PAGE>
Brian Cowley has served as our Senior Vice President of Global Sales since
December 1998. From August 1997 to December 1998, Mr. Cowley served as our
Senior Vice President of Global Sales and Distribution and as our Vice
President of Advertising Sales from October 1996 to August 1997. From February
1996 to October 1996, Mr. Cowley served as Business Development Manager at
Netscape Communications Corporation, over seeing advertising sales on the
Netscape Netcenter website. From April 1995 to March 1996, Mr. Cowley served as
Vice President of Sales and Product Marketing in the Data Products Division of
Strategic Mapping, Inc., a marketing data company. From June 1994 until April
1995, Mr. Cowley worked as a Vice President of Sales at Consumer Direct Access,
a company he co-founded, in San Francisco. Mr. Cowley holds a B.S. in marketing
from Bryant College.
Martin Hosking joined the Company in January 1996 and has held a variety of
senior management positions, most recently as Senior Vice President,
Distribution since July 1998. From 1994 to 1996, Mr. Hosking was a consultant
at McKinsey & Company, a management consulting company. Mr. Hosking holds a
B.A. in history and economics and an M.B.A. from the University of Melbourne,
Australia.
Val Landi has served as our Senior Vice President of Marketing & Media
Services since August 1998. From October 1997 to July 1998, Mr. Landi served as
Vice President, Sales and Marketing of Carnelian, Inc., an Internet software
company, and from April to September 1997 as Executive Vice President of Power
Agent, an Internet media company. From March 1995 to March 1997, Mr. Landi
served as Publisher and General Manager of International Data
Group/Computerworld Internet Media, an information technology company,
Corporate Vice President of International Data Group from 1994 to 1995, and as
Executive Vice President of International Data Group's International Marketing
Services from 1991 to 1995. Mr. Landi holds an M.A. from Harvard University.
Chris Tucher has served as our Vice President of Business Development and
Syndication since August 1998 and Senior Vice President of Business Development
from June 1999. From August 1995 to August 1998, Mr. Tucher served as Director
of Sales and Marketing and Media and Financial Markets at Netscape
Communications Corporation, an Internet software company. From 1991 to 1995,
Mr. Tucher was a vice president and member of the executive board of the Contra
Costa Newspapers, Inc., a news publishing company. Mr. Tucher holds a B.A. in
english and economics from Occidental College, and an M.B.A. from the Harvard
Business School.
Timothy Pethick has served as our Vice President of International and as
Chief Executive Officer and Director of LookSmart International Pty Ltd., our
Australian subsidiary, since March 1999. From August 1996 to March 1999, Mr.
Pethick was employed in several positions by Encyclopedia Britannica, Inc., a
publishing company, most recently as General Manager of Sales and Marketing.
From 1995 to 1996, Mr. Pethick was Managing Director of On Australia Pty.
Limited, an Internet/online publishing company, and from 1994 to 1995, he was
General Manager of Roadshow New Media, a CD-rom publishing company. Mr. Pethick
holds a Bachelor of Commerce from the University of New South Wales, a Masters
of Economics from Macquarie University, and an M.B.A. from Deakin University,
Australia. Mr. Pethick is a Chartered Accountant in Australia.
Ned Brody has served as our Vice President of eCommerce since November 1998.
From 1993 to November 1998, Mr. Brody was a Partner at Mercer Management
Consulting, a management consulting company. Mr. Brody holds a B.S. in
economics and an M.B.A. from Wharton School, University of Pennsylvania.
Martha Clark has served as our Vice President of Human Resources since May
1999. From October 1998 to April 1999, Ms. Clark was a consultant. From January
1997 to October 1998, Ms. Clark was Senior Vice President and Human Resources
Division Manager of Sumitomo Bank of California, a commercial bank. From August
1995 to January 1997, Ms. Clark was Director and Co- Founder of John Parry &
Alexander, a human resources consulting company. From 1993 to 1995, Ms. Clark
was Director
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<PAGE>
of Human Resources of Fritz Companies, Inc., a global logistics services
company. Ms. Clark holds a B.A. in economics from Wellesley College and an
M.B.A. from Stanford University.
Anthony D. Castagna has served as one of our directors since March 1999. Dr.
Castagna presently serves as a non-executive director of GlobalGate LLC, an
Internet-related technology holding company, and as a non-executive director of
Macquarie Technology Funds Management Pty Limited, an Australian venture
capital fund. From 1994 to present, Dr. Castagna has served as an independent
advisor to the Macquarie Technology Investment Banking Division of Macquarie
Bank Limited, an investment banking company, and other technology-based
companies in Australia, Asia and the U.S. Dr. Castagna holds a Bachelors of
Commerce from the University of Newcastle, Australia, and an M.B.A. and Ph.D.
in Finance from the University of New South Wales, Australia.
Paul Riley has served as a one of our directors since March 1998. Since
November 1992, Mr. Riley has served as a Managing Director and Company
Secretary, of Australian Mezzanine Investments Pty Limited, an Australian
venture capital company, and several of its affiliated entities. Mr. Riley also
serves as director of other private and public Australian companies. Mr. Riley
holds a Bachelor of Business in accounting from the University of Western
Sydney, Australia.
Robert J. Ryan has served as one of our directors since May 1998. Since
1995, Mr. Ryan has served as Chairman of Entrepreneur America, LLC, a business
consulting company. From 1989 to 1995, Mr. Ryan founded and served as Chief
Executive Officer and Chairman of Ascend Communications, Inc., a networking
company. Mr. Ryan holds a B.A. in Mathematics from Cornell University and an
M.A. in mathematics from the University of Wisconsin.
Scott Whiteside has served as one of our directors since May 1998. Since
October 1995, Mr. Whiteside has served as Director of Strategy and
Technology/New Media at Cox Enterprises, Inc., a media conglomerate. From 1993
to 1995, Mr. Whiteside served as a Director of Strategic Development at Times
Mirror Company, a publishing company. Mr. Whiteside holds a B.S. in journalism
from the University of Missouri, an M.B.A. from Rockhurst College, and a J.D.
from Oklahoma University.
Board Composition
LookSmart's Board of Directors is comprised of six directors. In accordance
with the terms of LookSmart's Restated Certificate of Incorporation, effective
upon the closing of this offering, the terms of office of the members of the
Board of Directors will be divided into three classes: Class I, whose term will
expire at the annual meeting of stockholders to be held in 2000, Class II,
whose term will expire at the annual meeting of stockholders to be held in
2001, and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. The Class I directors are Paul Riley and
Robert J. Ryan, the Class II directors are Anthony Castagna and Scott
Whiteside, and the Class III directors are Evan Thornley and Tracey Ellery. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, LookSmart's Amended and Restated Bylaws
provide that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the total number of directors. This classification of the Board of Directors
may have the effect of delaying or preventing changes in control or management
of LookSmart.
Each officer is elected by, and serves at the discretion of, the Board of
Directors. Each of LookSmart's officers and directors, other than non-employee
directors, devotes full time to the affairs of LookSmart. LookSmart's non-
employee directors devote time to the affairs of LookSmart as is necessary to
discharge their duties.
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<PAGE>
Board Committees
The Audit Committee reviews LookSmart's audited financial statements and
accounting practices, and considers and recommends the employment of, and
approves the fee arrangements with, independent accountants for both audit
functions and for advisory and other consulting services. The current members
of the Audit Committee are Paul Riley and Scott Whiteside.
The Compensation Committee reviews and approves the compensation and
benefits for our key executive officers, administers our employee benefit plans
and makes recommendations to the Board of Directors regarding issuances of
stock options and any other incentive compensation arrangements. The current
members of the Compensation Committee are Anthony Castagna and Robert J. Ryan.
Compensation Committee Interlocks and Insider Participation Interlocks
The compensation committee was established in March 1999. Prior to that
time, the entire board of directors participated in compensation decisions. In
particular, Mr. Thornley and Ms. Ellery, each an officer and employee of
LookSmart, actively participated in the deliberations concerning executive
officer compensation.
Director Compensation
The directors do not receive any compensation for their service as
directors, other than reimbursement of all reasonable out-of-pocket expenses
for attendance at board meetings.
Executive Compensation
The following summary compensation table sets forth the compensation paid to
LookSmart's named executive officers, who are our Chief Executive Officer and
each of our three other most highly compensated executive officers, during the
fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position(1) Salary Bonus Compensation Options Compensation(2)
- ------------------ -------- ------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Evan Thornley........... $137,136 -- $30,323(3) -- --
Chairman, Chief
Executive Officer and
Director
Brian Cowley............ 190,000(4) -- -- -- $7,969
Senior Vice President,
Global Sales
Barbara Bergin Read..... 172,057(5) $17,500 -- -- 5,375
Vice President,
Advertising Sales
Michael Reaves.......... 120,000 -- -- 63,000 3,500
Vice President,
Engineering
</TABLE>
- --------
(1) Mr. Landi joined us in August 1998 as our Senior Vice President of
Marketing and will be compensated at an annual base of salary of $150,000
during the fiscal year ended December 31, 1999. Mr. Neylon joined us in
November 1998 as our Chief Operating Officer and will be compensated at an
annual base salary of $180,000 during the fiscal year ended December 31,
1999. Ms. Cole joined us in February 1999 as our Chief Financial Officer
and will be compensated at an annual base salary of $200,000 during the
fiscal year ended December 31, 1999.
(2) Consists of 401(k) contributions made by LookSmart for the benefit of the
Executive Officer.
(3) Consists of rental housing allowance.
(4) Includes $37,500 earned as commissions.
(5) Includes $19,866 earned as commissions.
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<PAGE>
The following table sets forth information with respect to stock options
issued to each of the named executive officers during the fiscal year ended
December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------------------------------- Value at Assumed
% of Total Annual Rates of Stock
Options Price Appreciation or
Number of Granted to Exercise Option Term(3)
Options Employees Price Per Expiration ---------------------
Name(1) Granted(2) in Fiscal Year Share Date 5% ($) 10% ($)
- ------- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Evan Thornley........... -- -- -- -- -- --
Brian Cowley............ -- -- -- -- -- --
Barbara Bergin Read..... -- -- -- -- -- --
Michael Reaves.......... 63,000 0.01% $0.833 8/19/2008 $17,103 $35,601
</TABLE>
- --------
(1) In September 1998, we issued to Mr. Landi an option to purchase 600,000
shares of common stock at an exercise price of $0.1167 per share, which
expires on September 2, 2008. In November 1998, we issued to Mr. Neylon an
option to purchase 1,050,000 shares of common stock at an exercise price of
$0.167 per share, which expires on November 6, 2008. In February 1999, we
issued to Ms. Cole an option to purchase 900,000 shares of common stock at
an exercise price of $1.25 per share, which expires on February 25, 2009.
(2) All options were issued under LookSmart's 1998 Stock Plan. Options issued
under the Plan vest over a four-year period with 25% vesting at the first
anniversary date of the vest date and the remaining shares vesting in
monthly installments over the next 36 months.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% annual rates of stock price appreciation from the date of
issuance to the end of the option term are provided in accordance with SEC
rules and do not represent our estimate or projection of the future common
stock price. Actual gains, if any, on stock option exercises are dependent
on the future performance of the common stock, overall market conditions
and the option holders' continued employment through the vesting period.
This table does not take into account any actual appreciation in the price
of the common stock from the date of issuance to the present.
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<PAGE>
The following table sets forth information regarding exercised stock options
during the fiscal year ended December 31, 1998, and unexercised stock options
held as of December 31, 1998 by each of the named executive officers. None of
the named executive officers exercised stock options in 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at Fiscal Year-
Options at Fiscal Year-End(1) End(2)
-------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Evan Thornley........... -- -- -- --
Brian Cowley............ 911,250 708,750 $1,036,091 $805,849
Barbara Bergin Read..... 73,125 196,875 83,143 223,847
Michael Reaves.......... 37,750 164,250 42,921 186,752
</TABLE>
- --------
(1) All options were issued under LookSmart's 1998 Stock Plan. Options issued
under the Plan vest over a four-year period with 25% vesting at the first
anniversary date of the issuance date and the remaining shares vesting in
monthly installments over the next 36 months. The Board retains discretion
to modify the terms, including the exercise price, of outstanding options.
(2) Calculated on the basis of the deemed fair market value of the underlying
securities as of December 31, 1998 of $1.147 per share, minus the per share
exercise price, multiplied by the number of shares underlying the Option.
Employee Benefit Plans
1998 Stock Plan
LookSmart's 1998 Stock Plan provides for the issuance to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the issuance to employees, directors
and consultants of nonstatutory stock options and stock purchase rights, or
SPRs. The 1998 Plan was approved by the Board of Directors and by the
stockholders in December 1997. The Board of Directors approved amendments to
the 1998 Plan to increase the number of shares reserved under the 1998 Plan in
November 1998, February 1999, March 1999 and June 1999. The stockholders also
approved these amendments to the 1998 Plan in March 1999 and July 1999. Unless
terminated sooner, the 1998 Plan will terminate automatically in 2008. A total
of 20,850,000 shares of common stock is currently reserved for issuance under
the 1998 Plan. The 1998 Plan provides for automatic annual increases on January
1 of each year, beginning in 2000, equal to the lesser of: 2.5 million shares;
4% of the outstanding shares on January 1, or an amount determined by the Board
of Directors. As of June 30, 1999, options to purchase 2,009,100 shares of
common stock had been exercised and options to purchase 11,861,003 shares of
common stock were outstanding under the 1998 Plan with a weighted average
exercise price of $1.17, and 6,979,897 shares were available for future
issuance.
The 1998 Plan may be administered by the Board of Directors or a committee
of the Board of Directors. This Administrator shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Administrator has the power to
determine the terms of the options or SPRs issued, including the exercise
price, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise. The Board of
Directors has the authority to amend, suspend or terminate the 1998 Plan,
provided that this action may not affect any share of common stock previously
issued and sold or any option previously issued under the 1998 Plan.
Options and SPRs issued under the 1998 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by that optionee.
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<PAGE>
Options issued under the 1998 Plan must generally be exercised within three
months of the optionee's separation of service from LookSmart, or within twelve
months after an optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of SPRs,
unless the Administrator determines differently, a restricted stock purchase
agreement shall give LookSmart a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's service for LookSmart
for any reason, including death or disability. The purchase price for shares
repurchased under the restricted stock purchase agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any indebtedness
of the purchaser to LookSmart. The repurchase option shall lapse at a rate
determined by the Administrator. The exercise price of all incentive stock
options issued under the 1998 Plan must be at least equal to the fair market
value of the common stock on the date of issuance. The exercise price of
nonstatutory stock options and SPRs issued under the 1998 Plan is determined by
the Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to the fair
market value of the common stock on the date of issuance. The term of all other
options issued under the 1998 Plan may not exceed ten years.
The 1998 Plan provides that in the event of a merger of LookSmart with or
into another corporation or a sale of substantially all of LookSmart's assets,
each option or right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the outstanding options or rights
are not assumed or substituted as described in the preceding sentence, the
Administrator shall notify the optionee that he or she will have the right to
exercise the option or SPR as to all of the optioned stock, including shares as
to which he or she would not be exercisable, for a period of 15 days from the
date of the notice, and the option or SPR will terminate upon the expiration of
this period.
1999 Employee Stock Purchase Plan
LookSmart's 1999 employee stock purchase plan was adopted by the Board of
Directors in June 1999 and by the stockholders in July 1999. A total of 750,000
shares of common stock have been reserved for issuance under the employee stock
purchase plan, plus annual increases on January 1 of each year, beginning in
2000, equal to the lesser of:
. 1,000,000 shares,
. 3% of the outstanding shares on January 1, or
. a lesser amount determined by the Board
As of the date of this prospectus, no shares have been issued under the
employee stock purchase plan.
The employee stock purchase plan, which is intended to qualify under Section
423 of the Code, contains consecutive, overlapping, twenty-four month offering
periods. Each offering period includes four six-month purchase periods. The
offering periods generally start on the first trading day on or after June 1
and December 1 of each year, except for the first such offering period, which
begins on the first trading day on or after the effective date of this offering
and ends on the last trading day on or before May 31, 2001.
Employees are eligible to participate if they are customarily employed by
LookSmart or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who
immediately after issuance owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or whose
rights to purchase stock under all of our employee stock purchase plans accrues
at a rate which exceeds
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<PAGE>
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under the employee stock purchase plan. The employee stock
purchase plan permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's "compensation." Compensation is
the participant's base straight time gross earnings and commissions, but
exclusive of payments for overtime, shift premium payments, incentive
compensation, incentive payments, bonuses and other compensation. The maximum
number of shares a participant may purchase during a single purchase period is
2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the employee stock purchase plan is generally 85% of the lower
of the fair market value of the common stock at the beginning of the offering
period or at the end of the purchase period. In the event the fair market value
at the end of a purchase period is less than the fair market value at the
beginning of the offering period, the participants will be withdrawn from the
current offering period following exercise and automatically re-enrolled in a
new offering period. The new offering period will use the lower fair market
value as of the first date of the new offering period to determine the purchase
price for future purchase periods. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with LookSmart.
Rights issued under the employee stock purchase plan are not transferable by
a participant other than by will, the laws of descent and distribution, or as
otherwise provided under the employee stock purchase plan. The employee stock
purchase plan provides that, in the event of a merger of LookSmart with or into
another corporation or a sale of substantially all of LookSmart's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set. The employee stock purchase plan will
terminate in 2009. The Board of Directors has the authority to amend or
terminate the employee stock purchase plan, except that no such action may
adversely affect any outstanding rights to purchase stock under the employee
stock purchase plan.
401(k) Plan
LookSmart's 401(k) plan covers its eligible full-time employees located in
the United States. The 401(k) plan is intended to qualify under Section 401(k)
of the Internal Revenue Code. Consequently, contributions to the 401(k) plan by
employees or by LookSmart, and the investment earnings thereon, are not taxable
to employees until withdrawn from the 401(k) plan. Further, contributions by
LookSmart, if any, will be deductible by LookSmart when made. Employees may
elect to contribute up to 15% of their current compensation to the 401(k) plan
up to the statutorily prescribed annual limit, which was $10,000 in 1998. The
401(k) plan permits, but does not require, additional matching contributions to
the 401(k) plan by LookSmart on behalf of all participants in the 401(k) plan.
LookSmart matches a portion of the employee's contribution.
Life Insurance Program
LookSmart provides as a benefit to each employee a term life insurance
policy in the amount of $50,000 and an accidental death and dismemberment
policy in the amount of $50,000. Each employee may designate one or more
beneficiaries, and the coverage is provided during the term of employment. Upon
termination of employment, the employee may convert the policies to individual
policies.
Limitation of Liability and Indemnification
LookSmart's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be
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personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for: breach of their duty of loyalty to the
corporation or its stockholders; acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; unlawful payments
of dividends or unlawful stock repurchases or redemptions; or any transaction
from which the director derived an improper personal benefit. This limitation
of liability does not apply to liabilities arising under the federal or state
securities laws and does not affect the availability of equitable remedies,
including injunctive relief or rescission.
LookSmart's Bylaws provide that LookSmart shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
LookSmart believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. LookSmart's
Bylaws also permit it to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the Bylaws permit the indemnification.
LookSmart has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided in its Bylaws.
These agreements, among other things, indemnify LookSmart's directors and
executive officers for expenses, including attorneys' fees, judgments, fines
and settlement amounts incurred by any person in any action or proceeding,
including any action by or in the right of LookSmart arising out of that
person's services as a director, officer, employee, agent or fiduciary of
LookSmart, any subsidiary of LookSmart or any other company or enterprise to
which the person provides services at the request of LookSmart. LookSmart
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of LookSmart in which indemnification is required or
permitted, and LookSmart is not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
Since our inception in July 1996, we have never been a party to, and we have
no plans to be a party to, any transaction or series of similar transactions in
which the amount involved exceeds $60,000, and in which any director, executive
officer, or holder of more than 5% of any class of our voting stock, or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest, other than as described under
"Management" and the transactions described below.
The share numbers and per share prices for the transactions described below
have been adjusted to give effect to the stock splits effected on December 17,
1997, on March 23, 1999 and on July 23, 1999.
Common Stock Transactions
In July 1996, we sold 90,000,000 shares of common stock at the purchase
price of $0.00017 per share to The Reader's Digest Association and 18,000,000
shares of common stock at the purchase price of $0.00017 per share to Buy Back
the Farm, Inc., a Delaware corporation whose principal shareholders were Evan
Thornley, Tracey Ellery, and KMG Trust, of which Martin Hosking is a trustee.
Mr. Thornley, Ms. Ellery and Mr. Hosking are all executive officers of
LookSmart.
In August 1997, we sold 11,640,000 shares of common stock at a purchase
price of $0.00017 per share to The Reader's Digest Association.
In September 1997, we repurchased 101,640,000 shares of our common stock
from The Readers Digest Association in exchange for a warrant to purchase
9,000,000 shares of our common stock at an exercise price of $0.00017 per
share.
Preferred Stock Transactions
In May 1998, we sold an aggregate of 6,352,614 shares of Series A preferred
stock to investors at a purchase price of $0.3563 per share in consideration of
the cancellation of indebtedness by those investors. These shares of Series A
preferred stock shall automatically convert into 6,352,614 shares of common
stock upon the completion of this offering. Also, in May 1998, we sold an
aggregate of 14,327,748 shares of Series B preferred stock to Cox Interactive
Media at a purchase price of $0.4191 per share, which shares shall
automatically convert into 14,327,748 shares of common stock upon the
completion of this offering. In October 1998, we sold an aggregate of 6,000,000
shares of Series 1 Junior preferred stock to investors at a purchase price of
$0.5833 per share in connection with the acquisition of BeSeen.com, Inc., which
shares shall automatically convert into 6,000,000 shares of common stock upon
the completion of this offering. In March and April 1999, we sold an aggregate
of 12,083,529 shares of Series C preferred stock to investors at a purchase
price of $5.00 per share, which shares shall automatically convert into
12,083,529 shares of common stock upon the completion of this offering.
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The investors in preferred stock include the following entities, which are
5% stockholders of a class of our voting securities or affiliated with our
directors or both.
<TABLE>
<CAPTION>
Shares of
Shares of Shares of Shares of Series 1
Series A Series B Series C Junior
Preferred Preferred Preferred Preferred
Purchaser(1) Stock Stock Stock Stock
- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cox Interactive Media,
Inc.(2)(3)(6)....................... 14,327,748 2,410,053
Entities Affiliated with Australian
Mezzanine Investments Pty
Limited(2)(4)....................... 4,210,524 400,000
Entities Affiliated with Macquarie
Bank Limited(2)(5).................. 2,601,936 3,006,502
Entrepreneur America, LLC(8)......... 171,247
Entities Affiliated with Drew
Duncan(2)(11)....................... 2,259,936
Entities Affiliated with Thomas
Duncan and
Mary Duncan(2)(12).................. 681,753
Allen Lee(2)......................... 119,893 631,812
Entities Affiliated with Josh
Elmore(2)(13)....................... 2,171,345
Conpress Trading Pty Limited(2)...... 1,275,000
Entities Affiliated with Amerindo
Investment Advisors, Inc.(2)(9)..... 979,999
Entities Affiliated with Sand Hill
Capital LLC(2)(7)................... 1,500,000 252,312
Jokren Pty Limited Instanz Nominees
Pty Limited(2)(10).................. 701,748 199,998
</TABLE>
- --------
(1) See notes to table of beneficial ownership in "Principal Stockholders" for
information relating to the beneficial ownership of such shares.
(2) A holder of more than 5% of a class of LookSmart's voting securities.
(3) Mr. Whiteside, one of our directors, is Director of Strategy and
Technology/New Media at Cox Enterprises Inc, of which Cox Interactive Media
is a division. Mr. Whiteside disclaims beneficial ownership of the shares
owned by Cox Interactive Media.
(4) Mr. Riley, one of our directors, is a Director of Australian Venture
Capital Nominees Pty Ltd, trustee of the AMWIN Innovation Fund, a 50/50
joint venture between Australian Mezzanine Investments Pty Limited and
Walden International Investment Group, Director and Company Secretary of
Australian Mezzanine Investments Pty Limited, and the manager of Australian
Mezzanine Investments No. 2 Trust. Mr. Riley disclaims beneficial ownership
of the shares listed. The aggregate shares listed are owned as follows:
Australian Venture Capital Nominee Pty Ltd as Trustee for AMWIN Innovation
Fund holds 4,210,524 shares of Series A preferred stock, and Perpetual
Trustee Company Limited as Trustee of the Australian Mezzanine Investments
No. 2 Trust holds 400,000 shares of Series C preferred stock. The amount
listed above does not include a warrant we issued in May 1998 to purchase
an aggregate of 1,010,412 shares of Series A preferred stock to Perpetual
Trustee Company Limited, Trustee for Australian Mezzanine Investments, No.
3 Trust, then a holder of shares in excess of 5% of our Series A preferred
stock, which was subsequently transferred to another party.
(5) Mr. Castagna, one of our directors, is a Director of Macquarie Technology
Fund Management Pty Limited and an independent advisor of Macquarie
Technology Investment Banking Division of Macquarie Bank Limited.
Mr. Castagna disclaims beneficial ownership of the shares listed. The
aggregate shares listed are owned as follows: Macquarie Bank Limited holds
484,218 shares of Series A preferred stock, holds a warrant to purchase
1,512,462 shares of Series A preferred stock, and holds a warrant to
purchase 439,999 shares of Series C preferred stock. Perpetual Trustee
Company Limited as Trustee for Macquarie Technology Fund 1A holds 302,628
shares of Series A preferred stock and 71,112 shares of Series C preferred
stock. Perpetual Trustee Company Limited as Trustee for Macquarie
Technology Fund 1B holds 302,628 shares of Series A preferred stock and
71,112 shares of Series C preferred stock. Belike Nominees Pty Limited
holds 1,897,566 shares of Series C preferred stock. Perpetual Trustee
Company limited as Trustee for Macquarie Select Opportunities Fund holds
201,000 shares of Series C preferred stock. Macquarie PRISM Pty Limited
holds 325,713 shares of Series C preferred stock.
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(6) Cox Interactive Media also holds 750,000 shares of common stock and a
warrant to purchase an aggregate of 1,500,000 shares of our common stock at
an exercise price of $2.50 per share.
(7) In February 1999, Sand Hill Capital LLC exercised its warrant to purchase
1,500,000 shares of our Series A preferred stock. Sand Hill Capital
Partners I, LLC holds 252,312 shares of Series C preferred stock.
(8) Mr. Ryan, one of our directors, is the Managing Member of Entrepreneur
America, LLC. Entrepreneur America, LLC owns 171,247 shares of Series C
preferred stock convertible into common stock. Mr. Ryan disclaims
beneficial ownership of the shares held by Entrepreneur America, LLC except
as to those shares issuable to Mr. Ryan upon a pro rata distribution by
Entrepreneur America, LLC.
(9) The aggregate shares listed for Entities affiliated with Amerindo
Investment Advisors, Inc. are owned as follows: Amerlook Investments, LLC
holds 18,825 shares of Series C preferred stock. ATGFII holds 661,174
shares of Series C preferred stock. Litton Master Trust holds 300,000
shares of Series C preferred stock.
(10) Jokren Pty Limited and Instanz Nominees Pty Limited are affiliated
entities. Jokren Pty Limited holds 350,874 shares of Series A preferred
stock and 199,998 shares of Series C preferred stock. Instanz Nominees Pty
Limited holds 350,874 shares of Series A preferred stock.
(11) The aggregated shares listed for Mr. Duncan and affiliate entities are
owned as follows: Mr. Duncan holds 564,984 shares of Series 1 Junior
preferred stock. The Duncan Brothers Retained Annuity Trust, for which Mr.
Duncan is trustee, holds 60,000 shares of Series 1 Junior preferred stock.
Potato Hill, Ltd., for which Mr. Duncan is general partner, holds
1,634,952 shares of Series 1 Junior preferred stock. Mr. Duncan disclaims
beneficial ownership of the shares held by the Duncan Brother Retained
Annuity Trust and Potato HIll, Ltd. except as to those shares issuable to
Mr. Duncan upon a pro rata distribution by the respective entities.
(12) The aggregated shares listed for Mr. and Mrs. Duncan are owned as follows:
Mr. and Mrs. Duncan holds 581,755 shares of Series 1 Junior preferred
stock. Of their respective trusts, the Thomas E. Duncan Grantor Retained
Annuity Trust, for which Mr. Duncan is trustee, holds 49,999 shares of
Series 1 Junior preferred stock, and the Mary Stripling Duncan Grantor
Retained Annuity Trust, for which Mrs. Duncan is trustee, holds 49,999
shares of Series 1 Junior preferred stock.
(13) The aggregated shares listed for Mr. Elmore and affiliate entities are
owned as follows: Mr. Elmore holds 542,837 shares of Series 1 Junior
preferred stock. Elmore Partners, LP, for which Mr. Elmore is general
partner and has a pecuniary interest, holds 1,328,508 shares of Series 1
Junior preferred stock. Wal-Par, LP, for which Mr. Elmore is general
partner, holds 150,000 shares of Series 1 Junior preferred stock. OWA
Partners, LP, for which Mr. Elmore is general partner, holds 150,000
shares of Series 1 Junior preferred stock. Mr. Elmore disclaims beneficial
ownership of the shares held by Elmore Partners, LP, Wal-Par, LP and OWA
Partners, LP except as to those shares issuable to Mr. Elmore upon a pro
rata distribution by the respective entities.
Other Transactions
In May 1998, we entered into a development, licensing and affiliation
agreement with Cox Interactive Media, a holder of shares in excess of 5% of our
common stock. Revenues from this agreement amounted to $538,396 for the year
ended December 31, 1998.
Upon the completion of this offering, all outstanding shares of Series A
preferred stock, Series B preferred stock, Series C preferred stock and Series
1 Junior preferred stock will automatically convert into shares of common stock
on a one-for-one basis.
We believe that all transactions between LookSmart and its officers,
directors, principal stockholders and other affiliates have been and will be on
terms no less favorable to us than could be obtained from other parties.
The holders of converted shares of common stock are entitled to demand and
piggy-back registration rights. See "Description of Capital Stock--Registration
Rights".
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of June 30, 1999, assuming conversion of all outstanding shares of preferred
stock into common stock upon the closing of this offering and as adjusted to
reflect the sale of the shares offered by this prospectus, by:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of the Named Executive Officers and by each of LookSmart's
directors; and
. all of our officers and directors as a group.
Percentage of ownership prior to this offering is based on 63,880,465 shares
outstanding as of June 30, 1999, assuming conversion of the preferred stock,
and percentage of ownership after this offering is based on 75,880,465 shares
outstanding after this offering assuming no exercise of the underwriters' over-
allotment option.
<TABLE>
<CAPTION>
Shares Beneficially Owned(2)
----------------------------
Percent Percent
Prior to After
Beneficial Owner Number Offering Offering
- ---------------- ---------- -------- --------
<S> <C> <C> <C>
Five Percent Stockholders
Cox Interactive Media, Inc.(3)................... 18,987,801 29.0% 25.0%
1400 Lake Hearn Drive
Atlanta, GA 30319
The Reader's Digest Association, Inc.(4)......... 9,000,000 12.3 10.6
Reader's Digest Road
Pleasantville, NY 10570
Evan Thornley(1)(5).............................. 7,725,000 12.1 10.2
Tracey Ellery(1)(5).............................. 7,725,000 12.1 10.2
Entities Affiliated with Macquarie Bank
Limited(6)...................................... 5,608,438 8.5 7.2
Macquarie Bank Limited
Level 16, 20 Bond Street
Sydney, NSW, 2000 Australia
Entities Affiliated with Australian Mezzanine
Investments Pty Limited(7)...................... 4,610,524 7.2 6.1
Australian Venture Capital Nominee Pty Ltd
Level 2, The Terrace
155 George Street
Sydney, NSW, 2000 Australia
Named Executive Officers and Directors
Scott Whiteside(3)(8)............................ 18,987,801 29.0 25.0
Cox Interactive Media, Inc.
1400 Lake Hearn Drive
Atlanta, GA 30319
Evan Thornley(1)(5).............................. 7,725,000 12.1 10.2
Tracey Ellery(1)(5).............................. 7,725,000 12.1 10.2
Anthony Castagna(9).............................. 5,608,438 8.5 7.2
Macquarie Bank Limited
Level 16, 20 Bond Street
Sydney, NSW, 2000 Australia
Paul Riley(10)................................... 4,610,524 7.2 6.1
Australian Venture Capital Nominee Pty Ltd.
Level 2, The Terrace
155 George Street
Sydney, NSW, 2000 Australia
Brian Cowley(11)................................. 1,181,250 1.8 1.6
Robert J. Ryan(12)............................... 1,228,747 1.9 1.6
77 Storm King Road
Hamilton, MT 59840
Barbara Bergin Read(1)(13)....................... 118,125 * *
Michael Reaves(1)(14)............................ 71,250 * *
All current directors and executive officers as a
group (17 persons)(5)(15)....................... 49,839,885 73.0% 62.1%
</TABLE>
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<PAGE>
- --------
* Less than 1% of LookSmart's outstanding common stock.
(1) Except as otherwise reported the address on each person listed in the
table is c/o LookSmart, Ltd., 487 Bryant Street, San Francisco, CA 94107.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially
owned by a person includes shares of common stock subject to options held
by that person that are currently exercisable or exercisable within 60
days. Shares issuable pursuant to options are deemed outstanding for
computing the percentage ownership of the person holding those options,
but are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. Unless indicated below, each
stockholder named in the table has sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws.
(3) Includes 750,000 shares of common stock, common stock issued upon
automatic conversion of 16,737,801 shares of preferred stock and common
stock issuable upon exercise of a warrant to purchase 1,500,000 shares of
common stock.
(4) The Reader's Digest Association, Inc. holds a warrant to purchase
9,000,000 shares of common stock.
(5) Evan Thornley is also a beneficial owner of the shares of common stock
held by Tracey Ellery; Tracey Ellery is also a beneficial owner of the
shares of common stock held by Evan Thornley. The shares of common stock
beneficially owned by each of Mr. Thornley and Ms. Ellery have been
counted once in the total number of shares beneficially owned by them
prior to the offering.
(6) Includes: common stock issued upon automatic conversion of 484,217 shares
of preferred stock and common stock issuable upon exercise of warrants to
purchase an aggregate of 1,952,461 shares of preferred stock owned by
Macquarie Bank Limited; 373,740 shares of preferred stock owned by
Perpetual Trustee Company Limited as Trustee for Macquarie Technology Fund
1A; 373,740 shares of preferred stock owned by Perpetual Trustee Company
Limited as Trustee for Macquarie Technology Fund 1B; 1,897,566 shares of
preferred stock owned by Belike Nominees Pty Limited; 201,000 shares of
preferred stock owned by Macquarie Select Opportunities Fund; and 325,713
shares of preferred stock owned by Macquarie PRISM Pty Limited.
(7) Includes (a) common stock issued upon automatic conversion of 4,210,524
shares of preferred stock owned by Australian Venture Capital Nominee Pty
Ltd as Trustee for AMWIN Innovation Fund, which is a 50/50 joint venture
between Australian Mezzanine Investments Pty Limited and Walden
International Investment Group, and (b) 400,000 shares of preferred stock
owned by Perpetual Trustee Company Limited as Trustee of the Australian
Mezzanine Investments No. 2 Trust.
(8) Mr. Whiteside, one of our directors, is Director of Strategy and
Technology/New Media at Cox Enterprises, of which Cox Interactive Media is
a division. Cox Interactive Media owns 750,000 shares of common stock,
16,737,801 shares of preferred stock convertible into common stock, and a
warrant to purchase 1,500,000 shares of common stock. Mr. Whiteside
disclaims beneficial ownership of the shares held by Cox Interactive
Media.
(9) Dr. Castagna, one of our directors, is a director of Macquarie Technology
Fund Management Pty Limited, which is a subsidiary of Macquarie Bank
Limited. Entities affiliated with Macquarie Bank Limited are beneficial
owners of 3,655,977 shares and warrants to purchase an aggregate of
1,952,461 shares of preferred stock. Dr. Castagna disclaims beneficial
ownership of the shares held by Macquarie Bank Limited and its affiliated
entities.
(10) Mr. Paul Riley, one of our directors, is a Managing Director of Australian
Mezzanine Investments Pty Limited. Entities affiliated with Australian
Mezzanine Investments Pty Limited own 4,610,524 shares. Mr. Riley
disclaims beneficial ownership of the shares held by Australian Mezzanine
Investments Pty Limited and its affiliated entities.
(11) Includes 202,500 shares under stock options that are exercisable within 60
days.
(12) Mr. Ryan, one of our Directors, is the Managing Member of Entrepreneur
America, LLC. Entrepreneur America, LLC owns 171,247 shares of preferred
stock convertible into common stock. Mr. Ryan disclaims beneficial
ownership of the shares held by Entrepreneur America, LLC except as to
those shares issuable to Mr. Ryan upon a pro rata distribution by
Entrepreneur America, LLC.
(13) Includes 11,250 shares under stock options that are exercisable within 60
days.
(14) Includes 26,250 shares under stock options that are exercisable within 60
days.
(15) Includes an aggregate of 3,452,461 shares of common stock issuable upon
exercise of warrants and 956,250 shares under stock options exercisable
within 60 days.
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DESCRIPTION OF CAPITAL STOCK
General
Our Certificate of Incorporation currently authorizes 155,194,302 shares of
common stock, par value $0.001 per share and 44,805,698 shares of preferred
stock. As of June 30, 1999, 23,616,597 shares of common stock were outstanding
and 40,263,868 shares of preferred stock, which is comprised of 7,852,609
shares of Series A preferred stock, 14,327,748 shares of Series B preferred
stock, 12,083,518 shares of Series C preferred stock and 5,999,993 shares of
Series 1 Junior preferred stock. These shares of preferred stock are
convertible into an aggregate of 40,263,868 shares of common stock. As of June
30, 1999, we had 109 stockholders.
Our Restated Certificate of Incorporation, which will become effective upon
the closing of this offering, authorizes the issuance of up to 200,000,000
shares of common stock, par value $0.001 per share, and 5,000,000 shares of
preferred stock, par value $0.001 per share, the rights and preferences of
which may be established from time to time by our Board of Directors.
Common Stock
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. Please see "Dividend Policy". In the event of a
liquidation, dissolution or winding up of LookSmart, holders of common stock
would be entitled to share in LookSmart's assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference issued to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights and there
are no redemption or sinking fund provisions applicable to the common stock.
All outstanding shares of common stock are, and the shares of common stock
offered by LookSmart in this offering, when issued and paid for, will be fully
paid and nonassessable. The rights, preferences and privileges of the holders
of common stock are subject to, and may be adversely affected by the rights of
the holders of shares of any series of preferred stock, which LookSmart may
designate in the future.
Preferred Stock
Upon the closing of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
preferred stock, $0.001 par value per share, in one or more series, each of the
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights
of holders of any preferred stock that may be issued in the future. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for others to acquire, or of discouraging others from
attempting to acquire, a majority of the outstanding voting stock of LookSmart.
LookSmart has no present plans to issue any shares of preferred stock.
Warrants
As of June 30, 1999, giving effect to the conversion of all preferred stock
into common stock, we had outstanding warrants to purchase an aggregate of
15,995,336 shares of common stock, all of which are immediately exercisable. Of
these, warrants to purchase 3,024,924 shares of preferred
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<PAGE>
stock and 9,453,749 shares of common stock expire immediately prior to the
closing of this offering. The remaining warrants expire at various dates
through March 2005. Our warrant holders include the following:
The following table sets forth warrants outstanding as of June 30, 1999 (in
thousands, except for per share data):
<TABLE>
<CAPTION>
Date of Number of Exercise
issuance Type warrants price Expires
-------- ------------------ --------- -------- --------------
<S> <C> <C> <C> <C>
September 1997.......... Common 9,000 $0.0002 September 2007
March 1998.............. Series A preferred 1,010 $0.3563 March 2005
May 1998................ Series A preferred 3,025 $0.4191 May 2005
May 1998................ Common 1,500 $ 2.50 May 2003
September 1998.......... Common 480 $0.4183 September 2003
March 1999.............. Series C preferred 440 $ 5.00 March 2002
June 1999............... Common 540 $ 1.25 June 2004
</TABLE>
Some of the warrants have a net exercise provision under which the holder
may, in lieu of payment of the exercise price in cash, surrender the warrant
and receive a net amount of shares, based on the fair market value of our stock
at the time of the exercise of the warrant, after deducting the aggregate
exercise price.
Registration Rights
The Second Amended and Restated Investors' Rights Agreement, dated March 24,
1999, allows the holders of approximately 42,208,612 shares of common stock,
and the holders of 13,475,335 shares of common stock issuable upon exercise of
warrants or their permitted transferees, rights to require LookSmart to
register those shares under the Securities Act six months after the closing of
this offering LookSmart's obligation to register these shares include the
following:
. at any time after six months following this offering, at the request of
the holders of at least 30% of the outstanding shares of the registrable
securities issued or issuable upon conversion of either the Series A
preferred stock or of the Series 1 Junior preferred stock if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $3,000,000; provided, however, that LookSmart
is not required to effect more than one registration on behalf of the
holders of the Series A preferred stock, and one registration on behalf
of the holders of the Series 1 Junior preferred stock; or
. at any time after the earlier of November 7, 1999 and six months
following this offering, at the request of the holders of at least 30%
of the outstanding shares of the registrable securities issued or
issuable upon conversion of the Series B preferred stock if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $3,000,000; provided, however, that LookSmart
is not required to effect more than two registrations on behalf of the
holders of the Series B preferred stock; or
. at any time after six months following this offering, at the request of
the holders of at least 30% of the outstanding shares of the registrable
securities issued or issuable upon conversion of the Series C preferred
stock if the anticipated aggregate offering price, net of underwriting
discounts and commissions, would exceed $10,000,000; provided, however,
that LookSmart is not required to effect more than one registration on
behalf of the holders of the Series C preferred stock.
The holders of 20% of these registrable securities may require LookSmart to
register all or a portion of their registrable securities on Form S-3 when
LookSmart is eligible to use such form, provided that the proposed aggregate
price to the public is at least $1,000,000.
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Each of the foregoing registration rights is qualified by conditions,
including the right of the underwriters in any underwritten offering to limit
the number of shares to be included in a registration due to market or other
conditions.
If LookSmart registers any of its common stock for its own account or for
the account of other security holders, the holders of registrable securities
will be entitled to include their shares of common stock in the registration,
unless the underwriters limit the number of shares included in the offering.
The shares of holders of registrable securities wishing to register their
shares cannot be reduced below 25% of the total number of shares in that
registration. The Restricted Stock Agreement between Guthy-Renker Internet,
LLC and LookSmart, allows the holders of 2,550,000 shares of our common stock
"piggyback" registration rights. The underwriters can limit the number of
shares to be included in this "piggyback" registration. LookSmart will bear
all fees, costs and expenses of all registrations, other than underwriting
discounts and commissions. Once the registration statement filed to register
LookSmart's common stock is effective, these shares become freely tradable,
without any restrictions imposed by the Securities Act.
Effect of Provisions of the Certificate of Incorporation and Bylaws and the
Delaware Anti-Takeover Statute
LookSmart's Restated Certificate of Incorporation and Bylaws may make it
more difficult for stockholders to take various corporate actions. In
particular, some provisions make it difficult for others to acquire, or may
discourage others from attempting to acquire, control of LookSmart. These
provisions could limit the price that investors might be willing to pay in the
future for shares of LookSmart's common stock. Other provisions allow
LookSmart to issue preferred stock without any vote or further action by the
stockholders and eliminate the right of stockholders to call a special meeting
of stockholders or act by written consent without a meeting.
In addition, LookSmart must comply with Section 203 of the Delaware General
Corporation Law which, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder, unless: prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; upon completion of the transaction which resulted in
the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction began, excluding for purposes of determining the number
of shares outstanding those shares owned by persons who are directors and also
officers and by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held under the plan
will be tendered in a tender or exchange offer; or on or subsequent to that
date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
LookSmart's Restated Certificate of Incorporation provides that, upon the
closing of this offering, the Board of Directors will be divided into three
classes of directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage others from
making a tender offer or attempting to obtain control of LookSmart. The
classification of the Board of Directors increases the difficulty of replacing
a majority of the directors and may maintain the incumbency of the Board of
Directors. The Restated Certificate of Incorporation and Bylaws do not provide
for cumulative voting in the election of directors. The amendment of any of
the provisions described above would require approval by holders of at least
66 2/3% of the outstanding common stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding an aggregate of
88,359,138 shares of common stock, assuming the issuance of 12,000,000 shares
of common stock offered hereby and no exercise of options after June 30, 1999.
Of these shares, the 12,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by "affiliates" of LookSmart as that term is
defined in Rule 144 under the Securities Act, whose sales would be subject to
certain limitations and restrictions described below.
The remaining 76,359,138 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of these shares will be
subject to "lock-up" agreements described below on the effective date of this
offering. Upon expiration of the lock-up agreements 180 days after the
effective date of this offering, 5,161,547 shares will become eligible for
sale, within the limitations of Rule 144.
<TABLE>
<CAPTION>
Days After Date of this Shares Eligible
Prospectus for Sale Comment
----------------------- --------------- --------------------------------
<C> <C> <S>
Upon Effectiveness.......... 0 Freely tradeable shares saleable
under Rule 144(k) that are not
covered by the lock-up
180 days.................... 5,161,547 Lock-up released; shares
saleable under Rules 144 and
701
</TABLE>
In addition, holders of stock options could exercise such options and sell
the shares issued upon exercise. As of June 30, 1999, a total of 11,861,003
shares of common stock were issuable under outstanding options under our 1998
Stock Plan, approximately 854,500 of which were vested and exercisable. All
options held by officers and directors of LookSmart are covered by 180-day
lock-up agreements described below. Immediately after the completion of this
offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or reserved
for future issuance under the 1998 Stock Plan and 1999 Employee Stock Purchase
Plan. On the date 180 days after the effective date of this offering, a total
of approximately 3,306,769 shares of common stock issuable under outstanding
options will be vested and exercisable. After the effective dates of the
registration statements on Form S-8, shares purchased upon exercise of options
issued under to the 1998 Stock Option Plan and 1999 Employee Stock Purchase
Plan generally would be available for resale in the public market.
The holders of approximately 42,208,612 shares of outstanding common stock
and warrants to purchase 13,475,335 shares of common stock have rights to
require us to register those shares under the Securities Act beginning six
months after the closing of this offering. See "Description of Capital Stock--
Registration Rights".
Our officers and directors and all of our existing stockholders agreed not
to sell or dispose of any of their shares for a period of 180 days after the
date of this offering. Goldman, Sachs & Co. may in its sole discretion release
all or any portion of the shares covered by lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year
70
<PAGE>
would be entitled to sell in "broker's transactions" or to market makers,
within any three-month period, a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 883,591 shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current
public information about LookSmart.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been an affiliate of
LookSmart at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell the shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell those shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
issued by an issuer before it becomes covered by the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of those options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, within the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates", as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by "affiliates" under Rule 144 without compliance
with its one-year minimum holding period requirements.
71
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
LookSmart by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Legal matters specified by the underwriters will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California. As of the date of
this prospectus, WS Investment Company 99A, an investment partnership composed
of current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, P.C., and members of Wilson Sonsini Goodrich & Rosati, P.C.,
beneficially own an aggregate of 19,998 shares of LookSmart Series C preferred
stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
LookSmart, Ltd. as of December 31, 1997 and 1998 and for the period from July
19, 1996 (date of incorporation) through December 31, 1996 and for the years
ended December 31, 1997 and 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of the firm as experts in auditing and
accounting.
The financial statements of BeSeen.com, Inc. as of December 31, 1997 and
September 30, 1998 and for the period from January 27, 1997 (date of inception)
through December 31, 1997 and for the nine months ended September 30, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in auditing and accounting.
The financial statements of Guthy-Renker Internet, LLC as of January 3, 1999
and December 31, 1997, and for the 53 weeks ended January 3, 1999, and the year
ended December 31, 1997 appearing in this prospectus, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing in this prospectus, and are included in reliance upon such report
given upon the authority of the firm as experts in accounting and auditing.
The financial statements of ITW NewCorp, Inc. as of December 31, 1997 and
1998 and March 31, 1999 and for the years ended December 31, 1997 and 1998 and
for the three months ended March 31, 1999 included in this prospectus have been
so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of the firm as experts in
auditing and accounting.
The financial statements of HomeBase Directories Pty Ltd. as of July 24,
1996 and for the period from January 1, 1996 to July 24, 1996 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in auditing and accounting.
72
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
LookSmart has filed with the Securities and Exchange Commission a
registration statement on Form S-1, including exhibits and schedules, under the
Securities Act, with respect to the shares to be sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement. For further information with respect to LookSmart and
the common stock offered in this prospectus, reference is made to the
registration statement, including the exhibits thereto, and the financial
statements and notes filed as a part thereof. With respect to each such
document filed with the Commission as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information LookSmart files with the
Commission at the Commission's public reference room at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.C., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these
documents upon payment of a duplicating fee, by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. LookSmart's Commission filings,
including the registration statement will also be available to you on the
Commission's Internet site. The address of this site is http://www.sec.gov.
LookSmart intends to send to its stockholders annual reports containing
audited financial statements for each fiscal year and quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
73
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
LOOKSMART, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-3
Consolidated Balance Sheets at December 31, 1997 and 1998 and at June 30,
1999 (unaudited)......................................................... F-4
Consolidated Statements of Operations for the period July 19, 1996
(inception) through December 31, 1996 and for the years ended December
31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999
(unaudited).............................................................. F-5
Consolidated Statements of Stockholders' Equity for the period July 19,
1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998 and for the six months ended June 30, 1999
(unaudited).............................................................. F-6
Consolidated Statements of Cash Flows for the period July 19, 1996
(inception) through December 31, 1996 and for the years ended December
31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999
(unaudited).............................................................. F-7
Notes to Consolidated Financial Statements................................ F-8
LOOKSMART, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information........................ F-23
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1998........................................................ F-24
Unaudited Pro Forma Combined Statements of Operations for the six months
ended June 30, 1999...................................................... F-25
Notes to Unaudited Pro Forma Combined Financial Information............... F-26
</TABLE>
BESEEN.COM, INC.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-27
Balance Sheets at December 31, 1997 and September 30, 1998................ F-28
Statements of Operations for the periods January 27, 1997 (inception)
through December 31, 1997 and September 30, 1997 and for the nine months
ended September 30, 1998................................................. F-29
Statement of Stockholders' Equity for the period January 27, 1997
(inception) through September 30, 1998................................... F-30
Statements of Cash Flows for the periods January 27, 1997 (inception)
through December 31, 1997 and September 30, 1997 and for the nine months
ended September 30, 1998................................................. F-31
Notes to Financial Statements............................................. F-32
</TABLE>
F-1
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS--(Continued)
GUTHY-RENKER INTERNET, LLC
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-34
Balance Sheets at January 3, 1999 and December 31, 1997 ................. F-35
Statements of Operations for the 53 weeks ended January 3, 1999 and the
year ended December 31, 1997............................................ F-36
Statements of Members' Deficit for the period January 1, 1997 through
January 3, 1999......................................................... F-37
Statements of Cash Flows for the 53 weeks ended January 3, 1999 and the
year ended December 31, 1997............................................ F-38
Notes to Financial Statements............................................ F-39
Balance Sheets at January 3, 1999 and April 4, 1999 (unaudited).......... F-42
Statements of Operations for the 13 weeks ended April 4, 1999 and the
quarter ended March 31, 1998 (unaudited)................................ F-43
Statements of Cash Flows for the 13 weeks ended April 4, 1999 and the
quarter ended March 31, 1998 (unaudited)................................ F-44
Notes to Financial Statements (unaudited)................................ F-45
ITW NEWCORP, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants........................................ F-46
Balance Sheets at December 31, 1997 and 1998 and at March 31, 1999
(unaudited)............................................................. F-47
Statements of Operations for the years ended December 31, 1997 and 1998
and for the three months ended March 31, 1998 and 1999 (unaudited)...... F-48
Statements of Stockholders' Equity for the years ended December 31, 1997
and 1998 and for the three months ended March 31, 1999 (unaudited)...... F-49
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and for the three months ended March 31, 1998 and 1999 (unaudited)...... F-50
Notes to Financial Statements............................................ F-51
</TABLE>
HOMEBASE DIRECTORIES PTY LTD.
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................ F-54
Balance Sheet at July 24, 1996........................................... F-55
Statement of Operations for the period January 1, 1996 through July 24,
1996.................................................................... F-56
Statement of Stockholders' Deficit for the periods ended January 1, 1996
and July 24, 1996....................................................... F-57
Statement of Cash Flows for the periods ended January 1, 1996 and July
24, 1996................................................................ F-58
Notes to Financial Statements............................................ F-59
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
LookSmart, Ltd. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
LookSmart, Ltd. and Subsidiaries (the Company) at December 31, 1997 and 1998,
and the results of their operations and their cash flows for the period from
July 19, 1996 (inception) through December 31, 1996 and for the two years ended
December 31, 1997 and 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 7, 1999
F-3
<PAGE>
LOOKSMART, LTD.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, Pro forma at
------------------ June 30, June 30,
1997 1998 1999 1999
-------- -------- -------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ 48 $ 3,501 $ 42,731 $ 44,568
Trade accounts receivable, net of
allowance for doubtful accounts
of $0, $127 and $124 in 1997,
1998 and June 30, 1999............ 41 2,895 4,319
Prepaid Distribution Costs......... -- 546 3,274
Prepaid expenses................... 10 245 1,808
Other assets....................... 4 61 139
-------- -------- -------- --------
Total current assets............. 103 7,248 52,271 54,108
Property and equipment, net........ 707 1,979 6,174
Goodwill and intangible assets,
net of accumulated amortization
of $615, $1,220 and $3,078 in
1997, 1998 and June 30, 1999...... 1,435 4,744 28,716
Other assets....................... 30 119 2,199
-------- -------- -------- --------
Total assets..................... $ 2,275 $ 14,090 $ 89,360 $ 91,197
======== ======== ======== ========
Liabilities and Stockholders' Equity
(Deficit)
<CAPTION>
Current liabilities:
<S> <C> <C> <C> <C>
Trade accounts payable............. $ 439 $ 1,325 $ 2,093
Other accrued liabilities.......... 572 2,873 5,922
Deferred revenue................... -- 9,234 17,206
Income taxes payable............... 217 323 215
Capital lease obligation--current
portion........................... -- -- 142
Note payable--current.............. -- -- --
-------- -------- --------
Total current liabilities........ 1,228 13,755 25,578
Deferred revenue.................... -- 96 3,481
Capital lease obligation............ -- -- 322
Note payable to former stockholder
................................... 1,500 1,500 --
-------- -------- --------
Total liabilities................ 2,728 15,351 29,381
Commitments (Note 5).
Stockholders' equity (deficit):
Series A convertible preferred
stock, $.001 par value; 11,888
shares authorized and designated
at December 31, 1998 and June 30,
1999, respectively (none pro
forma); 6,353 and 7,853 issued
and outstanding at December 31,
1998 and June 30, 1999,
respectively (none pro forma);
aggregate liquidation preference
of $2,263 and $2,797 at December
31, 1998 and June 30, 1999 (none
pro forma)........................ -- 6 8 --
Series B convertible preferred
stock, $.001 par value; 14,328
shares authorized and designated,
issued and outstanding at
December 31, 1998 and June 30,
1999 (none pro forma); aggregate
liquidation preference $6,005
(none pro forma).................. -- 14 14 --
Series C convertible preferred
stock, $.001 par value; 12,590
shares authorized and designated
at June 30, 1999 (none pro
forma), 12,084 shares issued and
outstanding at June 30, 1999
(none pro forma); aggregate
liquidation preference of $60,038
(none pro forma).................. -- -- 12 --
Series 1 Junior convertible
preferred stock, $.001 par value;
6,000 shares authorized and
designated, issued and
outstanding at December 31, 1998
and June 30, 1999 (none pro
forma); aggregate liquidation
preference of $2,000 (none pro
forma)............................ -- 6 6 --
Common stock, $.001 par value;
81,000 and 105,194 shares
authorized at December 31, 1998
and June 30, 1999, respectively;
18,000, 19,459, and 23,616 issued
and outstanding at December 31,
1997, 1998 and June 30, 1999,
respectively (76,359 pro forma)... 18 19 24 $ 77
Additional paid-in capital......... 9,897 21,928 105,146 112,088
Warrants........................... 85 1,408 7,114 1,996
Unearned compensation.............. -- (1,315) (10,811) (10,811)
Cumulative translation
adjustment........................ (39) (55) (29) (29)
Accumulated deficit................ (10,414) (23,272) (41,505) (41,505)
-------- -------- -------- --------
Total stockholders' equity
(deficit)....................... (453) (1,261) 59,979 61,816
-------- -------- -------- --------
Total liabilities and
stockholders' equity (deficit).. $ 2,275 $ 14,090 $ 89,360 $ 91,197
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LOOKSMART, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands)
<TABLE>
<CAPTION>
Period from
July 19, 1996
(Inception) Year Ended Six Months Ended
through December 31, June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 3 $ 949 $ 8,785 $ 1,845 $ 18,058
Cost of revenues........ 90 430 1,586 495 2,754
------- ------- -------- ------- --------
Gross profit (loss).. (87) 519 7,199 1,350 15,304
------- ------- -------- ------- --------
Operating expenses:
Sales and marketing... 1,115 3,668 10,848 3,085 16,189
Product development... 915 2,605 4,427 1,144 9,567
General and
administrative....... 504 1,165 2,746 886 3,666
Amortization of
goodwill and
intangibles.......... 205 410 605 205 1,858
Amortization of
unearned
compensation......... -- -- 133 -- 2,794
Write off of in-
process research and
development.......... -- -- 338 -- --
------- ------- -------- ------- --------
Total operating
expenses............ 2,739 7,848 19,097 5,320 34,074
------- ------- -------- ------- --------
Loss from
operations.......... (2,826) (7,329) (11,898) (3,970) (18,770)
Non-operating income
(expense)
Other income
(expense), net....... (19) (3) (139) (124) (8)
Interest income
(expense), net....... 9 (16) (675) (443) 597
------- ------- -------- ------- --------
Total non-operating
income (expense).... (10) (19) (814) (567) 589
------- ------- -------- ------- --------
Loss before income
taxes............... (2,836) (7,348) (12,712) (4,537) (18,181)
Income taxes............ 64 166 146 76 52
------- ------- -------- ------- --------
Net loss............. (2,900) (7,514) (12,858) (4,613) (18,233)
Other comprehensive
income
Change in foreign
currency translation
adjustment during the
period............... -- (39) (16) (13) 26
------- ------- -------- ------- --------
Comprehensive loss... $(2,900) $(7,553) $(12,874) $(4,626) $(18,207)
======= ======= ======== ======= ========
Basic and diluted loss
per share.............. $ (0.03) $ (0.08) $ (0.68) $ (0.25) $ (0.86)
======= ======= ======== ======= ========
Weighted average shares
outstanding............ 115,947 91,589 18,790 18,326 21,265
======= ======= ======== ======= ========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.31) $ (0.33)
======== ========
Weighted average shares
outstanding used in the
pro forma calculation
(unaudited)............ 41,080 55,496
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
LOOKSMART, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Cumulative Total
----------------- ---------------- Paid-in Unearned Translation Accumulated Stockholders'
Shares Amount Shares Amount Capital Warrants Compensation Adjustment Deficit Equity
--------- ------- -------- ------ ---------- -------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July
19, 1996
(inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Common stock
issued for
acquisition of
HomeBase
Directories..... -- -- 90,000 90 1,960 -- -- -- -- 2,050
Stockholder
contribution.... -- -- -- -- 2,940 -- -- -- -- 2,940
Translation
adjustment...... -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (2,900) (2,900)
--------- ------ -------- ----- -------- ------ -------- ---- -------- --------
Balance at
December 31,
1996............ -- -- 90,000 90 4,900 -- -- -- (2,900) 2,090
Common stock
issued for
cash............ -- -- 29,640 30 125 -- -- -- -- 155
Stockholder
contribution.... -- -- -- -- 4,855 -- -- -- -- 4,855
Common stock
repurchased and
exchanged for
warrants........ -- -- (101,640) (102) 17 85 -- -- -- --
Translation
adjustment...... -- -- -- -- -- -- -- (39) -- (39)
Net loss........ -- -- -- -- -- -- -- -- (7,514) (7,514)
--------- ------ -------- ----- -------- ------ -------- ---- -------- --------
Balance at
December 31,
1997............ -- -- 18,000 18 9,897 85 -- (39) (10,414) (453)
Common stock
issued upon
exercise of
options......... -- -- 402 -- 5 -- -- -- -- 5
Common stock
issued for
cash............ -- -- 1,057 1 8 -- -- -- -- 9
Preferred stock
Series A issued
for conversion
of notes, net of
costs
of $425......... 6,353 6 -- -- 1,856 -- -- -- -- 1,862
Preferred stock
Series B issued
for cash and
conversion of
notes........... 14,328 14 -- -- 5,990 -- -- -- -- 6,004
Preferred stock
Series 1 Junior
issued as part
of acquisition
of BeSeen.com... 6,000 6 -- -- 3,494 -- -- -- -- 3,500
Issuance of
warrants with
preferred
stock........... -- -- -- -- (770) 770 -- -- -- --
Issuance of
warrants with
debt............ -- -- -- -- -- 379 -- -- -- 379
Issuance of
warrants for
services........ -- -- -- -- -- 31 -- -- -- 31
Issuance of
warrants with
financing
agreement....... -- -- -- -- -- 143 -- -- -- 143
Unearned
compensation.... -- -- -- -- 1,448 -- (1,448) -- -- --
Amortization of
unearned
compensation.... -- -- -- -- -- -- 133 -- -- 133
Translation
adjustment...... -- -- -- -- -- -- -- (16) -- (16)
Net loss........ -- -- -- -- -- -- -- -- (12,858) (12,858)
--------- ------ -------- ----- -------- ------ -------- ---- -------- --------
Balance at
December 31,
1998............ 26,681 26 19,459 19 21,928 1,408 (1,315) (55) (23,272) (1,261)
Preferred stock
Series A issued
for cash
(unaudited)..... 1,500 2 -- -- 531 -- -- -- -- 533
Preferred stock
Series C issued
for cash, net of
costs of $29
(unaudited)..... 12,084 12 -- -- 60,332 -- -- -- -- 60,344
Issuance of
warrants with
preferred
stock........... -- -- -- -- (1,443) 1,443 -- -- -- --
Common stock
issued as part
of Guthy-Renker
acquisition
(unaudited)..... -- -- 2,550 3 11,472 -- -- -- -- 11,475
Issuance of
warrants as part
of acquisition
of ITW NewCorp
Inc.
(unaudited)..... -- -- -- -- -- 4,263 -- -- -- 4,263
Common stock
issued upon
exercise of
options
(unaudited)..... -- -- 1,607 2 36 -- -- -- -- 38
Unearned
Compensation ITW
NewCorp Inc.
(unaudited)..... -- -- -- -- 1,218 -- (1,218) -- -- --
Unearned
compensation
(unaudited)..... -- -- -- -- 11,072 -- (11,072) -- -- --
Amortization of
unearned
compensation
(unaudited) .... -- -- -- -- -- -- 2,794 -- -- 2,794
Translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- 26 -- 26
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (18,233) (18,233)
--------- ------ -------- ----- -------- ------ -------- ---- -------- --------
Balance at June
30, 1999
(unaudited)..... 40,265 $ 40 23,616 $ 24 $105,146 $7,114 $(10,811) $(29) $(41,505) $ 59,979
========= ====== ======== ===== ======== ====== ======== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
LOOKSMART, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period from
July 19,
1996
(inception) Year Ended Six Months Ended
through December 31, June 30,
December 31, ----------------- -----------------
1996 1997 1998 1998 1999
------------ ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(2,900) $(7,514) $(12,858) $(4,613) $(18,233)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 259 679 956 346 2,589
Amortization of unearned
compensation............. -- -- 133 -- 2,794
Write-off of in-process
research
and development ......... -- -- 338 -- --
Warrants and other non-
cash charges............. -- -- 557 384 --
Loss from sale of
equipment................ -- 12 12 -- --
Changes in operating
assets and liabilities:
Trade accounts
receivable............. (3) (37) (2,709) (373) (1,425)
Prepaid expenses........ (15) 5 (781) (1,225) (4,291)
Other assets............ (5) (8) (170) (126) (2,172)
Trade accounts payable.. 185 254 834 141 768
Other accrued
liabilities............ 468 103 2,301 54 3,049
Deferred revenues....... -- -- 9,330 -- 11,357
Income taxes payable.... 64 133 130 63 (92)
------- ------- -------- ------- --------
Net cash used in
operating activities.. (1,947) (6,373) (1,927) (5,349) (5,656)
------- ------- -------- ------- --------
Cash flows from investing
activities:
Acquisition of BeSeen.com,
Inc. ..................... -- -- (907) -- --
Acquisition of Guthy-Renker
Internet, LLC............. -- -- -- -- (5,155)
Acquisition of ITW NewCorp,
Inc....................... -- -- -- -- (5,049)
Purchases of property and
equipment................. (707) (336) (1,573) (214) (4,361)
------- ------- -------- ------- --------
Net cash used in
investing activities.. (707) (336) (2,480) (214) (14,565)
Cash flows from financing
activities:
Cash paid for issuance
costs..................... -- -- (263) (263) --
Proceeds from note payable
to former stockholder..... -- 1,500 -- -- --
Proceeds from stockholder
contribution.............. 2,940 4,855 -- -- --
Proceeds from notes........ -- -- 4,952 2,875 --
Repayment of notes......... -- -- (2,327) (250) (1,500)
Proceeds from issuance of
preferred stock........... -- -- 5,500 5,500 60,887
Proceeds from issuance of
common stock.............. -- 155 14 10 38
------- ------- -------- ------- --------
Net cash provided by
financing activities.. 2,940 6,510 7,876 7,872 59,425
Effect of exchange rate
changes on cash............ -- (39) (16) (13) 26
------- ------- -------- ------- --------
Increase (decrease) in cash
and cash equivalents....... 286 (238) 3,453 2,296 39,230
Cash and cash equivalents,
beginning of period........ -- 286 48 48 3,501
------- ------- -------- ------- --------
Cash and cash equivalents,
end of period.............. $ 286 $ 48 $ 3,501 $ 2,344 $ 42,731
======= ======= ======== ======= ========
</TABLE>
Supplemental disclosure of cash flow information (Note 10)
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business and Principles of Consolidation
LookSmart, Ltd. and its Australian subsidiary (LookSmart or the Company)
were incorporated on July 19, 1996 under the name NetGet Ltd. to acquire the
business and associated intellectual property of HomeBase Directories Pty Ltd.
This acquisition was accounted for as a purchase. The purchase price of $2.1
million was recorded as goodwill. LookSmart is a global media company offering
consumers and advertisers comprehensive Internet navigation services. LookSmart
is a category-based web directory provider which assembles high quality, highly
specific content on the Internet. The LookSmart directory contains a collection
of unique uniform resource locators (URLs) organized by categories and
presented in an easy-to-navigate format.
LookSmart distributes its proprietary directory to a large number of
Internet users through LookSmart owned web properties, including looksmart.com,
BeSeen.com and others, as well as our strategic alliances, including Internet
portals and Internet service providers. The Company's web properties are
primarily targeted at a focused demographic of female household purchase
decision-makers. In addition, LookSmart has a network of web site affiliates
that may access its content and services.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Looksmart International Pty Ltd., an
Australian company and BeSeen.com, Inc., a Delaware corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Included in the Company's consolidated balance sheet at June 30, 1999 are
net assets of the Company's Australian subsidiary totaling ($207,000).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet, statements of
operations and statements of cash flows at June 30, 1999 and for the six months
ended June 30, 1998 and 1999, together with the related notes, are unaudited
but include all adjustments (consisting of normal recurring adjustments) which,
in the opinion of management, are necessary for a fair statement of the
financial position and the operating results and cash flows for the interim
date and periods presented. Results for the six months ended June 30, 1999 are
not necessarily indicative of results for the entire fiscal year or future
periods.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease are carried at cost,
which approximates fair value due to the relatively short maturity of those
instruments.
F-8
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Split
On December 17, 1997, the Company authorized and implemented a one thousand-
for-one stock split. On March 23, 1999, the Company authorized and implemented
a four-for-one stock split. On July 23, 1999, the Company authorized and
implemented a three-for-two stock split. Accordingly, all share and per share
amounts have been retroactively restated to reflect the effect of the stock
splits.
Foreign Currencies
The balance sheets of the Company's Australian subsidiary are translated
into U.S. dollars at year end rates of exchange. Revenues and expenses are
translated at average rates for the year. The resulting translation adjustments
are shown as a separate component of stockholders' equity.
Exchange gains and losses arising from transactions denominated in a foreign
currency other than the functional currency of the entity involved are included
in other expense. Such exchange gains (losses) amounted to ($19,000), $9,000
and ($119,000) for the period from July 19, 1996 (inception) through December
31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
Derivatives
To date, the Company has not entered into foreign currency forward exchange
contracts or any other derivative instruments.
Revenue Recognition
The Company generates revenues by providing access to its proprietary
database through a variety of channels. Revenues are generated from short term
and long term contracts.
Short term contract revenues are derived principally from the sale of banner
advertisements displayed on the Company's websites. Advertising revenues are
recognized ratably as impressions are delivered over the period in which the
advertisement is displayed, provided that no significant Company obligations
remain at the end of a period and collection of the resulting receivable is
probable. Company obligations typically include guarantees of minimum number of
"impressions," or times that an advertisement appears in pages viewed by users
of the Company's online properties. To the extent minimum guaranteed
impressions are not met, the Company defers recognition of the corresponding
revenues until the remaining guaranteed impression levels are achieved.
Revenues associated with long term fixed fee contracts are recognized as
delivery occurs as specified under the contracts, all performance obligations
have been satisfied and no refund obligations exist. Payments received in
advance of delivery are recorded as deferred revenues.
Revenues also include barter transactions which are the exchange of
advertising space on the Company's web sites for advertising space on other web
sites. These transactions are recorded at the fair value of the advertisements
provided or received, whichever is more readily determinable in the given
circumstance. For the period from July 19, 1996 (inception) through December
31, 1996, for the years ended December 31, 1997 and 1998, and for the six-month
period ended June 30, 1999 the Company recognized $0, $94,000, $478,000 and
$198,000 respectively in barter transactions.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
F-9
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment.............................................. 3 years
Furniture and fixtures.......................................... 5 years
Software........................................................ 3 years
</TABLE>
Leasehold improvements are amortized on a straight line basis over the
shorter of their estimated useful lives or the lease term.
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from their respective accounts, and any gain or loss
on such sale or disposal is reflected in operations.
Maintenance and repairs are charged to expense as incurred. Expenditures
which substantially increase an asset's useful life are capitalized.
Asset Impairment
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. SFAS 121 has not had an
impact on the consolidated financial statements of the Company.
Advertising Costs
Advertising costs are charged to sales and marketing expenses as incurred
and amounted to $430,000; $938,000 and $256,000 for the period from July 19,
1996 (inception) through December 31, 1996 and for the years ended December 31,
1997 and 1998, respectively.
Product Development Costs
Costs incurred in the classification and organization of listings within the
unique URL database and the development of new products and enhancements to
existing products are charged to expense as incurred. SFAS No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion
of a working model. No costs have been incurred by the Company between
completion of the working model and the point at which the product is ready for
general release.
Net Loss Per Share
SFAS No. 128 "Earnings per Share," establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using the
average shares of common stock outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as if
converted method for convertible preferred stock or the treasury stock method
for options and
F-10
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
warrants. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an initial public offering, are included in the
calculation of basic and diluted net loss per share as if such stock were
outstanding for all periods presented. To date, the Company has not had any
issuances for nominal consideration.
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999, is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B, C, Series 1 Junior preferred stock and
certain warrants into shares of the Company's common stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
on January 1, 1998, or at the date of issuance, if later. Pro forma common
equivalent shares, comprised of incremental common shares issuable upon the
exercise of stock options and warrants are not included in pro forma diluted
net loss per share because they would be anti-dilutive.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25, (APB
No. 25) "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123 "Accounting for Stock-based
Compensation." Under APB No. 25, compensation cost is recognized based on the
difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the stock.
Goodwill and Intangible Assets
Goodwill and intangible assets consist of the excess of purchase price paid
over identified intangible and tangible net assets of acquired companies.
Goodwill and intangible assets are amortized using the straight-line method
over one to five years, the period of expected benefit. Valuation of goodwill
and intangible assets is based on forecasted discounted cash flows and is
reassessed periodically as a result of changes in management's estimates of
future performance given consideration to existing and anticipated competitive
and economic conditions. Cash flow forecasts are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
The amount of an impairment loss is determined as the amount by which the
carrying amount of an intangible asset exceeds the fair value of the asset
based on the valuation.
Concentration of Credit Risk and Business Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
(including money market accounts) and accounts
F-11
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable. The Company places its temporary cash investments in the U.S. in
one major financial institution. Such deposits may at times exceed federally
insured limits. The Company performs ongoing credit evaluations and generally
requires no collateral from its customers. The Company maintains a reserve for
doubtful accounts receivable based upon expected collectibility of accounts
receivable.
As of December 31, 1997, one customer accounted for 100% of total accounts
receivable. As of December 31, 1998, one customer accounted for 13% of total
accounts receivable. No other individual customers accounted for more than 10%
of the total balance.
Three customers individually accounted for approximately 36%, 20% and 0% of
total revenues for the year ended December 31, 1997. The same three customers
individually accounted for approximately 22%, 0% and 32% of total revenues for
the year ended December 31, 1998.
The Internet navigation market is highly competitive. The success of the
Company is dependent upon its ability to raise capital, sell advertising on its
website, generate traffic and attract and retain key personnel. Additionally,
the Company's success is dependent upon the continued growth in use of the
Internet.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by SFAS No. 130,
"Comprehensive Income." Unless otherwise noted, the components of the Company's
"Other comprehensive income (loss)" and "Comprehensive income" have no tax
effect as the Company makes no provision for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.
Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. In accordance with
the provisions of SFAS 131, the Company has determined that it does not have
separately reportable operating segments.
Pro forma Balance Sheet (Unaudited)
The accompanying unaudited pro forma balance sheet at June 30, 1999 reflects
the conversion of the Series A, B, C, Series 1 Junior preferred stock and
certain warrants into common stock as of June 30, 1999. The conversion of this
preferred stock is automatic upon completion of an initial public offering that
results in total gross proceeds to the Company of at least $25 million.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits", and
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
are effective for the year ending December 31, 1999. The Company does not
believe that the adoption of these pronouncements will have a material effect
on the consolidated financial statements.
F-12
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1), which provides guidance for
determining whether computer software is internal-use software and for
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended December 31, 1999, also provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. The Company does not expect the adoption of SOP 98-1
to have a material effect on the consolidated financial statements.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," which
provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. As the Company has not capitalized such
costs, the adoption of SOP 98-5 does not have an impact on the consolidated
financial statements of the Company.
2. Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------- -----------
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment........ $ 989 $2,240 $5,993
Furniture and fixtures.... 41 207 675
Software.................. -- 130 608
Leasehold improvements.... -- 77 304
------ ------ ------
1,030 2,654 7,580
Less accumulated
depreciation and
amortization............. 323 675 1,406
------ ------ ------
Property and equipment,
net.................... $ 707 $1,979 $6,174
====== ====== ======
</TABLE>
Cost and accumulated depreciation related to assets under capital lease
obligations at June 30, 1999 were $523,000 and $58,000, respectively. No assets
were subject to capital lease prior to 1999.
Depreciation was $54,000, $269,000 and $351,000 for the period from July 19,
1996 (inception) through December 31, 1996, and for the two years ended
December 31, 1997 and 1998.
3. Notes Payable:
In September 1997, the Company issued a note payable for $1.5 million to a
former stockholder. The principal is due and payable on the earlier of
September 1, 2000 or on the closing of an initial public offering. Interest is
charged at the rate of 10% per annum and is payable quarterly starting
September 30, 1998. The Company repaid the note in June 1999.
F-13
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From January to April 1998, the Company issued convertible promissory notes
in the principal amount of $2.9 million to investors of the Company. All notes
bore interest at 10% per annum and included an issuance of 2,510,412 Series A
preferred stock warrants (Note 6). In May 1998, in accordance with the terms of
these notes, outstanding principal of $2.1 million was converted into Series A
preferred stock and outstanding principal and interest of $505,000 was
converted into Series B preferred stock. Outstanding principal of $250,000 was
repaid to a note holder.
In September 1998, the Company entered into a financing agreement with
Microsoft to borrow up to $11.9 million at an interest rate of 8% per annum.
Principal and accrued interest were due upon the earlier of September 1999, or
the closing of any acquisition of the Company by a third party of a majority of
its capital stock or substantially all of its assets. Borrowings were
convertible, at the option of the Company, to any series of equity issued to
third parties pursuant to any equity financing that in the aggregate exceeded
$5 million. Warrants to purchase 480,000 shares of common stock at an exercise
price of $0.6275 per share were issued in conjunction with the financing
agreement. These warrants expire in September 2003. The fair value of these
warrants was recorded as interest expense over the term the financing agreement
was effective. In December 1998, pursuant to a licensing agreement with
Microsoft, this note was applied as an offset against the consideration due
under that license agreement and was recorded as deferred revenue of $11.4
million.
4. Income Taxes:
The provision for income taxes of $64,000, $166,000 and $146,000 for the
period from July 19, 1996 (inception) through December 31, 1996 and for the
years ended December 31, 1997 and 1998, applies to the Australian subsidiary.
The primary components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................. $ 3,700 $ 4,699
Deferred revenue...................................... -- 3,637
Depreciation & amortization........................... 446 391
Accruals and reserves................................. 52 110
------- -------
Total deferred tax assets............................. 4,198 8,837
Deferred tax liability................................ -- (3)
------- -------
Net deferred tax asset................................ 4,198 8,834
Valuation allowance................................... (4,177) (8,834)
------- -------
Deferred tax asset.................................... $ 21 $ --
======= =======
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax asset.
As of December 31, 1998, the Company has net operating loss (NOL)
carryforwards of approximately $12.1 million and $10.2 million for federal and
state tax purposes, respectively. Such carryforwards expire from 2004 to 2011.
F-14
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the provisions of Section 382 of the Internal Revenue Code,
utilization of the NOLs are subject to annual limitations through 2011 due to a
greater than 50% change in the ownership of the Company which occurred during
fiscal years 1997 and 1998.
5. Commitments:
The Company leases office and storage space for technical equipment under
non-cancelable operating leases which expire at various dates through the year
2003.
Future minimum lease payments under all operating leases at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999.............................................................. $1,264
2000.............................................................. 932
2001.............................................................. 660
2002.............................................................. 287
2003.............................................................. 119
Thereafter........................................................ --
------
Total minimum lease payments.................................... $3,262
======
</TABLE>
In May 1999, the Company entered into a ten year operating lease agreement
for office space. The lease commences in October 1999 and has average monthly
lease payments over the lease term of $364,000 per month.
Rent expense under all operating leases for the period from July 19, 1996
(inception) through December 31, 1996 and for the years ended December 31, 1997
and 1998, amounted to $71,000, $215,000 and $508,000 respectively.
In February 1999, the Company obtained a financing lease with a total
commitment of $2.0 million which is accounted for as a capital lease. The
Company has pledged as collateral certain computer equipment. The total credit
extended to the Company under the agreement was $464,000 as of June 30, 1999.
Future minimum lease payments under this capital lease at June 30, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
Six months ended December 31, 1999................................... $100
Year ending December 31,
2000............................................................... 201
2001............................................................... 201
2002............................................................... 69
Thereafter......................................................... --
----
Total minimum lease payments......................................... 571
Less: Interest....................................................... 107
----
Present value of net minimum lease payments.......................... $464
====
Capital lease obligation--current portion............................ $142
====
Capital lease obligation--long-term.................................. $322
====
</TABLE>
F-15
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company entered into five agreements with three PBS-
related entities under which the Company agreed to sponsor five programs on
PBS. The terms of four agreements are for five years, with either party having
the right to terminate the agreements after three years. The term of the fifth
agreement is for three years and gives the Company a right of first refusal for
the fourth and fifth years. The Company is committed to pay a total of $19.3
million during the contract period to the PBS-related entities.
6. Stockholders' Equity:
Convertible Preferred Stock
The Company is authorized to issue 44,805,698 shares of $0.001 par value
preferred stock. The following is outstanding (in thousands):
<TABLE>
<CAPTION>
Issued and Outstanding
-----------------------
December
31,
----------- June 30,
Designated 1997 1998 1999
---------- ---- ------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Series A................................ 11,888 -- 6,353 7,853
Series B................................ 14,328 -- 14,328 14,328
Series C................................ 12,590 -- -- 12,084
Series 1 Junior......................... 6,000 -- 6,000 6,000
--- ------ ------
Total convertible preferred............. -- 26,681 40,265
=== ====== ======
</TABLE>
The rights, preferences and privileges of the preferred stockholders are as
follows:
Dividends
The Company's Certificate of Incorporation prohibits the Company from
declaring or paying dividends on the Junior preferred stock unless dividends
have been paid on the Series A, B and C preferred stock. Dividends are
noncumulative and the dividend rate is at the discretion of the Board of
Directors of the Company. The Certificate also prohibits declaring or paying
dividends on the common stock unless dividends are paid on the senior and
Series 1 Junior preferred stock. As of June 30, 1999, no dividends have been
declared or paid on any class of the Company's capital stock.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A, Series B and Series C preferred stock (senior
preferred stockholders) retain liquidation preference over Series 1 Junior
preferred stockholders and common stockholders equal to the sum of the original
purchase price of $0.35625, $0.41911 and $5.00 per share, respectively, plus
any declared but unpaid dividends. After payment to the Senior preferred
stockholders, the holders of Series 1 Junior preferred stock retain liquidation
preference over common stockholders equal to the sum of $0.33333 per share of
Series 1 Junior preferred plus any declared but unpaid dividends. After payment
has been made to holders of preferred stock, all remaining assets shall be
distributed pro rata among all senior preferred and common stockholders until
the holders of Series A, Series B, and Series C preferred stock have received
$0.89061, $1.04778 and $7.50, respectively, as adjusted for stock splits, stock
dividends and recapitalizations.
F-16
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conversion
Preferred stock is convertible, at the option of the holder, into shares of
common stock at an initial conversion price of $0.35625 per share for Series A
preferred stock, $0.41911 per share for Series B preferred stock, $5.00 per
share for Series C preferred stock and $0.58333 per share for Series 1 Junior
preferred stock, as adjusted for stock splits, combinations, or
recapitalization. Convertible preferred shares are convertible into common
stock at a one-to-one ratio, and will automatically be converted upon the
effectiveness of an initial public offering. The Company has reserved
44,805,698 shares of common stock for preferred stock conversions.
Voting Rights
Each holder of preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which the shares are convertible.
Common Stock
In September 1997, the Company reorganized its capital structure by entering
into a transaction with a major stockholder in which it repurchased 101,640,000
shares of its common stock (approximately 85% of the outstanding shares), in
exchange for a warrant to purchase 9,000,000 shares of common stock at an
exercise price of $0.00017 per share. In conjunction with this exchange, the
Company issued a note payable for $1.5 million to the former stockholder.
See discussion in Note 3.
Warrants
During 1997, in conjunction with the reorganization of its capital
structure, the Company issued a warrant to purchase 9,000,000 shares of common
stock at an exercise price of $0.00017 per share to a former stockholder. The
warrant is exercisable until the earlier of (1) September 30, 2007, (2) the
closing of an initial public offering of the Company's stock, (3) a
reorganization, merger or consolidation, or (4) the sale of all of the
Company's assets. The fair value of this warrant was recorded as treasury
stock.
During 1998, the Company also issued warrants to purchase 2,510,412 shares
of Series A preferred stock at $0.35627 per share in connection with the
issuance of convertible notes payable (Note 3). During 1998, 1,500,000 of these
warrants were exercised. The remaining warrants are immediately exercisable and
expire in March 2005. The fair value of the warrants has been recorded as
interest expense over the period the notes were outstanding.
During 1998, in connection with the issuance of Series A convertible
preferred stock the Company issued warrants to purchase 3,024,924 shares of
Series A preferred stock at $0.41913 per share as a finder's fee to certain
preferred stockholders. The warrants are immediately exercisable and expire at
the earlier of May 2005 or immediately prior to the closing of an initial
public offering. The fair value of the warrants has been recorded as stock
issuance cost.
During 1998, the Company issued a warrant to purchase up to 1,500,000 shares
of common stock at an exercise price of $2.50 per share in connection with a
strategic alliance agreement. This warrant is immediately exercisable and
expires in May 2003. Because the exercise price exceeded the deemed fair value
of the underlying stock at the date of grant, no positive fair value was
attributed to this warrant.
During 1998, the Company issued a warrant to purchase up to 480,000 shares
of common stock at an exercise price of $0.41833 per share in connection with a
financing agreement. This warrant is immediately exercisable and expires in
September 2003. See Note 3.
F-17
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1999, the Company issued a warrant to purchase 439,999 shares of
Series C preferred stock at $5.00 per share as compensation for services
provided in connection with the Series C preferred financing. The warrants are
immediately exercisable and expire in March 2002. The fair value of the
warrants has been recorded as issuance costs.
During 1999, the Company issued warrants to purchase 420,000 shares of
common stock at $1.25 per shares in connection with an asset purchase. These
warrants are immediately exercisable and expire in June 2004. The fair value of
the warrants, which was determined using the Black-Scholes model, was recorded
as part of the purchase price.
In June 1999, the Company granted warrants to purchase 120,000 shares of
common stock at $1.25 per share to two individuals in connection with their
employment. Of these warrants, 30,000 vest immediately and the remaining 90,000
vest at a rate of 3,750 shares per month provided the individuals continue to
be employees of the Company. These warrants expire in June 2004 and are
accounted for under APB 25 and the Company recorded deferred compensation of
$1,218,000 for the difference between exercise price and the fair market value
of the underlying common stock at the date of grant.
As of June 30, 1999, 15,909,085 of the warrants outstanding are exercisable.
The following table sets forth warrants outstanding as of June 30, 1999 (in
thousands, except for per share data):
<TABLE>
<CAPTION>
Number
of Exercise
Date of grant Type warrants price Expires
------------- ------------------ -------- -------- --------------
<S> <C> <C> <C> <C>
September 1997.......... Common 9,000 $0.00017 September 2007
March 1998.............. Series A preferred 1,010 $0.35627 March 2005
May 1998................ Series A preferred 3,025 $0.41913 May 2005
May 1998................ Common 1,500 $ 2.50 May 2003
September 1998.......... Common 480 $0.41833 September 2003
March 1999.............. Series C preferred 440 $ 5.00 March 2002
June 1999............... Common 420 $ 1.25 June 2004
June 1999............... Common 120 $ 1.25 June 2004
</TABLE>
Stock Option Plan
In December 1997, in connection with a stock split, the Company canceled the
1996 Stock Option Plan and all options granted thereunder. In December 1997,
the Company approved the 1998 Stock Option Plan (the Plan). The Company has
reserved 9,750,000 and 20,850,000 shares of common stock for issuance under the
Plan at December 31, 1998 and June 30, 1999, respectively. Options generally
become exercisable ratably over up to four years after the grant date and have
a term of ten years. Under the Plan, the Company may grant incentive stock
options, nonstatutory stock options and stock purchase rights to employees,
directors and consultants.
As of June 30, 1999, 11,861,003 options were outstanding and 6,979,897
shares remained available for grant under the Company's stock option plan. At
June 30, 1999, 854,500 options were exercisable at exercise prices ranging from
$0.00953 to $10.66667, with an average exercise price of $0.02813.
F-18
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity under the plans during the periods indicated is as
follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
Weighted
Average
Outstanding Exercise
Options Price
Number of Per
Shares Share
----------- --------
<S> <C> <C>
Balance at December 31, 1996............................ --
Granted............................................... 13,401 $0.0047
Canceled.............................................. (8,964) $0.0002
------
Balance at December 31, 1997............................ 4,437 $0.0095
Granted............................................... 5,424 $0.1609
Canceled.............................................. (618) $0.0246
Exercised............................................. (402) $0.0095
------
Balance at December 31, 1998............................ 8,841 $0.1014
Granted (unaudited)................................... 4,950 $2.6731
Canceled (unaudited).................................. (323) $0.5123
Exercised (unaudited)................................. (1,607) $0.0246
------
Balance at June 30, 1999................................ 11,861 $1.1695
======
</TABLE>
The Company accounts for employee stock options under APB No. 25 and related
Interpretations for grants to employees under its stock option plans. For the
years ended December 31, 1997 and 1998, the Company recorded deferred
compensation of $0 and $1,448,000, respectively, for stock option grants where
the deemed fair value of the option at grant date was in excess of the exercise
price.
The following table summarizes information about stock options outstanding
at December 31, 1998 (in thousands, except for per share data):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.00953 to $0.00953........... 3,585 8.97 $.00953 1,741 $.00953
$0.08333 to $0.08333........... 567 9.63 $.08333 -- --
$0.11667 to $0.11667........... 1,200 9.67 $.11667 -- --
$0.16667 to $0.16667........... 2,358 9.85 $.16667 -- --
$0.25000 to $0.25000........... 1,131 9.93 $.25000 30 $.25000
----- -----
8,841 9.46 $.10140 1,771 $.01360
===== =====
</TABLE>
The following information concerning the Company's stock options plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation".
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Expected volatility.............................................. 0% 0%
Risk-free interest rate.......................................... 5.72% 5.18%
Expected lives (years)........................................... 5 5
Expected dividend yield.......................................... -- --
</TABLE>
F-19
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value for options granted was $.00273 and $.30013
for 1997 and 1998, respectively. The fair value of options granted to
independent contractors has been determined using the Black-Scholes model with
the same assumptions as options granted to employees and with a volatility of
104%. The fair value is recorded as consulting expense as services are
provided.
The pro forma net loss for the Company for 1997 and 1998 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Net Loss
As reported........................................... $(7,514) $(12,858)
Pro forma............................................. $(7,515) $(12,933)
Basic and Diluted net loss per share
As reported........................................... $(0.08) $(0.68)
Pro forma............................................. $(0.08) $(0.69)
</TABLE>
1999 Employee Stock Purchase Plan
In June 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan, which was approved by the stockholders in July 1999. A total of
750,000 shares of common stock have been reserved for issuance under the 1999
Purchase Plan, plus annual increases on January 1 of each year, beginning in
2000, equal to the lesser of 1 million shares; 3% of the outstanding shares on
January 1; or an amount determined by the Board of Directors. As of June 30,
1999, no shares have been issued under the 1999 Purchase Plan.
7. Microsoft Contract:
The Company has entered into a long-term, fixed-fee contract with Microsoft
Corporation. Under the terms of this contract, the Company has licensed its
proprietary database and is obligated to add a certain number of incremental
URLs ratably over the contract term. Microsoft may direct the specific topics
or specific websites of approximately half of the required URLs. The contract
provides for a refund of a portion of the fee in the event that the Company
does not deliver the specified number of URLs.
Under the contract, the Company has received an upfront, nonrefundable fee
of $30 million and will receive quarterly payments throughout the contract
term. Payments received in advance of performance under the contract are
recorded as deferred revenues. The Company recognizes revenues under this
contract ratably as access to URLs is delivered and no further obligation for
performance or refund exists.
F-20
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Net Loss Per Share:
In accordance with the requirements of SFAS No. 128, a reconciliation of the
numerator and denominator of basic and diluted loss per share is provided as
follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
-------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator-Basic and diluted:
Net loss..................... $ (2,900) $(7,514) $(12,858) $(4,613) $(18,233)
Denominator-Basic and diluted:
Weighted average common
shares outstanding.......... 115,947 91,589 18,790 18,326 21,265
Basic and diluted loss per
share......................... $ (0.03) $ (0.08) $ (0.68) $ (0.25) $ (0.86)
</TABLE>
In September, 1997, the Company reorganized its capital structure by
entering into a transaction with a major stockholder in which it repurchased
101,640,000 shares of its common stock. Options and warrants to purchase common
and preferred shares are not included in the diluted loss per share
calculations as their effect is antidilutive for all periods presented. These
dilutive securities included weighted average common stock equivalents relating
to preferred stock, stock options and warrants to purchase common and preferred
shares (as calculated using the treasury method) and are as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
----------------- ------------
1996 1997 1998 1998 1999
---- ----- ------ ----- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Preferred stock............................. -- -- 12,703 -- 34,230
Options..................................... -- 5,358 3,933 -- 9,214
Warrants.................................... -- 2,287 9,484 9,398 15,347
--- ----- ------ ----- ------
Total dilutive shares....................... -- 7,645 26,120 9,398 58,791
=== ===== ====== ===== ======
</TABLE>
9. Acquisitions:
On October 23, 1998, the Company acquired all of the outstanding stock of
BeSeen.com, Inc. (BeSeen) a privately held company, for $907,000 cash,
including acquisition costs of $157,000, and the issuance of 6,000,000 shares
of Series 1 Junior preferred stock. At the acquisition date, the Series 1
Junior preferred stock was valued at $0.583 per share. This transaction was
accounted for as a purchase. The results of operations of BeSeen are included
in the consolidated results of operations for periods subsequent to the
acquisition date. The total purchase price was $4.4 million, of which $3.9
million was allocated to goodwill and intangible assets.
On April 9, 1999, the Company acquired certain assets and liabilities of
Guthy-Renker Internet, LLC in exchange for $5 million cash and 2,550,000 shares
of the Company's common stock. At the date of acquisition, the common shares
were valued at $4.50 each. The total purchase price of this transaction was
$16.6 million including direct costs and expenses related to the acquisition,
of which $16.5 million were allocated to goodwill and intangible assets.
On June 9, 1999, the Company acquired substantially all of the assets and
liabilities of ITW NewCorp, Inc. in exchange for $5 million cash and warrants
to purchase 420,000 shares of the
F-21
<PAGE>
Company's common stock at $1.25. At the date of acquisition, the common shares
were valued at $11.40 each. The total purchase price of this transaction was
$9.3 million, including direct costs and expenses related to the acquisition,
all of which were recorded as goodwill.
10. Supplemental Disclosure of Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
Period from
July 19, 1996 Six
(Inception) Year Ended Months Ended
through December 31, June 30,
December 31, ------------- -------------
1996 1997 1998 1998 1999
------------- ---- -------- ---- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest........................... -- $24 $ 274 $66 $ 96
====== === ======== === ========
Income taxes....................... -- -- -- -- $ 174
====== === ======== === ========
Noncash investing and financing
activities:
Equipment under capital lease...... -- -- -- -- $ 523
====== === ======== === ========
Purchase of Homebase Directories
for common stock.................. $2,050 -- -- -- --
====== === ======== === ========
Conversion of notes payable to
Series A preferred stock.......... -- -- $ 2,125 -- --
====== === ======== === ========
Conversion of notes payable and
accrued interest to Series B
preferred stock................... -- -- $ 505 -- --
====== === ======== === ========
Series A preferred stock given for
issuance costs of Series A........ -- -- $ 163 -- --
====== === ======== === ========
Issuance of Series 1 Junior
preferred stock for the
acquisition of BeSeen.com......... -- -- $ 3,500 -- --
====== === ======== === ========
Note payable converted to deferred
revenue under license agreement... -- -- $ 11,385 -- --
====== === ======== === ========
Issuance of common stock for the
acquisition of Guthy-Renker....... -- -- -- -- $ 11,475
====== === ======== === ========
Issuance of common warrants for the
acquisition of ITW NewCorp., Inc.
.................................. -- -- -- -- $ 4,263
====== === ======== === ========
</TABLE>
11. Related Party Transactions:
The Company receives licensing revenues from Cox Interactive Media, Inc., a
stockholder of the Company, for the design and licensing of LookSmart database
content used on Cox Interactive websites. Revenues from Cox Interactive Media,
Inc. amounted to $0 and $538,000 for the years ended December 31, 1997 and
1998, respectively.
F-22
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information for Looksmart, Ltd.
set forth below gives effect to the merger between the LookSmart, Ltd. and
BeSeen.com, Inc., (Merger) as well as LookSmart's asset purchase transactions
with Guthy-Renker Internet, LLC and ITW NewCorp, Inc. (Purchase Transactions).
The historical financial information set forth below has been derived from, and
is qualified by reference to, the consolidated financial statements of
LookSmart, and the financial statements of BeSeen.com, Inc. Guthy-Renker
Internet, LLC and ITW NewCorp, Inc., and should be read in conjunction with
those financial statements, the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
On October 23, 1998, LookSmart acquired all of the outstanding common stock
of BeSeen.com, Inc. in exchange for 6,000,000 shares of LookSmart Series 1
Junior preferred stock. This transaction was accounted for using the purchase
method.
On April 9, 1999, LookSmart acquired certain assets from Guthy-Renker
Internet, LLC in exchange for $5 million cash and 2,550,000 shares of LookSmart
common stock.
On June 9, 1999, LookSmart acquired substantially all of the assets of ITW
NewCorp, Inc., in exchange for $5 million and warrants to purchase 420,000
shares of LookSmart common stock.
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1998, set forth below, give effect to the Merger and the
Purchase Transactions as if they occurred on January 1, 1998. The unaudited pro
forma combined statement of operations data for the six months ended June 30,
1999, set forth below, give effect to the Purchase Transactions as if they
occurred on January 1, 1999.
The unaudited pro forma combined financial information set forth below does
not purport to represent what the consolidated results of operations or
financial condition of LookSmart, Ltd would have been if the Merger or the
Purchase Transactions had in fact occurred on such dates or to the future
consolidated results of operations or financial condition of LookSmart, Ltd.
F-23
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Guthy-Renker
Looksmart, Ltd. BeSeen.com, Inc. Internet, LLC ITW NewCorp,
for the Year for the Period for the Inc. for the
Ended January 1, 1998 53 Weeks Ended Year Ended
December 31, through January 3, December 31, Pro Forma
1998 October 23, 1998 1999 1998 Combined Adjustments Total
--------------- ---------------- -------------- ------------ -------- ----------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 8,785 $298 $10,670 $389 $ 20,142 $ -- $ 20,142
Cost of revenues........ 1,586 83 6,459 119 8,247 -- 8,247
-------- ---- ------- ---- -------- ------- --------
Gross profit (loss)..... 7,199 215 4,211 270 11,895 -- 11,895
Operating expenses:
Sales and marketing... 10,848 23 3,214 24 14,109 -- 14,109
Product development... 4,427 31 59 4,517 -- 4,517
General and
administrative....... 2,746 187 1,532 70 4,535 -- 4,535
Write-off of in-
process research and
development.......... 338 -- -- -- 338 -- 338
Amortization of
goodwill, intangibles
and unearned
compensation......... 738 -- -- -- 738 6,047 (1) 6,785
-------- ---- ------- ---- -------- ------- --------
Total operating
expenses............... 19,097 241 4,746 153 24,237 6,047 30,284
-------- ---- ------- ---- -------- ------- --------
Income (loss) from
operations............. (11,898) (26) (535) 117 (12,342) (6,047) (18,389)
Other income/ (expense),
net.................... (139) -- -- -- (139) -- (139)
Interest income/
(expense), net......... (675) (1) -- (1) (677) -- (677)
Income taxes............ (146) -- (5) -- (151) 5 (2) (146)
-------- ---- ------- ---- -------- ------- --------
Net income (loss)....... (12,858) (27) (540) 116 (13,309) (6,042)(3) (19,351)
Change in foreign
currency translation
adjustment during the
period................. (16) -- -- -- (16) -- (16)
-------- ---- ------- ---- -------- ------- --------
Comprehensive income
(loss)................. $(12,874) $(27) $ (540) $116 $(13,325) $(6,042)(3) $(19,367)
======== ==== ======= ==== ======== ======= ========
Basic and diluted net
loss per share......... $ (0.68) (3) $ (0.91)
======== ========
Weighted average number
of shares of common
stock outstanding used
in computing basic and
diluted net loss per
share.................. 18,790 2,550 (3) 21,340
======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (0.31) $ (0.42)
======== ========
Shares used in computing
pro forma basic and
diluted net loss
per share.............. 41,080 4,867 (3) 45,947
======== ======= ========
</TABLE>
F-24
<PAGE>
LOOKSMART LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1999
<TABLE>
<CAPTION>
LookSmart, Ltd. Guthy-Renker ITW NewCorp,
for the Internet, LLC Inc. for the
Six Months for the Period
Ended 13 Weeks Ended January 1 to
June 30, April 4, June 9, Pro Forma
1999 1999 1999 Combined Adjustments Total
--------------- -------------- ------------ -------- ----------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 18,058 $3,471 $392 $ 21,921 -- $ 21,921
Cost of revenues........ 2,754 2,287 128 5,169 -- 5,169
-------- ------ ---- -------- ------- --------
Gross profit (loss)..... 15,304 1,184 264 16,752 -- 16,752
Operating expenses:
Sales and marketing... 16,189 853 107 17,149 -- 17,149
Product development... 9,567 -- 84 9,651 -- 9,651
General and
administrative....... 3,666 421 93 4,180 -- 4,180
Amortization of
goodwill, intangibles
and deferred
compensation......... 4,652 -- -- 4,652 2,610(1) 7,262
-------- ------ ---- -------- ------- --------
Total operating
expenses............ 34,074 1,274 284 35,632 2,610 38,242
-------- ------ ---- -------- ------- --------
Loss from operations.... (18,770) (90) (20) (18,880) (2,610) (21,490)
Other income/(expense),
net.................... (8) -- -- (8) -- (8)
Interest
income/(expense), net.. 597 -- -- 597 -- 597
Income Taxes............ (52) (5) (57) 5(2) (52)
-------- ------ ---- -------- ------- --------
Net loss............. (18,233) (95) (20) (18,348) (2,605) (20,953)
Change in foreign
currency translation
adjustment during the
period................. 26 -- -- 26 -- 26
-------- ------ ---- -------- ------- --------
Comprehensive loss...... $(18,207) $ (95) $(20) $(18,322) $(2,605) $(20,927)
======== ====== ==== ======== ======= ========
Basic and diluted net
loss per share......... $ (0.86) $ (0.88)
======== ========
Weighted average number
of shares of common
stock outstanding used
in computing basic and
diluted net loss per
share.................. 21,265 2,550(3) 23,815
======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (0.33) $ (0.38)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 55,496 55,496
======== ========
</TABLE>
F-25
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Pro forma adjustments for the unaudited pro forma combined statements of
operations for the year ended December 31, 1998 and the six months ended June
30, 1999 are as follows:
(1) Represents the amortization of intangible assets and goodwill. For the
unaudited pro forma combined statement of operations for the year ended
December 31, 1998 this amount also includes amortization of intangible
assets and goodwill as a result of the BeSeen.com, Inc. merger.
(2) Represents elimination of Guthy-Renker Internet, LLC tax provision.
(3) Pro forma net loss reflects the impact of the adjustments above. Basic
and diluted net loss per share (pro forma) is computed using the
weighted-average number of shares of common stock outstanding after the
issuance of LookSmart common stock to purchase the Guthy-Renker
Internet, LLC assets. Pro forma basic and diluted net loss per share
includes the weighted-average shares described above and it gives
effect to the assumed conversion of LookSmart's Series A, B and C
preferred stock, Series 1 Junior preferred stock and certain warrants
at the date of issuance.
F-26
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
BeSeen.com, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of BeSeen.com, Inc. at December 31,
1997 and September 30, 1998, and the results of its operations and its cash
flows for the period from January 27, 1997 (inception) to December 31, 1997 and
for the nine month period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
April 7, 1999
F-27
<PAGE>
BESEEN.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 6,500 $ 11,616
Trade accounts receivable......................... -- 85,151
------- --------
Total current assets............................ 6,500 96,767
Computer equipment and software, net................ 15,347 33,426
------- --------
Total assets.................................... $21,847 $130,193
======= ========
Liabilities and Net Assets
Current liabilities:
Trade accounts payable............................ $ 6,152 $ 68,316
Other accrued liabilities......................... -- 13,912
Income taxes payable.............................. -- 2,214
------- --------
Total liabilities............................... 6,152 84,442
------- --------
Stockholders' equity:
Common stock, $.001 par value, 1,000,000 shares
authorized; issued and outstanding: 79,342 and
101,388 shares December 31, 1997 and
September 30, 1998, respectively................. 79 101
Additional paid-in capital........................ 46,012 100,015
Accumulated deficit............................... (30,396) (54,365)
------- --------
Total stockholders' equity...................... 15,695 45,751
------- --------
Total liabilities and stockholders' equity.... $21,847 $130,193
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BESEEN.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 27, 1997 January 27, 1997
(Inception) to (Inception) to Nine Months Ended
December 31, 1997 September 30, 1997 September 30, 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
Revenues................ $ 13,059 $ 1,299 $235,942
Cost of revenues........ (19,228) (5,363) (69,718)
-------- -------- --------
Gross profit (loss)... (6,169) (4,064) 166,224
-------- -------- --------
Operating expenses:
Sales and marketing... 5,772 1,668 22,738
General and
administrative....... 10,759 2,933 143,031
Research and
development.......... 7,696 2,224 23,399
-------- -------- --------
Total operating
expenses........... 24,227 6,825 189,168
-------- -------- --------
Loss from
operations......... (30,396) (10,889) (22,944)
Interest expense, net... -- -- (1,025)
-------- -------- --------
Net loss.............. $(30,396) $(10,889) $(23,969)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BESEEN.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 27, 1997 (INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------- Paid in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 27,
1997 (inception)......... -- $ -- $ -- $ -- $ --
Common stock issued for
cash..................... 79,342 79 46,012 -- 46,091
Net loss.................. -- -- -- (30,396) (30,396)
------- ---- -------- -------- --------
Balance at December 31,
1997..................... 79,342 79 46,012 (30,396) 15,695
Common stock issued for
cash..................... 20,658 21 11,979 -- 12,000
Common stock issued for
conversion of notes...... 1,121 1 42,024 -- 42,025
Net loss.................. -- -- -- (23,969) (23,969)
------- ---- -------- -------- --------
Balance at September 30,
1998..................... 101,121 $101 $100,015 $(54,365) $ 45,751
======= ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BESEEN.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 27, 1997 January 27, 1997 Nine Months
(Inception) to (Inception) to Ended
December 31, 1997 September 30, 1997 September 30, 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(30,396) $(10,889) $(23,969)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 2,337 983 8,011
Noncash interest
expense.............. -- -- 1,025
Changes in operating
assets and
liabilities:
Decrease (increase)
in assets:
Trade account
receivable......... -- -- (85,151)
Increase (decrease)
in liabilities:
Trade accounts
payable............ 6,152 -- 62,164
Other accrued
liabilities........ -- -- 13,912
Income taxes
payable............ -- -- 2,214
-------- -------- --------
Net cash used in
operating
activities......... (21,907) (9,906) (21,794)
-------- -------- --------
Cash flows from
investing activities:
Purchase of computers
and software.......... (17,684) (12,726) (26,090)
-------- -------- --------
Net cash used in
investing.......... (17,684) (12,726) (26,090)
-------- -------- --------
Cash flows from
financing activities:
Proceeds from
stockholder
contributions......... 46,091 30,092 12,000
Proceeds from issuance
of note payable....... -- -- 47,000
Repayment of note
payable............... -- -- (6,000)
-------- -------- --------
Net cash provided by
financing
activities......... 46,091 30,092 53,000
-------- -------- --------
Net increase in cash and
cash equivalents....... 6,500 7,460 5,116
Cash and cash
equivalents, beginning
of period.............. -- -- 6,500
-------- -------- --------
Cash and cash
equivalents, end of
period................. $ 6,500 $ 7,460 $ 11,616
======== ======== ========
Supplemental noncash
activity:
Conversion of note
payable to equity..... $ -- $ -- $ 42,025
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BESEEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of presentation:
BeSeen.com, Inc. (the Company) was incorporated on August 3, 1998 as a
Texas corporation. As of that date, all interests in Duncan & Elmore,
L.L.C., a Texas limited liability company formed on January 27, 1997, were
transferred in exchange for 100,000 shares of BeSeen.com, Inc. common
stock. The issuance of these shares is retroactively presented in these
financial statements. The Company provides tools for website development
and online community interaction.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition:
Revenues are derived principally from short-term advertising contracts in
which the Company guarantees a minimum number of impressions (a view of an
advertisement by a consumer) for a fixed fee. Revenues are recognized
ratably over the period in which the advertisement is displayed, provided
that no significant obligations remain and collection of the resulting
receivable is probable. To the extent minimum guaranteed impressions are
not met, the Company defers recognition of the corresponding revenue until
the remaining guaranteed impression levels are achieved.
Revenues derived from monthly subscription services and upgrades are
recognized in the period in which the services are provided. The Company
records deferred revenues for any amounts received in advance of the
completion of the subscription period.
Revenues from retail sales are recognized in the period in which the goods
are shipped. Such revenues have been insignificant to date.
Cash and Cash Equivalents:
Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less
to be cash equivalents.
Computer Equipment and Software:
Computer equipment and software are recorded at cost and depreciated using
the straight-line method over their useful lives of three years. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from their respective accounts, and any gain or
loss on such sale or disposal is reflected in operations.
Maintenance and repairs are charged to expense as incurred. Expenditures
which substantially increase an asset's useful life are capitalized.
Computer equipment and software was $17,684 and $ 43,774 at December 31,
1997 and September 30 1998, respectively. Accumulated depreciation was
$2,337 and $10,348 at December 31, 1997 and September 30, 1998,
respectively.
F-32
<PAGE>
BESEEN.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Product Development:
Costs incurred in the development of new products and enhancements to
existing products are charged to expense as incurred. Statements of
Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release are considered to be insignificant.
Deferred Revenues:
Deferred revenues primarily represent prepayments by customers for
advertising space over a predetermined period.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The
Company performs ongoing credit evaluations, does not require collateral,
and maintains reserves for potential credit losses on customer accounts
when deemed necessary.
Recently Issued Accounting Pronouncements:
In 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income" and No. 131, "Disclosure About Segments of an
Enterprise and Related Information" which are effective for the year ending
December 31, 1998. In 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which is
effective for the year ending December 31, 1999. The Company has not yet
determined the impact of the implementation of these pronouncements;
however, it is not expected to be material to the financial statements.
2. Income Taxes:
On August 3, 1998, the Company changed its tax status from a Limited
Liability Corporation to a C-Corporation. Prior to converting to a C-
Corporation, the taxes were the responsibility of the members of the
Limited Liability Corporation. There were no significant deferred tax
balances at September 30, 1998.
3. Common Stock:
On August 3, 1998, the Company incorporated as a Texas corporation. On that
date, the Corporation issued 1,000 share certificates for every one percent
of membership interest to the owners Duncan & Elmore, L.L.C. for a total of
100,000 shares.
4. Related Party Transactions:
On July 1, 1998, the Company issued a note payable to a contracted
technical support employee and investor in the amount of $41,000. As of
August 31, 1998, the outstanding principal and accrued interest of $1,025
were converted into 1,121 shares of common stock.
On April 10, 1998, an interest free loan payable to a Company officer was
originated in the amount of $6,000. This loan was repaid on October 8,
1998.
5. Subsequent Event:
On October 23, 1998 in accordance with the Certificate of Merger and
Articles of Merger then dated, LookSmart, Ltd. acquired all of the
Company's outstanding shares of common stock, at which time the Company
became a wholly owned subsidiary of LookSmart, Ltd.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Members
Guthy-Renker Internet, LLC
We have audited the accompanying balance sheets of Guthy-Renker Internet,
LLC, a California limited liability company, as of January 3, 1999 and December
31, 1997, and the related statements of operations, members' deficit, and cash
flows for the 53 weeks ended January 3, 1999 and the year ended December 31,
1997, respectively. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Guthy-Renker Internet, LLC
at January 3, 1999 and December 31, 1997, and the results of its operations and
its cash flows for the 53 weeks ended January 3, 1999 and the year ended
December 31, 1997, respectively, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Riverside, California
March 24, 1999,
except for Note 6,as to which the date is
April 9, 1999
F-34
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, December
1999 31, 1997
----------- -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable................................. $ 127,000 $ 89,000
Deferred direct-response costs...................... 291,000 293,000
Supplies inventory.................................. 8,000 --
----------- -----------
Total current assets.............................. 426,000 382,000
Equipment........................................... 241,000 212,000
Accumulated depreciation............................ (167,000) (90,000)
----------- -----------
74,000 122,000
----------- -----------
Total assets...................................... $ 500,000 $ 504,000
=========== ===========
Liabilities and members' equity (deficit)
Current liabilities:
Accounts payable.................................... $ 1,016,000 $ 854,000
Amounts due to member............................... 735,000 192,000
Accrued Internet setup costs........................ 227,000 280,000
Accrued expenses.................................... 22,000 96,000
Deferred revenue.................................... 68,000 110,000
----------- -----------
Total current liabilities......................... 2,068,000 1,532,000
Contingencies
Members' deficit...................................... (1,568,000) (1,028,000)
----------- -----------
Total liabilities and members' deficit............ $ 500,000 $ 504,000
=========== ===========
</TABLE>
See accompanying notes.
F-35
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
53 weeks
Ended Year Ended
January 3, December
1999 31, 1997
----------- -----------
<S> <C> <C>
Gross revenues........................................ $11,201,000 $20,925,000
Less returns........................................ (531,000) (2,102,000)
----------- -----------
Net revenues...................................... 10,670,000 18,823,000
Cost of revenues...................................... 6,459,000 9,608,000
----------- -----------
Gross profit.......................................... 4,211,000 9,215,000
Cost and expenses:
Advertising expense................................. 3,214,000 5,364,000
General and administrative expenses................. 1,532,000 2,763,000
----------- -----------
Total costs and expenses.......................... 4,746,000 8,127,000
----------- -----------
Income (loss) before tax expense...................... (535,000) 1,088,000
Income tax expense.................................... 5,000 5,000
----------- -----------
Net income (loss)................................. $ (540,000) $ 1,083,000
=========== ===========
</TABLE>
See accompanying notes.
F-36
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
Guthy-
Renker Shim and Sons Platform
Corporation Enterprises, Inc. Dynamics, Inc. Total
----------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at January 1,
1997................... $ 1,543,800 $ (28,400) $ (28,400) $ 1,487,000
Net income............ 649,800 216,600 216,600 1,083,000
Distributions to
members.............. (2,618,000) (490,000) (490,000) (3,598,000)
----------- --------- --------- -----------
Balance at December 31,
1997................... (424,400) (301,800) (301,800) (1,028,000)
Net loss.............. (432,000) (108,000) -- (540,000)
Transfer of negative
equity of selling
member............... (301,800) -- 301,800 --
----------- --------- --------- -----------
Balance at January 3,
1999................... $(1,158,200) $(409,800) $ -- $(1,568,000)
=========== ========= ========= ===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
53 weeks
Ended Year Ended
January 3, December 31,
1999 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(540,000) $ 1,083,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation....................................... 77,000 58,000
Provision for loss on receivables.................. 197,000 104,000
Changes in operating assets and liabilities:
Accounts receivable.............................. (235,000) (45,000)
Supplies inventory............................... (8,000) --
Amounts due to member............................ 543,000 192,000
Deferred direct-response costs................... 2,000 (92,000)
Accounts payable................................. 162,000 241,000
Accrued Internet setup costs..................... (53,000) 94,000
Accrued expenses................................. (74,000) 51,000
Deferred revenues................................ (42,000) (162,000)
--------- -----------
Net cash provided by operating activities.............. 29,000 1,524,000
Cash flows from investing activities
Purchases of equipment............................... (29,000) (78,000)
Cash flows from financing activities:
Amount due from member............................... -- 2,152,000
Distributions to members............................. -- (3,598,000)
--------- -----------
Net cash used in financing activities.................. -- (1,446,000)
Net change in cash..................................... -- --
Cash at beginning of year.............................. -- --
--------- -----------
Cash at end of year.................................... $ -- $ --
========= ===========
Supplemental disclosure of cash flow information:
Cash paid for taxes.................................... $ 5,000 $ 5,000
========= ===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS
JANUARY 3, 1999
1. Organization and Summary of Significant Accounting Policies
Organization
Guthy-Renker Internet, LLC, a California limited liability company
(Company), was formed on January 1, 1996. Guthy-Renker Corporation (GRC), Shim
and Sons Enterprises, Inc. (SSE) and Platform Dynamics, Inc. (PDI) are members
of the Company having a 60%, 20% and 20% interest in the Company, respectively.
On May 22, 1998, PDI sold its 20% interest to GRC. As a result of the
transaction, GRC has $800,000 of goodwill which has not been pushed down to the
Company.
The Company is in the business of providing Internet-related seminars and
selling Internet websites throughout the United States. The Company also
receives revenues from processing sales orders of GRC products purchased
through the Internet.
Effective January 1, 1998, the Company changed from a calendar year end to a
52- or 53-week year, ending on the Sunday nearest December 31 each year. For
the convenience of the readers, the 52 or 53 weeks ended December 31, 1997 and
January 3, 1999 will be referred to as the years ended 1997 and 1998,
respectively.
Operating Agreement
As set forth in the Operating Agreement (the Agreement), no member is
required to make any additional capital contributions other than the initial
contributions unless there is unanimous consent of the members.
Net profits and losses shall be allocated to the members in proportion to
their membership interests. Losses should be allocated only to the extent that
such allocation will not create a deficit capital account balance. Any excess
losses will be reallocated to the other members that have positive capital
accounts. Any reallocation will be taken into account in computing subsequent
allocations of income.
During 1997, the Company made distributions in excess of the amounts
provided for under the Agreement. In accordance with the Agreement, these
overpayments will be withheld from future cash distributions until the
overpayments have been recovered.
The Company pays fees to the members for providing management and other
services to the Company. The Company pays GRC a fee equal to 4% of the
Company's gross revenues, as defined; SSE a fee of at least $15,000 per month;
and PDI a fee of 7% of certain revenues or otherwise $15,000 per month until
the dissolution of its member interest. The fees are considered remuneration
for services and not distributions of the Company.
Each member's liability is limited pursuant to the Beverly-Killea Limited
Liability Company Act. The term of the Company shall continue until December
31, 2050, unless terminated sooner pursuant to the terms of the Agreement.
F-39
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS
Deferred Direct-Response Costs
Deferred direct-response costs include production costs and direct-response
advertising costs. The Company defers these costs in accordance with Statement
of Position 93-7, "Reporting on Advertising Costs." Production costs include
various costs incurred by the Company to produce a commercial, generally for
television, in which the Company's seminars are marketed. The costs are
amortized over the estimated revenue stream, not to exceed 12 months. Direct-
response advertising costs include costs of airing the commercials and are
expensed when the revenues are recognized.
Equipment
Equipment is stated at cost and is depreciated using the straight-line
method based on an estimated useful life of three years.
Accrued Internet Setup Costs
Accrued Internet setup costs represent estimated costs expected to be
incurred for setup of Internet Web pages.
Income Taxes
As a limited liability company, the Company pays no federal income tax and a
nominal state LLC surtax; the members include their respective share of profits
or losses in their individual federal and state income tax returns.
Revenue Recognition
Revenues include seminar fees, sales of Internet Web pages, subscription
sales of virtual mall Web pages and Internet sales order processing fees. The
Company records revenues for the seminars when the seminars are conducted.
Revenues for the Internet Web pages are recorded when the pages are delivered.
Revenues for the subscription sales are recorded on a monthly basis. Revenues
for the processing fees are recorded when the related products are shipped. The
Company offers its services over a broad geographic base and is not dependent
on any single customer or market geographic area.
Deferred revenue represents amounts received from customers for future
seminars and is recognized when the seminar is given. Amounts received in
advance for Internet subscriptions are recognized as revenue on a monthly
basis.
Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have
traditionally been minimal and such losses have been within management's
expectation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-40
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS
2. Deferred Direct-Response Costs
Deferred direct-response costs are included in seminar and website expenses
and advertising expenses and consist of direct-response advertising costs of
$291,000 and $293,000 at January 3, 1999 and December 31, 1997, respectively.
3. Related-Party Transactions
In accordance with the Agreement (Note 1), the Company pays amounts to the
members for providing management and other services to the Company. Total fees
recognized as expense for fees paid to GRC, SSE and PDI were $427,000, $334,000
and $23,000 in 1998, and $742,000, $534,000 and $543,000 in 1997, respectively.
Commissions are paid to GRC for the sales of GRC products over the Internet
and were approximately $975,000 in 1998. There were no such expenses in 1997.
Amounts due to GRC for intercompany expenses totaled $735,000 and $192,000
at January 3, 1999 and December 31, 1997, respectively.
4. Contingencies
The Company is involved with pending litigation which has arisen in the
ordinary course of business. Although the outcome of these matters is not
presently determinable, management does not expect that the resolution of these
matters will have a material adverse impact on the financial condition of the
Company.
5. Impact of Year 2000 (Unaudited)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. GRC performs the
accounting functions for the Company. GRC has completed an assessment of its
systems to ensure Year 2000 compliance and is upgrading their systems to be
compliant by third quarter 1999.
There can be no assurance that the systems of customers and suppliers upon
which the Company relies also will be compliant by the Year 2000. Should there
be such a failure by the customers and suppliers to convert to a Year 2000
compliant status, it would not have a material adverse effect on the operations
of the Company.
6. Subsequent Event
On April 9, 1999, the assets of the Company were sold to a third party.
F-41
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
BALANCE SHEETS
<TABLE>
<CAPTION>
January 3, April 4,
1999 1999
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Accounts receivable................................. $ 127,000 $ 5,000
Deferred direct-response costs...................... 291,000 138,000
Supplies inventory.................................. 8,000 8,000
----------- -----------
Total current assets.............................. 426,000 151,000
Equipment............................................. 241,000 255,000
Accumulated depreciation.............................. (167,000) (183,000)
----------- -----------
74,000 72,000
----------- -----------
Total assets...................................... $ 500,000 $ 223,000
=========== ===========
Liabilities and members' equity (deficit)
Current liabilities:
Accounts payable.................................... $ 1,016,000 $ 789,000
Amounts due to member............................... 735,000 773,000
Accrued Internet setup costs........................ 227,000 250,000
Accrued expenses.................................... 22,000 27,000
Deferred revenue.................................... 68,000 47,000
----------- -----------
Total current liabilities......................... 2,068,000 1,886,000
Contingencies
Members' deficit...................................... (1,568,000) (1,663,000)
----------- -----------
Total liabilities and members' deficit............ $ 500,000 $ 223,000
=========== ===========
</TABLE>
F-42
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
13 Weeks Ended March 31,
April 4, 1999 1998
-------------- -------------
<S> <C> <C>
Gross revenues..................................... $3,580,000 $2,653,000
Less returns..................................... (109,000) (60,000)
---------- ----------
Net revenues................................... 3,471,000 2,593,000
Cost of revenues................................... 2,287,000 1,433,000
---------- ----------
Gross profit....................................... 1,184,000 1,160,000
Costs and Expenses:
Advertising expense.............................. 853,000 627,000
General and administrative expenses.............. 421,000 407,000
---------- ----------
Total costs and expenses....................... 1,274,000 1,034,000
---------- ----------
Income (loss) before tax expense................... (90,000) 126,000
Income tax expense................................. (5,000) (5,000)
---------- ----------
Net income (loss).............................. $ (95,000) $ 121,000
========== ==========
</TABLE>
F-43
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
13 Weeks
Ended Quarter Ended
April 4, March 31,
1999 1998
--------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (95,000) $121,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation........................................ 16,000 19,000
Change in operating assets and liabilities:
Accounts receivable................................ 122,000 32,000
Amounts due to member.............................. 38,000 (12,000)
Deferred direct-response costs..................... 153,000 77,000
Accounts payable................................... (227,000) (94,000)
Accrued Internet setup costs....................... 23,000 (31,000)
Accrued expenses................................... 5,000 (46,000)
Deferred revenues.................................. (21,000) (52,000)
--------- --------
Net cash provided by operating activities............. 14,000 14,000
Cash flows from investing activities:
Purchases of equipment.............................. (14,000) (14,000)
--------- --------
Net change in cash.................................... -- --
Cash at beginning of quarter.......................... -- --
--------- --------
Cash at end of quarter................................ $ -- $ --
========= ========
Supplemental Information:
Cash paid for taxes................................... $ 5,000 $ --
========= ========
</TABLE>
F-44
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
April 4, 1999
1. Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements contain all normal recurring adjustments necessary to present fairly
the financial position of Guthy-Renker Internet, LLC (Company) as of April 4,
1999 and the results of its operations and its cash flows for the three months
ended March 31, 1998 and April 4, 1999. These financial statements should be
read in conjunction with the audited financial statements and related notes as
of and for the 53 weeks ended January 3, 1999. The operating results for the
three months ended March 31, 1998 and 13 weeks ended April 4, 1999 are not
necessarily indicative of the results of operations for a full year.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Contingencies
The Company is involved with pending litigation which has arisen in the
ordinary course of business. Although the outcome of these matters is not
presently determinable, management does not expect that the resolution of these
matters will have a material adverse impact on the financial condition of the
Company.
4. Subsequent Event
On April 9, 1999, the assets of the Company were sold to a third party.
F-45
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder of
ITW NewCorp, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholder's equity and cash flows present fairly, in all
material respects, the financial position of ITW NewCorp, Inc., successor to
Inside the Web, Inc., at December 31, 1997 and 1998, and March 31, 1999, the
results of its operations and its cash flows for each of the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1999 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
F-46
<PAGE>
ITW NEWCORP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------- March
1997 1998 31, 1999
------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 1,737 $ 1,412 $ 22,540
Trade accounts receivable.......................... 10,878 135,123 125,556
Other current assets............................... 3,208 41 41
------- -------- --------
Total current assets............................. 15,823 136,576 148,137
Property and equipment, net.......................... 3,571 7,228 8,659
------- -------- --------
Total assets..................................... $19,394 $143,804 $156,796
======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable............................. $ -- $ 1,976 $ 5,058
Credit card and other liabilities.................. 7,998 8,371 2,483
------- -------- --------
Total liabilities................................ 7,998 10,347 7,541
------- -------- --------
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized; 100 issued and outstanding............ 1 1 1
Additional paid-in capital......................... 428 6,436 6,436
Retained earnings.................................. 10,967 127,020 142,818
------- -------- --------
Total stockholder's equity....................... 11,396 133,457 149,255
------- -------- --------
Total liabilities and stockholder's equity..... $19,394 $143,804 $156,796
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-47
<PAGE>
ITW NEWCORP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended March 31,
----------------- -----------------
1997 1998 1998 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues.................................. $37,458 $389,285 $28,124 $193,408
Cost of revenues.......................... 7,967 119,469 8,104 68,618
------- -------- ------- --------
Gross margin.......................... 29,491 269,816 20,020 124,790
------- -------- ------- --------
Operating expenses:
Sales and marketing..................... 87 23,903 12 24,321
General and administrative.............. 10,861 70,006 6,008 57,504
Research and development................ 9,161 58,422 9,374 27,053
------- -------- ------- --------
Total operating expenses.............. 20,109 152,331 15,394 108,878
------- -------- ------- --------
Income from operations................ 9,382 117,485 4,626 15,912
Interest expense.......................... (124) (1,432) (371) (114)
------- -------- ------- --------
Net income............................ $ 9,258 $116,053 $ 4,255 $ 15,798
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-48
<PAGE>
ITW NEWCORP, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
------------- Paid In Retained Stockholder's
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 100 $ 1 $ 8 $ 1,709 $ 1,718
Capital contributions.......... -- -- 420 -- 420
Net income..................... -- -- -- 9,258 9,258
--- --- ------ -------- --------
Balance at December 31, 1997... 100 1 428 10,967 11,396
Capital contributions.......... -- -- 6,008 -- 6,008
Net income..................... -- -- -- 116,053 116,053
--- --- ------ -------- --------
Balance at December 31, 1998... 100 1 6,436 127,020 133,457
Net income .................... -- -- -- 15,798 15,798
--- --- ------ -------- --------
Balance at March 31, 1999 ..... 100 $ 1 $6,436 $142,818 $149,255
=== === ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
ITW NEWCORP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended March 31,
------------------ ----------------
1997 1998 1998 1999
------- --------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 9,258 $ 116,053 $ 4,255 $15,798
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization........ 308 2,124 437 841
Changes in operating assets and
liabilities:
Decrease (increase) in assets:
Trade accounts receivable.......... (9,430) (124,245) (8,937) 9,567
Other current assets............... (3,070) 3,167 3,117 --
Decrease (increase) in liabilities:
Trade accounts payable............. -- 1,976 2,670 3,082
Credit card and other liabilities.. 7,192 373 480 (5,888)
------- --------- ------- -------
Net cash provided by (used) in
operating activities.............. 4,258 (552) 2,022 23,400
------- --------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment.... (3,879) (5,781) (2,039) (2,272)
------- --------- ------- -------
Net cash used in investing
activities........................ (3,879) (5,781) (2,039) (2,272)
------- --------- ------- -------
Cash flows from financing activities:
Proceeds from stockholder
contributions......................... 420 6,008 -- --
------- --------- ------- -------
Net cash provided by financing
activities........................ 420 6,008 -- --
------- --------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................. 799 (325) (17) 21,128
Cash and cash equivalents, beginning of
period.................................. 938 1,737 1,737 1,412
------- --------- ------- -------
Cash and cash equivalents, end of
period.................................. $ 1,737 $ 1,412 $ 1,720 $22,540
======= ========= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid for interest................. $ 124 $ 1,432 $ 371 $ 114
======= ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-50
<PAGE>
ITW NEWCORP, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentation:
ITW NewCorp, Inc. was incorporated March 9, 1999 and is the successor to
Inside the Web, Inc., which was incorporated on August 5, 1998. The
corporations are the successors to a sole proprietorship founded in
September 1994. The corporations and sole proprietorship are referred to
hereafter as "the Company". The Company provides free customized message
board systems for existing Internet sites. Upon incorporation, the Company
issued 100 shares of common stock with a par value of $0.01 to the former
sole proprietor in exchange for the assets and liabilities of the sole
proprietorship. This issuance of common stock has been retroactively
presented in these financial statements and all assets and liabilities have
been presented at their historical basis.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition:
Revenues are derived principally from short-term advertising contracts.
Revenues are recognized as impressions (a view of an advertisement by a
consumer) are delivered, provided that no other significant obligations
remain and collection of the resulting receivable is probable. The Company
does not guarantee a minimum number of impressions to be delivered nor a
minimum time period for which impressions will be delivered.
Cash and Cash Equivalents:
Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less
to be cash equivalents.
Fair Value of Financial Instruments:
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable are carried at cost, which
approximates fair value due to the relatively short maturity of those
instruments.
Property and Equipment:
Property and equipment are recorded at cost and depreciated using the
straight-line method over their useful lives of three years for computer
equipment and five years for furniture and
F-51
<PAGE>
ITW NEWCORP, INC.
NOTES TO FINANCIAL STATEMENTS
fixtures. When assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from their accounts, and any gain or
loss on such sale or disposal is reflected in operations.
Maintenance and repairs are charged to expense as incurred. Expenditures
which substantially increase an asset's useful life are capitalized.
Concentration of Credit Risk:
The Company has used two third-party marketing companies to generate more
than 90% of its revenues for the years ended December 31, 1997 and 1998,
and for the three month period ended March 31, 1999. As of December 31,
1997 and 1998 and March 31, 1999 receivables from these third party
marketing companies exceeded 90% of total accounts receivable.
Comprehensive Income:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), "Comprehensive Income". SFAS No. 130
establishes standards for reporting comprehensive income and its components
in financial statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from nonowner sources. To
date, the Company has not had any transactions that are required to be
included in comprehensive income other than net income.
Segment Information:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
(SFAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for the way companies
report information about operating segments in financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. In accordance with the
provisions of SFAS No. 131, the Company has determined that it does not
have any separately reportable operating segments.
Recently Issued Accounting Pronouncements:
In 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
and No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which are effective for the year ending December 31, 1999. The
Company has not yet determined the impact of the implementation of these
pronouncements; however, it is not expected to be material to the financial
statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which provides
guidance for determining whether computer software is internal-use software
and accounting for the proceeds of computer software originally developed
or obtained for internal use and then subsequently sold to the public. SOP
98-1 also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company does
not expect the adoption of SOP 98-1 to have a material effect on the
financial statements.
F-52
<PAGE>
ITW NEWCORP, INC.
NOTES TO FINANCIAL STATEMENTS
2. Property and Equipment:
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment........ $3,879 $9,660 $10,863
Furniture and fixtures.... -- -- 1,069
------ ------ -------
3,879 9,660 11,932
Less accumulated
depreciation and
amortization............. 308 2,432 3,273
------ ------ -------
Property and equipment,
net.................... $3,571 $7,228 $ 8,659
====== ====== =======
</TABLE>
3. Income Taxes:
At August 5, 1998, the Company elected and continues to be treated as an S-
corporation for tax purposes. Prior to this, the Company was a sole
proprietorship. As an S-corporation, the Company's income and expenses are
passed through to its stockholder rather than being taxed at the
corporation level. The Company is not required to pay any federal or state
taxes.
4. Common Stock:
On March 9, 1999, the Company reincorporated as a Florida corporation. The
Company is authorized to issue 1,000 shares of common stock with a par
value of $0.01 per share.
5. Subsequent Events:
Subsequent to March 31, 1999, the Company sold substantially all of its
assets to LookSmart, Ltd.
F-53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
LookSmart, Ltd. and Subsidiaries:
In our opinion, the accompanying balance sheet and the related statement of
operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of HomeBase Directories Pty Ltd at
July 24, 1996, and the results of its operations and its cash flows for the
period from January 1, 1996 to July 24, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
F-54
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
BALANCE SHEET
<TABLE>
<CAPTION>
July 24,
1996
-----------
<S> <C>
Assets
Current assets:
Cash............................................................ $ 36,408
Prepaid expenses................................................ 15,291
Other current assets............................................ 791
-----------
Total current assets.......................................... 52,490
Plant and equipment, net.......................................... 281,937
-----------
Total assets.................................................. $ 334,427
===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable................................................ $ 215,148
Notes payable................................................... 1,479,781
Accrued liabilities............................................. 73,559
-----------
Total current liabilities..................................... 1,768,488
-----------
Total liabilities............................................. 1,768,488
-----------
Stockholders' deficit:
Common stock, $1 par value, 100,000 shares authorized; 12 shares
issued and outstanding at July 24, 1996........................ $ 12
Additional paid-in capital...................................... 53,321
Cumulative translation adjustment............................... (35,219)
Accumulated deficit............................................. (1,452,175)
-----------
Total stockholders' deficit................................... (1,434,061)
-----------
Total liabilities and stockholders' deficit................... $ 334,427
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-55
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period From
January 1,
1996 to
July 24,
1996
-----------
<S> <C>
Operating expenses:
Sales and marketing............................................. $ 271,997
General and administrative...................................... 568,403
Product development............................................. 545,272
-----------
Total operating expenses...................................... 1,385,672
-----------
Loss from operations.............................................. (1,385,672)
Interest expense, net............................................. (42,391)
-----------
Net loss...................................................... $(1,428,063)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-56
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Total
------------- Paid In Translation Cumulative Stockholders'
Shares Amount Capital Adjustment Deficit Deficit
------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... 12 $12 $ -- $ 139 $ (24,112) $ (23,961)
Stockholder
contribution........... -- -- 53,321 -- -- 53,321
Foreign currency
translation
adjustment............. -- -- -- (35,358) -- (35,358)
Net loss................ -- -- -- -- (1,428,063) (1,428,063)
--- --- ------- -------- ----------- -----------
Balances at July 24,
1996................... 12 $12 $53,321 $(35,219) $(1,452,175) $(1,434,061)
=== === ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-57
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
from January 1, 1996
to July 24, 1996
--------------------
<S> <C>
Cash flows from operating activities:
Net loss................................................ $(1,428,063)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation expense.................................. 34,201
Changes in operating assets and liabilities:
Increase in prepaid expenses.......................... (14,023)
Increase in other current assets...................... (773)
Increase in accounts payable.......................... 137,146
Increase in accrued liabilities....................... 77,290
-----------
Net cash used in operating activities............... (1,194,222)
Cash flows from investing activities:
Purchases of plant and equipment........................ (268,267)
-----------
Net cash used in investing activities............... (268,267)
Cash flows from financing activities:
Proceeds from note payable.............................. 1,048,073
-----------
Net cash provided by financing activities........... 1,048,073
-----------
Decrease in cash.................................... (414,416)
Cash and cash equivalents, beginning of period............ 450,824
-----------
Cash and cash equivalents, end of period.................. $ 36,408
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-58
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentation:
HomeBase Directories Pty Ltd. (Company) was incorporated on September 11,
1995 in Melbourne, Australia and is the predecessor to LookSmart, Ltd. The
Company's activities consisted of developing comprehensive Internet navigation
services. On July 24, 1996, the Company sold substantially all assets and
liabilities to NetGet Ltd.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
Interest revenue is recognized as it is earned. No revenues have been
derived from the Company's product to date.
Cash and Cash Equivalents:
Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments:
The Company's financial instruments, including cash and cash equivalents,
notes payable and accounts payable, are carried at cost, which approximates
fair value due to the short maturity of those instruments.
Plant and Equipment:
Plant and equipment are recorded at cost and depreciated using the straight-
line method over their useful lives, which is three years for computer
equipment and five years for furniture and fixtures. Leasehold improvements are
depreciated over the shorter of five years or the lease term. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from their respective accounts, and any gain or loss on such sale or
disposal is reflected in operations.
Maintenance and repairs are charged to expense as incurred. Expenditures
which substantially increase an asset's useful life are capitalized.
Foreign Currency Translation:
The accounts of the Company are translated into U.S. dollars, the functional
currency, at period end rates of exchange. Revenues and expenses are translated
at average rates for the period. The resulting translation adjustments are
shown as a separate component of stockholders' equity. Gains and losses from
foreign currency transactions are included in the determination of operations
and are not material.
F-59
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
NOTES TO FINANCIAL STATEMENTS
2. Plant and Equipment:
Plant and equipment at July 24, 1996 consisted of the following:
<TABLE>
<S> <C>
Computer equipment............................................. $255,930
Furniture and fixtures......................................... 3,826
Leasehold improvements......................................... 56,382
--------
316,138
Less accumulated depreciation................................ (34,201)
--------
Plant and equipment, net................................... $281,937
========
</TABLE>
3. Income Taxes:
For the period ended July 24, 1996, no income tax provision was recorded, as
the Company did not have taxable income.
The primary components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
July 24,
1996
---------
<S> <C>
Net operating loss carryforwards.............................. $ 495,350
Less valuation allowance...................................... (495,350)
---------
$ --
=========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax asset.
4. Notes Payable:
During 1995 and 1996, the Company borrowed $1,479,781 from a strategic
partner, and issued a note for the same amount.
5. Related Party Transactions:
During 1996, the company purchased plant and equipment from asia.java.com
Pty Ltd, the Company's parent company, for $10,856.
F-60
<PAGE>
UNDERWRITING
LookSmart and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. With some conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc.
and Hambrecht & Quist LLC are the representatives of the underwriters.
<TABLE>
<S> <C>
Underwriter Number of Shares
Goldman, Sachs & Co. .......................................
BancBoston Robertson Stephens Inc. .........................
Hambrecht & Quist LLC.......................................
----------------
Total..................................................... 12,000,000
================
</TABLE>
---------------
The underwriting agreement provides that if any of the shares of common
stock are purchased by the underwriters, all of the shares of common stock that
the underwriters have agreed to purchase under the underwriting agreement, must
be purchased. If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy up to an
additional 1,800,000 shares from LookSmart to cover such sales. They may
exercise that option for 30 days. If any shares are purchased under this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by LookSmart. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<S> <C> <C> <C> <C>
Paid by LookSmart
No Exercise Full Exercise
Per Share................................... $ $
Total....................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
LookSmart and its directors, officers, employees and other stockholders have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. This restriction does not apply to any
issuances under LookSmart's existing employee benefit plans or pursuant to an
acquisition transaction, provided that any person who acquires securities in an
acquisition transaction agrees to be bound by the restriction for any remaining
period. See "Shares Eligible for Future Sale" for a discussion of transfer
restrictions.
U-1
<PAGE>
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
negotiated among LookSmart and the representatives of the underwriters. Among
the factors considered in determining the initial public offering price of the
shares, in addition to prevailing market conditions, were LookSmart's
historical performance, estimates of LookSmart's business potential and
earnings prospects, an assessment of LookSmart's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "LOOK".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of this underwriter in stabilizing or short-sale
covering transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market or
in the over-the-counter market.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The underwriters have reserved for sale, at the initial public offering
price, up to 781,000 shares of common stock offered in this offering for
individuals designated by LookSmart who have expressed an interest in
purchasing the shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not purchased by
these persons will be offered by the underwriters to the general public on the
same basis as other shares offered in this offering.
LookSmart estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,200,000.
LookSmart has agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act of 1933.
In LookSmart's March 1999 private placement of Series C preferred stock,
Hambrecht & Quist California, the parent company of Hambrecht & Quist LLC,
purchased 39,000 shares of Series C preferred stock for $195,000. In addition,
the Hambrecht & Quist Employee Venture Fund, L.P. II and the Access Technology
Partners Brokers Fund, L.P. purchased and aggregate of 17,500 shares of Series
C preferred stock for $92,500. All of the limited partnership interests of
these two funds are held by employees of Hambrecht & Quist California or
Hambrecht & Quist LLC, and the general partner of both of these funds is H&Q
Venture Management LLC, a subsidiary of Hambrecht & Quist California. Some
employees of Hambrecht & Quist LLC also purchased an aggregate of 26,500
U-2
<PAGE>
shares of Series C preferred stock in the private placement for approximately
$132,500, and H&Q Venture Management LLC and two employees of Hambrecht & Quist
California together own a 1.0% general partnership interest in a partnership
that purchased 315,999 shares of Series C preferred stock in the private
placement. The purchases described above were made on the same terms as those
made by other investors in the private placement, including the purchase price
of $5.00 per share.
U-3
<PAGE>
DESCRIPTION OF ARTWORK
[The inside back cover includes a graphic representation of LookSmart's
network. The LookSmart logo appears at the center of the graphic. Emanating
from the LookSmart logo are (clockwise from the top) the logos of the Microsoft
Network, Netscape, Cox Interactive, and Netzero, a shaded oval with the text
"220 ISPs," and the logos of Blue Mountain Arts, Excite, and PBS.]
Heading for the graphic: look at our network.
One statement appears beneath the graphic, with text as follows:
Our high quality, proprietary directory of Internet content is also
accessible to millions of users through our distributed network. In May 1999
alone, nearly 43 million unique visitors accessed looksmart.com and the
websites of our licensees. Source: Media Metrix.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 24
Business................................................................. 41
Management............................................................... 53
Certain Transactions..................................................... 62
Principal Stockholders................................................... 65
Description of Capital Stock ............................................ 67
Shares Eligible for Future Sale.......................................... 70
Legal Matters............................................................ 72
Experts.................................................................. 72
Where You Can Find More Information...................................... 73
Index to the Financial Statements........................................ F-1
Underwriting............................................................. U-1
</TABLE>
---------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,000,000 Shares
LookSmart, Ltd.
Common Stock
---------------
---------------
Goldman, Sachs & Co.
BancBoston Robertson Stephens
Hambrecht & Quist
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by the Registrant,
other than the underwriting discounts and commissions payable by the Registrant
in connection with the sale of the common stock being registered. All amounts
shown are estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
Registration fee.................................................... $ 49,874
NASD filing fee..................................................... 18,440
Nasdaq National Market System listing fee........................... 95,000
Printing and engraving expenses..................................... 150,000
Legal fees and expenses............................................. 400,000
Accounting fees and expenses........................................ 300,000
Transfer agent and registrar fees................................... 10,000
Miscellaneous expenses.............................................. 176,686
----------
Total............................................................. $1,200,000
==========
</TABLE>
- --------
* To be supplied by amendment.
Item 14. Indemnification of Officers and Directors.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements with its
directors, officers and certain employees which would require the Registrant,
among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising from
willful misconduct of a culpable nature). The Registrant also intends to
maintain director and officer liability insurance, if available on reasonable
terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures the Registrant's directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
Since our incorporation in July 1996, we have sold and issued the following
securities:
(1) On July 24, 1996, we issued 119,640,000 shares of common stock to two
founding stockholders for an aggregate consideration of $19,940.00.
(2) On September 22, 1997, we repurchased 101,640,000 shares of our
common stock from one founding stockholder for the aggregate repurchase
price of $16,940.00 in exchange for the issuance of a warrant to purchase
9,000,000 shares of common stock and a promissory note in the aggregate
amount of $1,500,000. Such warrant has an exercise price of $0.00017 per
share.
(3) On January 5, 1998, we issued a warrant for 1,500,000 shares of
mandatorily redeemable convertible preferred stock (Series A) to a bank in
connection with a line of credit agreement for an aggregate purchase price
of $534,400.00.
(4) On February 1, 1998, we issued to one investor a convertible
promissory note in the aggregate amount of $250,000.00, mandatorily
redeemable for preferred stock (Series A).
(5) On February 5, 1998, we issued to two investors convertible
promissory notes in the aggregate amount of $250,000.00, mandatorily
redeemable for preferred stock (Series A).
(6) On March 7, 1998, we issued to one investor a convertible promissory
note in the aggregate amount of $50,000.00, mandatorily redeemable for
preferred stock (Series A).
(7) On March 12, 1998, we issued to one investor a convertible promissory
note in the aggregate amount of $75,000.00, mandatorily redeemable for
preferred stock (Series A).
(8) On March 26, 1998, we issued a warrant for 1,010,412 shares of
mandatorily redeemable convertible preferred stock (Series A) to one
investor for an aggregate purchase price of $359,976.12.
(9) On March 27, 1998, we issued to one investor a convertible promissory
note in the aggregate amount of $1,500,000, mandatorily redeemable for
preferred stock (Series A).
(10) On April 6, 1998, we issued to one investor a warrant for 336,804
shares for an aggregate purchase price of $56,134.00 and a convertible
promissory note in the aggregate amount of $500,000.00, both for
mandatorily redeemable convertible preferred stock (Series A).
(11) On May 6, 1998, we issued 1,057,500 shares of common stock to one
director for an aggregate consideration of $8,906.25.
(12) On May 7, 1998, we issued 6,352,614 shares of Series A to seven
investors for an aggregate consideration of $2,287,493.39, we issued
14,327,748 shares of Series B to one investor for an aggregate
consideration of 6,004,997.98, and we issued a warrant to purchase
1,500,000 shares of common stock to one investor for an aggregate purchase
price of $3,750,000.00 and warrants to purchase an aggregate of 3,024,924
shares of Series A to two investors for an aggregate of $1,267,846.48.
(13) On September 10, 1998, we issued a warrant to purchase 480,000
shares of common stock to one investor for an aggregate purchase price of
$200,800.00.
(14) On October 23, 1998, we issued 6,000,000 shares of Series 1 Junior
Preferred to seven investors for an aggregate of $2,900,000.00 in
connection with the acquisition of BeSeen.com, Inc. as a wholly-owned
subsidiary.
(15) On March 24, 1999, we issued 12,007,590 shares of Series C to 45
investors for an aggregate of $60,037,950.00, and a warrant to purchase
439,999 shares of Series C to one investor for an aggregate purchase price
of $2,199,997.50. One April 26, 1999, we issued 75,939 shares of Series C
Preferred Stock to 14 investors for an aggregate of $379,695.00.
(16) On April 9, 1999, we issued 2,550,000 shares of common stock to one
investor for the aggregate consideration of $6,375,000.00 in connection
with an asset purchase.
II-2
<PAGE>
(17) On June 9, 1999, we issued warrants to purchase an aggregate of
540,000 shares of common stock to 4 investors for an aggregate
consideration of $675,000 in connection with an asset purchase.
(18) Since our incorporation, we have issued, and there remain
outstanding, options to purchase an aggregate of 11,861,003 shares of
common stock with exercise prices ranging from $0.00953 to $10.66667 per
share. Since our incorporation, options to purchase 2,009,100 shares of
common stock have been exercised for an aggregate consideration of
$43,348.43.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances of securities described in Items 15(1), (4), (5), (7), (9),
(12), and (15) were deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) and on Regulation S of the Securities Act as
transactions by an issuer not involving a public offering and the offer and
sale of securities to non-U.S. investors. The issuance of securities described
in Items 15(2), (3), (6), (10), (11), (13), (16) and (17) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. The issuance of securities described in item 15(14) were deemed to be
exempt from registration in reliance on Sections (2) and 4(6) of the Securities
Act. The issuances of securities described in Item 15(18) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
or Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access,
through employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation as currently in effect
3.2 Form of Restated Certificate of Incorporation (to be filed with the
Delaware Secretary of State prior to the closing of the offering
covered by this Registration Statement)
3.3* Bylaws as currently in effect
3.4* Form of Bylaws (to be adopted upon the completion of the offering
covered by this Registration Statement)
4.1 Form of Specimen Stock Certificate
4.2* Second Amended and Restated Investor Rights Agreement dated March
24, 1999
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being issued
10.1 Form of Indemnification Agreement, to be entered into between the
Registrant and each of its directors and officers, to become
effective upon the closing of the offering made under this
Registration Statement
10.2 Amended and Restated 1998 Stock Plan
10.3 1999 Employee Stock Purchase Plan
10.4+* License and Update Agreement with Microsoft Corporation
10.5+* Asset Purchase Agreement with Guthy-Renker Internet, LLC
10.6+* Agreement and Plan of Reorganization with BeSeen.com, Inc.
10.7 * Procurement and Trafficking Agreement with DoubleClick, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.8+* Development Agreement with Cox Interactive Media, Inc.
10.9+* Premier Positions on US Search Pages with Netscape Communications
Corporation
10.10+* PBS Group Sponsorship Agreement
10.10A Agreement with Educational Broadcasting Corporation regarding Chefs
of Cucina Amore, dated June 18, 1999
10.10B Agreement with Educational Broadcasting Corporation regarding Great
Food, dated June 18, 1999
10.10C Agreement with Educational Broadcasting Corporation regarding Master
Chef USA, dated June 18, 1999
10.10D Agreement with WGBH Educational Foundation regarding Mystery!, dated
June 7, 1999
10.10E Agreement with Children's Television Workshop regarding Sesame
Street, dated June 28, 1999
10.11* Sublease Agreement with Wired Ventures, Inc. for property located at
660 Third Street, San Francisco, California, dated December 2, 1998
10.12* Lease Agreement with 487 Bryant Street, LLC for property located at
487 Bryant Street, San Francisco, California, dated May 4, 1998
10.13* Sublease Agreement with Skidmarks, Inc. for property located at 550
Bryant Street, San Francisco, California, dated November 18, 1998
10.14* Sublease Agreement with Jaran, Inc. for property located at 275
Brannan Street, San Francisco, California, dated April 30, 1999
10.15* Lease Agreement with Rosenberg SOMA Investments III, LLC for
property located at 625 Second Street, San Francisco, California,
dated May 5, 1999
10.16* Consent to Sublease Agreement with Ninety Park Property LLC, and
First Manhattan Consulting Group Inc. for property located at 90
Park Avenue, New York, New York, dated October 22, 1998
10.17* Lease Agreement with Euro Asia Properties Pty Ltd for property
located at Level 5, 388 Lonsdale Street, Melbourne, Australia, dated
September 1, 1998
10.18* Lease Agreement with Tonicalon Pty Limited for property located at
Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
June 1, 1999
10.19* Summary Plan Description of 401(k) Plan
21.1* List of Subsidiary
23.1 Consent of PricewaterhouseCoopers LLP (LookSmart, Ltd.)
23.2 Consent of PricewaterhouseCoopers LLP (BeSeen.com, Inc.)
23.3 Consent of Ernst & Young LLP (Guthy-Renker Internet, LLC)
23.4 Consent of PricewaterhouseCoopers LLP (ITW NewCorp, Inc.)
23.5 Consent of PricewaterhouseCoopers LLP (HomeBase Directories Pty
Ltd.)
23.6 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1* Power of Attorney (contained in the signature page to this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- --------
+ confidential treatment requested
* previously filed
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(17) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, County of San Francisco, State of California, on the day of July 27,
1999.
LOOKSMART, LTD.
Evan Thornley*
By: _________________________________
Evan Thornley, Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Evan Thornley* Chairman, Chief Executive July 27, 1999
______________________________________ Officer and Director
(Evan Thornley) (Principal Executive
Officer)
Tracey Ellery* President, Director July 27, 1999
______________________________________
(Tracey Ellery)
/s/ Patricia Cole Chief Financial Officer July 27, 1999
______________________________________ (Principal Financial and
(Patricia Cole) Accounting Officer)
Anthony Castagna* Director July 27, 1999
______________________________________
(Anthony Castagna)
Paul Riley* Director July 27, 1999
______________________________________
(Paul Riley)
Robert J. Ryan* Director July 27, 1999
______________________________________
(Robert J. Ryan)
Scott Whiteside* Director July 27, 1999
______________________________________
(Scott Whiteside)
</TABLE>
/s/ Patricia Cole
*By:________________________
Patricia Cole
Attorney-in-fact
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders of LookSmart, Ltd. and Subsidiaries:
We have audited the financial statements of LookSmart, Ltd. and subsidiaries
as of December 31, 1997 and 1998 and for the period from July 19, 1996
(inception) to December 31, 1996 and for each of the two years in the period
ended December 31, 1998, and have issued our report thereon dated May 7, 1999.
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
May 7, 1999
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
LookSmart, Ltd. and Subsidiaries
<TABLE>
<CAPTION>
Balance
Balance at Charged to at End
Beginning Costs and of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Period from July 19, 1996 (inception)
to December 31, 1996:
Deferred tax valuation allowance... $ -- $ 986 $ -- $ 986
------ ------ ----- ------
Total............................ $ -- $ 986 $ -- $ 986
====== ====== ===== ======
Year ended December 31, 1997:
Deferred tax valuation allowance... $ 986 $3,191 $ -- $4,177
------ ------ ----- ------
Total............................ $ 986 $3,191 $ -- $4,177
====== ====== ===== ======
Year ended December 31, 1998:
Allowance for doubtful accounts.... $ -- $ 127 $ -- $ 127
Deferred tax valuation allowance... 4,177 4,658 -- 8,834
------ ------ ----- ------
Total............................ $4,177 $4,785 $ -- $8,961
====== ====== ===== ======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation as currently in effect
3.2 Form of Restated Certificate of Incorporation (to be filed with the
Delaware Secretary of State prior to the closing of the offering
covered by this Registration Statement)
3.3* Bylaws as currently in effect
3.4* Form of Bylaws (to be adopted upon the completion of the offering
covered by this Registration Statement)
4.1 Form of Specimen Stock Certificate
4.2* Second Amended and Restated Investor Rights Agreement dated March
24, 1999
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being issued
10.1 Form of Indemnification Agreement, to be entered into between the
Registrant and each of its directors and officers, to become
effective upon the closing of the offering made under this
Registration Statement
10.2 Amended and Restated 1998 Stock Plan
10.3 1999 Employee Stock Purchase Plan
10.4+* License and Update Agreement with Microsoft Corporation
10.5+* Asset Purchase Agreement with Guthy-Renker Internet LLC
10.6+* Agreement and Plan of Reorganization with BeSeen.com, Inc.
10.7* Procurement and Trafficking Agreement with DoubleClick, Inc.
10.8+* Development Agreement with Cox Interactive Media, Inc.
10.9+* Premier Positions on US Search Pages with Netscape Communications
Corporation
10.10+* PBS Group Sponsorship Agreement
10.10A Agreement with Educational Broadcasting Corporation concerning Chefs
of Cucina Amore, dated June 18, 1999
10.10B Agreement with Educational Broadcasting Corporation concerning Great
Food, dated June 18, 1999
10.10C Agreement with Educational Broadcasting Corporation concerning Master
Chef USA, dated June 18, 1999
10.10D Agreement with WGBH Educational Foundation concerning Mystery!, dated
June 7, 1999
10.10E Agreement with Children's Television Workshop concerning Sesame
Street, dated June 28, 1999
10.11* Sublease Agreement with Wired Ventures, Inc. for property located at
660 Third Street, San Francisco, California, dated December 2, 1998
10.12* Lease Agreement with 487 Bryant Street, LLC for property located at
487 Bryant Street, San Francisco, California, dated May 4, 1998
10.13* Sublease Agreement with Skidmarks, Inc. for property located at 550
Bryant Street, San Francisco, California, dated November 18, 1998
10.14* Sublease Agreement with Jaran, Inc. for property located at 275
Brannan Street, San Francisco, California, dated April 30, 1999
10.15* Lease Agreement with Rosenberg SOMA Investments III, LLC for
property located at 625 Second Street, San Francisco, California,
dated May 5, 1999
10.16* Consent to Sublease Agreement with Ninety Park Property LLC, and
First Manhattan Consulting Group Inc. for property located at 90
Park Avenue, New York, New York, dated October 22, 1998
10.17* Lease Agreement with Euro Asia Properties Pty Ltd for property
located at Level 5, 388 Lonsdale Street, Melbourne, Australia, dated
September 1, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.18* Lease Agreement with Tonicalon Pty Limited for property located at
Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
June 1, 1999
10.19* Summary Plan Description of 401(k) Plan
21.1* List of Subsidiary
23.1 Consent of PricewaterhouseCoopers LLP (LookSmart, Ltd.)
23.2 Consent of PricewaterhouseCoopers LLP (BeSeen.com, Inc.)
23.3 Consent of Ernst & Young LLP (Guthy-Renker Internet, LLC)
23.4 Consent of PricewaterhouseCoopers LLP (ITW NewCorp, Inc.)
23.5 Consent of PricewaterhouseCoopers LLP (HomeBase Directories Pty
Ltd.)
23.6 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1* Power of Attorney (contained in the signature page to this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- --------
+ confidential treatment requested
* previously filed
<PAGE>
EXHIBIT 1.1
LookSmart, Ltd.
Common Stock, par value $0.001 per share
Underwriting Agreement
----------------------
, 1999
---------
Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
LookSmart, Ltd., a Delaware corporation (the "Company"), proposes, subject
to the terms and conditions stated herein, to issue and sell to the Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of 12,000,000
shares (the "Firm Shares") and, at the election of the Underwriters, up to
1,800,000 additional shares (the "Optional Shares") of Common Stock, par value
$0.001 per share ("Stock"), of the Company (the Firm Shares and the Optional
Shares that the Underwriters elect to purchase pursuant to Section 2 hereof
being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
<PAGE>
2
(a) A registration statement on Form S-1 (File No. 333-80581) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, to
you for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became or will become effective upon
filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been
initiated or threatened by the Commission (any preliminary prospectus
included in the Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the Commission
under the Act is hereinafter called a "Preliminary Prospectus"; the various
parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed
with the Commission pursuant to Rule 424(b) under the Act in accordance
with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under the
Act, is hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and
<PAGE>
3
regulations of the Commission thereunder and do not and will not, as of the
applicable effective date as to the Registration Statement and any
amendment thereto, and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(d) The Company's only "significant subsidiary" as that term is
defined in Regulation S-X is BeSeen.Com, Inc. ("BeSeen"). Neither the
Company nor any of its subsidiaries has sustained since the date of the
latest audited financial statements included in the Prospectus any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(e) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, or
<PAGE>
4
is subject to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction; and each subsidiary of the
Company has been duly incorporated and is validly existing as a corporation
in good standing under the laws of its jurisdiction of incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; the shares of Stock issuable upon conversion of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock
and the Series 1 Junior Preferred Stock (collectively, the "Preferred
Stock") have been duly and validly authorized and reserved for issuance
upon such conversion and, upon conversion of the Preferred Stock on the
First Time of Delivery (as defined in Section 4 hereof), the shares of
Stock issuable upon such conversion will be validly issued, fully paid and
non-assessable and will conform to the description of the Stock contained
in the Prospectus; all outstanding warrants (the "Warrants") to purchase
shares of capital stock of the Company have been duly and validly
authorized, executed and delivered by the Company and constitute valid and
binding obligations of the Company enforceable against the Company in
accordance with their terms, and the shares of capital stock issuable upon
exercise of such Warrants have been duly and validly authorized and
reserved for issuance upon such exercise and, upon payment of the exercise
price thereof upon exercise of such Warrants, such shares of capital stock
will be validly issued, fully paid and non-assessable and will conform to
the description of such stock contained in the Prospectus; except as
described or contemplated in the Prospectus, there are no outstanding
rights, warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock of, or other equity interests
in, the Company, or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock of
the Company or any such convertible or exchangeable securities or any such
rights, warrants or options; and all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
<PAGE>
5
(i) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or qualification of
or with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(j) No holder of securities of the Company has any rights to the
registration of such securities for sale under the Act in connection with
this Offering as a result of the filing of the Registration Statement or
otherwise in connection with the offer and sale of the Shares by the
Underwriters hereunder;
(k) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound;
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and the provisions of the laws and
documents referred to therein, are accurate and complete;
(m) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the
Company and its
<PAGE>
6
subsidiaries; and, to the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(n) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act");
(o) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(p) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its subsidiaries, and Ernst &Young, who have
certified certain financial statements of Guthy-Renker Corporation, are
each independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder;
(q) The financial statements and schedules of the Company and its
subsidiaries included in the Registration Statement and the Prospectus were
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved and present fairly the
financial condition of the Company and its subsidiaries as of the dates
indicated therein and the results of operations of the Company and its
subsidiaries for the periods indicated therein; and except as disclosed in
the Registration Statement and the Prospectus, the pro forma financial
information included in the Registration Statement and the Prospectus has
been prepared in accordance with the Act and the rules and regulations of
the Commission thereunder and the assumptions used in the preparation
thereof are reasonable;
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(s) The Company owns, or possesses adequate rights to use, all
material trademarks, service marks, trade mark registrations, service mark
registrations, domain names, copyrights, licenses, inventions and know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or
<PAGE>
7
procedures) necessary for the conduct of its business as described in the
Prospectus, and, except as set forth in the Prospectus, the Company has no
reason to believe that the conduct of its business will conflict with, and
has not received any notice of any claim of conflict with, any such rights
of others, except as would not have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company; and, to the Company's knowledge, neither the Company nor any of
its subsidiaries have infringed or are infringing any trademarks, service
marks, trade mark registrations, service mark registrations, domain names
or copyrights, which infringement could reasonably be expected to result in
a material adverse change in or affecting the general affairs, financial
position, stockholder's equity or results of operations of the Company and
its subsidiaries;
(t) The Company possesses adequate rights to use all material patents
necessary for the conduct of its business; to the Company's knowledge, no
valid United States patent is or would be infringed by the activities of
the Company, except as would not have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company; there are no actions, suits or proceedings pending relating to
patents or proprietary information to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is subject and, to the Company's knowledge, no such
actions, suits or proceedings are threatened by governmental authorities or
others; the Company is not aware of any claim by others that the Company is
infringing or otherwise violating the patents or other intellectual
property of others and, except as set forth in the Prospectus, is not
aware of any rights of third parties to any of the Company's licensed
patents or licenses which could materially affect the use thereof by the
Company; and
(u) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which
the business or operations of the Company or any of its subsidiaries will
be affected by the Year 2000 Problem. As a result of such review, the
Company has no reason to believe, and does not believe, that the Year 2000
Problem will have a material adverse effect on the general affairs,
management, the current or future consolidated financial position, business
prospects, stockholders' equity or results of operations of the Company and
its subsidiaries or result in any material loss or interference with the
Company's business or operations. The "Year 2000 Problem" as used herein
means any significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of dates
or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
<PAGE>
8
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $_____, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 1,800,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least 48 hours' prior notice
to the Company shall be delivered by or on behalf of the Company to Goldman,
Sachs & Co., through the facilities of the Depository Trust Company ("DTC"), for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of Federal (same-
day) funds to the account specified by the Company to Goldman, Sachs & Co. at
least 48 hours in advance. The Company will cause the certificates representing
the Shares to be made available for checking and packaging at least 24 hours
prior to the Time of Delivery (as defined below) with respect thereto at the
office of DTC or its designated custodian (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York
<PAGE>
9
City time, on _____ ___, 1999 or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing, and, with respect to the Optional
Shares, 9:30 a.m., New York City time, on the date specified by Goldman, Sachs &
Co. in the written notice given by Goldman, Sachs & Co. of the Underwriters'
election to purchase such Optional Shares, or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(k) hereof, will be delivered at the offices of Wilson
Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at 12:00 p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order
<PAGE>
10
preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any event shall have occurred as
a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in order
to comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement, an earnings statement (as
defined in Rule 158(c) under the Act) of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations thereunder (including, at the option of the Company,
Rule 158);
<PAGE>
11
(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than (i)
pursuant to employee stock option plans existing on, or upon the conversion
or exchange of convertible or exchangeable securities outstanding as of,
the date of this Agreement or (ii) pursuant to an acquisition transaction,
provided that any person who acquires securities of the Company in this
manner agrees not to offer, sell contract to sell or otherwise dispose of
such securities for the period of time beginning from the date of
acquisition of such securities and continuing to and including the date 180
days after the date of the Prospectus), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to make
available to its stockholders consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act;
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market System ("NASDAQ"); and
<PAGE>
12
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with listing the Shares on NASDAQ; (v) the filing fees
incident to, and the fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost
of preparing stock certificates; (vii) the cost and charges of any transfer
agent or registrar; and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, and Sections 8 and 11 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
stock transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement;
<PAGE>
13
no stop order suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Shearman & Sterling, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to certain matters covered in paragraphs (i), (ii), (vii),
(xi) and (xiv) of subsection (c) below as well as such other related
matters as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them
to pass upon such matters;
(c) Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Company, shall have furnished to you their written opinion
(a draft of such opinion is attached as Annex II(b) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company (including the Shares being delivered at such Time of
Delivery and the shares of Stock issued on the First Time of Delivery
upon conversion of all of the shares of Preferred Stock) have been
duly and validly authorized and issued and are fully paid and non-
assessable; and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect of matters of
fact upon certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
<PAGE>
14
(iv) BeSeen has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction
of incorporation; and all of the issued shares of capital stock of
BeSeen has been duly and validly authorized and issued, are fully paid
and non-assessable, and (except for directors' qualifying shares) are
owned directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims (such counsel being entitled
to rely in respect of the opinion in this clause upon opinions of
local counsel and in respect to matters of fact upon certificates of
officers of the Company or BeSeen, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending
to which the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the subject
which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the current consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; and, to such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such
counsel to which the Company or BeSeen is a party or by which the
Company or BeSeen is bound or to which any of the property or assets
of the Company or BeSeen is subject, nor will such action result in
any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or BeSeen or any of their
properties;
<PAGE>
15
(viii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(ix) Neither the Company nor BeSeen is in violation of its
Certificate of Incorporation or By-laws or, to such counsel's
knowledge, in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any
of its properties may be bound;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute
a summary of the terms of the Stock, and insofar as they purport to
describe the provisions of the laws and documents referred to therein,
are accurate and complete;
(xi) The Company is not an "investment company", as such term is
defined in the Investment Company Act;
(xii) To such counsel's knowledge, no holder of any security of
the Company has the right, not effectively satisfied or waived, to
require inclusion of any shares of Stock or any other security in the
Registration Statement; and
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder;
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (xi) of this section 7(c), they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that,
<PAGE>
16
as of its date, the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which
such counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading or that, as of such Time of Delivery,
either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contains an
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do
not know of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character required
to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus that are
not filed or described as required;
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery,
PricewaterhouseCoopers LLP shall have furnished to you a letter or letters,
dated the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto (the
executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
<PAGE>
17
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries (except changes
occurring as a result of the exercise of warrants or stock options issued
prior to the date of this agreement) or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is in the judgment of the Representatives
so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(f) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York or California State authorities; or
(iv) the outbreak or escalation of hostilities involving the United States
or the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this clause (iv) in the judgment
of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(g) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(h) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from the directors and executive officers
of the Company, and from the stockholders of the Company listed in Schedule
II hereto, substantially to the effect set forth in Subsection 5(e) hereof
in form and substance satisfactory to you;
(i) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
<PAGE>
18
(j) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, as to the matters set forth
in subsections (a) and (f) of this Section and as to such other matters as
you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
<PAGE>
19
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by
<PAGE>
20
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within 36 hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company shall be entitled to a further period of 36 hours within which
to procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may
<PAGE>
21
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8
<PAGE>
22
hereof; but, if for any other reason, any Shares are not delivered by or on
behalf of the Company as provided herein, the Company will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company shall then be under no further
liability to any Underwriter except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
<PAGE>
23
If the foregoing is in accordance with your understanding, please sign and
return to us five counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
LookSmart, Ltd.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Hambrecht & Quist LLC
By:
---------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional Shares to
Total Number of be Purchased if
Firm Shares to be Maximum Option
Underwriter Purchased Exercised
- ------------------------------------ ----------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co. ................
BancBoston Robertson Stephens Inc. ..
Hambrecht & Quist LLC................
[Names of other Underwriters]........
----------------- ------------------
Total......................
</TABLE>
<PAGE>
SCHEDULE II
Stockholders Furnishing Lock-Up Agreements
------------------------------------------
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the applicable
published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as indicated
in their reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives") and are attached
hereto;
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus as indicated in
their reports thereon copies of which have been separately furnished to the
Representatives and are attached hereto and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations, nothing
came to their attention that cause them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for the
four most recent fiscal years included in the Prospectus agrees with the
corresponding amounts in the audited consolidated financial statements for such
five fiscal years appearing elsewhere in the Prospectus;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis of
limited procedures specified in such letter nothing came to their attention as a
result of the foregoing procedures that caused
<PAGE>
them to believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information referred to
below, a reading of the latest available interim financial statements of the
Company and its subsidiaries, inspection of the minute books of the Company and
its subsidiaries since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, or (ii) any material modifications should be made to
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted accounting
principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such data and items
were derived, and any such unaudited data and items were not determined on
a basis substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included in the
Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in clause (A) and any unaudited income statement
data and balance sheet items included in the Prospectus and referred to in
clause (B) were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included in the
Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options and
upon conversions of convertible securities, in
<PAGE>
each case which were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in clause (E)
there were any decreases in consolidated net revenues or operating profit
or the total or per share amounts of consolidated net income or other items
specified by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding length
specified by the Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives, which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
Looksmart, Ltd.
A Delaware Corporation
The undersigned, Evan Thornley and Henry V. Barry, hereby certify that:
1. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of LookSmart, Ltd., a Delaware corporation, the
original Certificate of Incorporation of which was filed with the Secretary of
the State of Delaware on July 19, 1996, under the name of NetGet, Ltd.
2. The Certificate of Incorporation of this corporation is hereby amended
and restated in its entirety to read as follows:
"FIRST: The name of the Corporation is LookSmart, Ltd. (the "Corporation").
-----
SECOND: The address of the Corporation's registered office in the State of
------
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
Delaware 19805. The name of its registered agent at such address is Corporate
Agents, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: This Corporation is authorized to issue two classes of shares
------
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of stock which the Corporation shall have the authority to issue is
200,000,000 of which 155,194,302 shares shall be designated "Common Stock",
$0.001 par value per share, and 44,805,698 shares shall be designated "Preferred
Stock", $0.001 par value per share. The Preferred Stock shall be issued in four
series, of which 11,887,950 shares shall be designated "Series A Preferred
Stock" (the "Series A Preferred"), 14,327,748 shares shall be designated "Series
B Preferred Stock" (the "Series B Preferred") and 12,590,000 shares shall be
designated "Series C Preferred Stock" (the "Series C Preferred") and together
with the Series A Preferred and the Series B Preferred, (the "Senior Preferred
Stock"), and 6,000,000 shares shall be designated as the "Series 1 Junior
Preferred Stock" (the "Junior Preferred Stock," and together with the Senior
Preferred Stock the "Preferred Stock").
Upon amendment of this article to read as herein set forth, each two
currently outstanding shares of Common Stock, Series A Preferred, Series B
Preferred, Series C and Junior Preferred Stock shall be converted into or
reconstituted as three (3) shares of Common Stock, Series A Preferred, Series B
Preferred, Series C Preferred and Junior Preferred Stock, as the case may be. No
fractional shares of Common Stock shall be issued upon such stock split; any
fractional shares resulting from the stock split shall be rounded down to the
nearest whole share on a certificate by certificate basis.
<PAGE>
The relative rights, preferences, privileges and restrictions granted to or
imposed on the respective classes of the shares of capital stock or the holders
thereof are as follows:
1. Dividends.
---------
(a) The Corporation shall not declare or pay any dividends or
other distributions (as defined below) on shares of any series of Senior
Preferred Stock unless the holders of all other series of Senior Preferred Stock
then outstanding receive a dividend on each outstanding share of Senior
Preferred Stock on a pari passu basis relative to the Original Issue Price of
each series of Senior Preferred Stock. The Corporation shall not declare or pay
any dividends or other distributions (as defined below) on shares of Common
Stock unless the holders of the Preferred Stock then outstanding shall
simultaneously receive a dividend on each outstanding share of Preferred Stock
in an amount equal to the product of (i) the per share amount, if any, of the
dividends or other distributions to be declared, paid or set aside for the
Common Stock, multiplied by (ii) the number of whole shares of Common Stock into
which such share of Preferred Stock is then convertible.
(b) For purposes of this Section 1, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
held by employees or directors of, consultants to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase at a price equal to the original issue price of such shares and
other than redemptions in liquidation or dissolution of the Corporation) for
cash or property, including any such transfer, purchase or redemption by a
subsidiary of this Corporation.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of Senior
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Junior Preferred and Common Stock by reason of their ownership
thereof, an amount equal to the sum of (i) the Original Issue Price for each
such series of Preferred Stock (as adjusted for stock splits, combinations,
stock dividends or other recapitalizations with respect to such series of
Preferred Stock); and, (ii) an amount equal to all declared but unpaid dividends
on such Senior Preferred Stock. The "Original Issue Price" shall mean $0.35625
per share for the Series A Preferred, $0.41911 per share for the Series B
Preferred, and $5.00 per share for the Series C Preferred. The aggregate amount
payable to each holder shall be rounded to the nearest whole cent. If, upon
occurrence of such event the assets and funds thus distributed among the holders
of the Senior Preferred Stock shall be insufficient to permit the payment to
such holders of the full preferential amount to which they respectively shall be
entitled pursuant to this Section 2(a), then the entire assets and funds of the
Corporation legally available for distribution shall be distributed pro rata
among the holders of the Senior Preferred Stock in proportion to the respective
amounts which
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<PAGE>
would otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(b) After payment has been made to the holders of the Senior
Preferred Stock of the full amounts to which they shall be entitled pursuant to
Section 2(a) above, the holders of the Junior Preferred Stock shall be entitled
to receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason of
their ownership thereof, an amount equal to the sum of (i) $0.33333 per share of
Junior Preferred Stock (as adjusted for stock splits, combinations, stock
dividends or other recapitalizations); and, (ii) an amount equal to all declared
but unpaid dividends on each such share. The aggregate amount payable to each
holder shall be rounded to the nearest whole cent. If, upon occurrence of such
event, and following satisfaction of the liquidation preferences of the Senior
Preferred Stock set forth in Section 2(a) above, the assets and funds thus
distributed among the holders of the Junior Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount to which they respectively shall be entitled pursuant to this Section
2(b), then the entire assets and funds of the Corporation legally available for
distribution shall be distributed pro rata among the holders of the Junior
Preferred Stock in proportion to the respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(c) After payment has been made to the holders of the Preferred
Stock of the full amounts to which they shall be entitled pursuant to Section
2(a) and 2(b) above, all remaining assets of the Corporation shall be
distributed pro rata among all holders of Series A Preferred, Series B
Preferred, Series C Preferred and Common Stock based on the number of shares of
Common Stock which would be held by each such holder if all shares of Series A
Preferred, Series B Preferred and Series C Preferred were converted into Common
Stock at the then effective Conversion Price (as defined in Section 3(a) below)
until (i) with respect to the holders of Series A Preferred, such holders have
received an amount equal to $0.89061 per share as adjusted for stock splits,
combinations, stock dividends, recapitalizations and the like (including amounts
previously paid pursuant to Section 2(a) above), (ii) with respect to the
holders of Series B Preferred, such holders have received an amount equal to
$1.04778 per share as adjusted for stock splits, combinations, stock dividends,
recapitalizations and the like (including amounts previously paid pursuant to
Section 2(a) above), and (iii) with respect to the holders of Series C
Preferred, such holders have received an amount equal to $7.50 per share as
adjusted for stock splits, combinations, stock dividends, recapitalizations and
the like (including amounts previously paid pursuant to Section 2(a) above).
Thereafter, all remaining assets shall be distributed pro rata among the holders
of Common Stock.
(d) The holders of Preferred Stock shall not be entitled to
convert shares of Preferred Stock into shares of Common Stock in order to
participate in any distribution, or series of distributions, as holders of
Common Stock, without first foregoing participation in the distribution, or
series of distribution, as holders of such shares of Preferred Stock.
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<PAGE>
(e) For purposes of this Section 2, a liquidation, dissolution
or winding up of the Corporation shall be deemed to be occasioned by, and to
include, (i) the Corporation's sale of all or substantially all of its assets,
or (ii) any transaction or series of related transactions (including, but not
limited to, any consolidation, merger or reorganization) which will result in
the holders of the outstanding voting equity securities of the Corporation
immediately prior to such transaction holding less than fifty percent (50%) of
the voting equity securities of the surviving entity immediately following such
transaction.
(f) For purposes of this Section 2, the amount of assets and/or
proceeds available for distribution upon a liquidation, dissolution or winding
up of this Corporation shall be determined as follows:
(i) insofar as such assets or proceeds consist of cash,
the amount shall be computed at the aggregate amount of cash held by this
Corporation or payable to the stockholders at the time of the liquidation,
dissolution or winding up, excluding amounts paid or payable for accrued
interest or accrued dividends; and
(ii) insofar as it consists of securities, (A) if the
securities are then traded on a national securities exchange or the NASDAQ Stock
Market (or a similar national quotation system), then the value shall be
computed based on the closing price on such exchange or system at the time of
the liquidation, dissolution or winding up, (B) if the securities are actively
traded over-the-counter, then the value shall be computed based on the closing
price at the time of the liquidation, dissolution or winding up, and (C) if
there is no public market for the securities, then the value shall be computed
based on the fair market value thereof, as determined in good faith by the Board
of Directors of the Corporation (the "Board") at the time of liquidation,
dissolution or winding up; and
(iii) insofar as it consists of property other than cash or
securities, the amount shall be computed at the fair value thereof at the time
of the liquidation, dissolution or winding up, as determined in good faith by
the Board.
3. Conversion. The holders of the Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert; Automatic Conversion. Each share of
--------------------------------------
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing either (i) $0.35625 for the Series A Preferred,
(ii) $0.41911 for the Series B Preferred, (iii) $0.58333 for the Junior
Preferred Stock, or (iv) $5.00 for the Series C Preferred by the Conversion
Price (as defined hereinafter) per share in effect for each series of Preferred
Stock at the time of conversion.
The respective Conversion Price per share for each series of
Preferred Stock shall initially be the Original Issue Price for such series of
Preferred Stock. The Original Issue Price
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<PAGE>
for the Junior Preferred Stock is $0.58333. Such initial Conversion Prices shall
be subject to adjustment as hereinafter provided.
Each share of Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective Conversion Price upon the
earlier of (i) with respect to each series of Preferred Stock, the election to
effect such conversion by the holders of at least 50% of the applicable series
of Preferred Stock, or (ii) immediately upon the effectiveness of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the public at a price
per share in such offering that results in total gross proceeds to the Company
of at least $25,000,000. In the event of such an offering, the person(s)
entitled to receive the Common Stock issuable upon such conversion of Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such underwritten public offering.
(b) Mechanics of Conversion. No fractional shares of Common
-----------------------
Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional share to which a holder would otherwise be entitled, the Corporation
shall pay cash equal to such fraction multiplied by the fair market value of the
Common Stock as determined in good faith by the Board of Directors. Before any
holder of Preferred Stock shall be entitled to convert the same into full shares
of Common Stock, he shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for the
Preferred Stock, and shall give written notice to the Corporation at such office
that he elects to convert the same. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into a fractional share of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. If the conversion is in
connection with an underwritten public offering of securities registered
pursuant to the Securities Act of 1933, as amended, the conversion shall be
conditioned upon the closing of such public offering, in which event the
person(s) entitled to receive the Common Stock issuable upon such conversion of
the Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to such closing.
(c) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3,
-------------------
the following definitions shall apply:
(1) "Options" shall mean rights, options or warrants
-------
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
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<PAGE>
(2) "Convertible Securities" shall mean any evidences
----------------------
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "Original Issue Date" shall mean the date on which
-------------------
the first share of the applicable series of Preferred Stock was first issued.
(4) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock (i) issued (or, pursuant to paragraph 3(c)(iii), deemed
to be issued) by the Corporation after the Original Issue Date, or (ii) sold or
exchanged by the Corporation in conjunction with an acquisition of the
Corporation after the Original Issue Date, other than shares of Common Stock
issued or issuable:
(A) upon conversion of shares of Series A
Preferred, Series B Preferred, Junior Preferred Stock or Series C Preferred;
(B) to employees, officers or directors of, or
consultants to, the Corporation pursuant to a stock grant, option plan, purchase
plan or other employee stock incentive program (collectively, the "Plans") or
any other agreement so long as any such Plans or agreement are unanimously
approved by the Board of Directors;
(C) as a dividend or distribution on Series A
Preferred, Series B Preferred, Junior Preferred Stock or Series C Preferred;
(D) up to 4,350,000 shares issued in connection
with equipment lease financing transactions, bank financing transactions,
strategic alliances or licensing agreements approved by the Board of Directors,
where the issuance of such shares is not principally for the purpose of raising
additional equity capital for the Corporation;
(E) securities issued in connection with any
acquisition, merger or similar transaction;
(F) by way of dividend or other distribution on
shares of Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (A), (B), (C), (D) and (E) or on shares of
Common Stock so excluded;
(ii) No Adjustment of Conversion Price: No adjustment in the
---------------------------------
Conversion Price of a series of Preferred Stock shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to such issue, for such share of Preferred Stock.
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<PAGE>
(iii) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
(1) Options and Convertible Securities. In the event
----------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Section 3(c)(v) hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be, and provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
(C) on the expiration or cancellation of any
Options or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Conversion Price shall
have been adjusted upon the original issuance thereof or shall have been
subsequently adjusted pursuant to clause (B) above, the Conversion Price shall
be recomputed as if:
(1) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the
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<PAGE>
issue of all such Convertible Securities which were actually converted
or exchanged plus the consideration actually received by the Corporation upon
such conversion or exchange, if any, and
(2) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
date, or (ii) the Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event this Corporation shall issue
- ---------------------------------
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 3(c)(iii)) without consideration or for
a consideration per share less than the Conversion Price of any series of
Preferred Stock in effect on the date of and immediately prior to such issue,
then and in such event, the Conversion Price of the Preferred Stock shall be
reduced, concurrently with such issuance (A) with respect to each such series of
Preferred Stock, to a price (calculated to the nearest cent) determined by
multiplying each such Conversion Price by a fraction, (x) the numerator of which
shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such issue, plus (2) the number of shares of Common Stock
which the aggregate consideration received by the Corporation for the total
number of Additional Shares of Common Stock so issued would purchase at such
Conversion Price; and (y) the denominator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior to such issue, plus (2) the
number of such Additional Shares of Common Stock so issued; and provided further
that, for the purposes of this Section 3(c)(iv), all shares of Common Stock
issuable (i) upon conversion of all outstanding Preferred Stock, (ii) upon
conversion of all outstanding Convertible Securities, and (iii) upon exercise of
all outstanding Options, shall be deemed to be outstanding, and immediately
after any Additional Shares of Common Stock are deemed issued pursuant to
Section 3(c)(iii), such Additional Shares of Common Stock shall be deemed to be
outstanding, and (B) notwithstanding the above, with respect to the Series C
Preferred, to a price equal to the consideration per share for which such
Additional Shares of Common Stock are issued; provided, however, that (x) the
Conversion Price for the Series C Preferred shall be reduced only until it is
equal to a per share price that when multiplied by all of the shares of Common
Stock of the Corporation outstanding (including any shares of Common Stock
issuable upon conversion of all outstanding Preferred Stock and Convertible
Securities and upon exercise of all outstanding Options) immediately prior to
the issuance of such Additional Shares of Common Stock, is equal to
$240,000,000, and (y) the provisions of this Section 3(c)(iv)(B) shall only
apply until the closing of a firmly underwritten
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<PAGE>
public offering of shares of Common Stock at a price that results in gross
proceeds to the Corporation of at least $25,000,000. If such Additional Shares
of Common Stock are issued for no consideration, then the consideration per
share shall be deemed to be $0.001.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 3(c), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed
as the aggregate amount of cash received by the Corporation;
(B) insofar as it consists of property other then
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3(c)(iii), relating
to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(d) Adjustments for Stock Dividends, Subdivisions, Combinations,
------------------------------------------------------------
or Consolidations. In the event the Corporation shall pay a stock dividend on
- -----------------
the Common Stock, or the outstanding shares of Common Stock shall be subdivided,
combined or consolidated, by reclassification, stock split or otherwise, into a
greater or lesser number of shares of Common Stock,
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<PAGE>
the Conversion Price for each series of Preferred Stock in effect immediately
prior to such dividend, subdivision, combination or consolidation shall,
concurrently with the effectiveness of such dividend, subdivision, combination
or consolidation, be proportionately decreased or increased, as appropriate.
(e) No Impairment. The Corporation will not, by amendment of
-------------
its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation but will at all times
in good faith assist in the carrying out of all the provisions of this Section 3
and in the taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Preferred Stock against
impairment.
(f) Notices of Record Date. In the event that this Corporation
----------------------
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Preferred Stock:
(1) at least twenty (20) days' prior written notice
of the terms of such contemplated action and the date on which a record shall be
taken for such dividend, distribution or subscription rights (and specifying the
date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (iii) and
(iv) above; and
(2) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written notice of the date when
the same shall take place and the terms of such contemplated transaction (and
specifying the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
the occurrence of such event).
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<PAGE>
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of Preferred Stock at the address for each
such holder as shown on the books of this Corporation.
4. Voting Rights and Directors.
---------------------------
(a) General. Except as otherwise expressly provided herein or
-------
as required by law and as provided in paragraph (b) below, the holders of Series
A Preferred, Series B Preferred, Series C Preferred, Junior Preferred Stock and
the holders of Common Stock shall be entitled to notice of any stockholders'
meeting and to vote as a single class upon any matter submitted to the
stockholders for a vote, as follows: (i) each holder of Preferred Stock shall
have one vote for each full share of Common Stock into which its respective
shares of Preferred Stock would be convertible on the record date for the vote,
and (ii) each holder of Common Stock will have one vote per share of Common
Stock.
(b) Number of Directors and Voting for Directors. For so long
--------------------------------------------
as more than 1,050,000 shares of Series A Preferred are outstanding (as adjusted
for stock splits, reverse splits, recapitalizations or similar event), the
holders of shares of Series A Preferred, voting as a class, shall be entitled to
elect one (1) director. For so long as more than 1,500,000 shares of Series B
Preferred are outstanding (as adjusted for stock splits, reverse splits,
recapitalizations or similar event) the holders of shares of Series B Preferred,
voting as a class, shall be entitled to elect two (2) directors. For so long as
more than 1,500,000 shares of Series C Preferred are outstanding (as adjusted
for stock splits, reverse splits, recapitalizations or similar event) the
holders of shares of Series C Preferred, voting as a class, shall be entitled to
elect one (1) director; provided, however, the holders of shares of Series C
Preferred shall only be entitled to such right until the closing of a firmly
underwritten public offering of shares of Common Stock at a price that results
in gross proceeds to the Corporation of at least $25,000,000. For so long as
shares of Junior Preferred Stock remain outstanding, the holders of shares of
Common Stock and Junior Preferred Stock voting as a class shall be entitled to
elect two (2) directors. Any remaining directors shall be elected by the holders
of the Preferred Stock and the holders of Common Stock, voting as provided in
Section 4(a) above. In the case of a vacancy on the Board of Directors of the
Corporation caused by the death, resignation or removal of a director elected by
a particular class or series of stock, such vacancy shall be filled by a
director elected by the affirmative vote of a majority of the outstanding shares
of such class or series of Preferred Stock or Common Stock, as the case may be,
given at a special meeting of stockholders duly called or by an action by
written consent for that purpose. Any director elected by the holders of a
particular class or series of stock may be removed during such director's term
of office, either for or without cause, by and only by the affirmative vote of
the holders of a majority of the outstanding shares of such class or series of
stock given at a special meeting of stockholders duly called or by an action by
written consent for that purpose.
5. Protective Provisions. In addition to any other rights provided
---------------------
by law, for so long as at least 3,000,000 shares of Preferred Stock shall be
outstanding (as adjusted for stock splits, combinations, stock dividends,
recapitalizations and the like), this Corporation shall not without first
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<PAGE>
obtaining the affirmative vote or written consent of the holders of a majority
of the outstanding shares of Senior Preferred Stock, voting as a single class on
an as-converted basis:
(a) amend or repeal any provision of, or add any provision to,
this Corporation's Certificate of Incorporation or Bylaws if such action would
adversely alter or change the preferences, rights, privileges or powers of, or
the restrictions provided for the benefit of, the Preferred Stock; provided,
however, that in the event any such amendment or repeal would adversely affect
one series of the Preferred Stock but would not so affect the entire class of
Preferred Stock, then the Corporation shall obtain the affirmative vote or
written consent of the holders of a majority of the outstanding shares of such
affected series of Preferred Stock, voting separately as a single class.
(b) authorize or issue shares of any class or series of stock on
parity with or which has a preference over any series of the Senior Preferred
Stock;
(c) declare or pay any dividends on shares other than the
Preferred Stock;
(d) redeem or purchase any of the Preferred Stock or Common
Stock, provided, however, that this restriction shall not apply to the
repurchase of any unvested shares of Common Stock at cost (unless a repurchase
price other than cost is unanimously approved by the Board of Directors) from
employees, officers, directors, consultants or other persons performing services
for the Corporation upon the termination of the employment, consulting or other
relationship between the Corporation and such persons;
(e) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, but not limited to, any consolidation, merger or reorganization)
which will result in the holders of the outstanding voting equity securities of
the Corporation immediately prior to such transaction holding less than fifty
percent (50%) of the voting equity securities of the surviving entity
immediately following such transaction;
(f) increase or decrease the number of authorized shares of
Preferred Stock; and
(g) incur or prepay, or have any subsidiaries incur or prepay,
any indebtedness in excess of $10,000,000.
6. Junior Preferred Protective Provision. For so long as shares of
--------------------------------------
Junior Preferred Stock remain outstanding, without the Corporation first
obtaining the affirmative vote or written consent of the holders of a majority
of the Junior Preferred Stock, voting separately as a single class, the
Corporation shall not authorize or issue shares of a new class or series of
securities with rights, preferences, and privileges that are junior to the
Senior Preferred Stock, but senior to the Junior Preferred Stock.
7. Status of Converted Stock. In the event any shares of Preferred
-------------------------
Stock shall be converted pursuant to Section 3 hereof, the shares so converted
shall be canceled and shall not be issuable by the Corporation, and the
Certificate of Incorporation of this Corporation shall be
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<PAGE>
appropriately amended to effect the corresponding reduction in the Corporation's
authorized capital stock.
FIFTH: The Corporation is to have perpetual existence.
-----
SIXTH: Elections of directors need not be by written ballot unless a
-----
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation provide otherwise.
SEVENTH: The number of directors that constitute the whole Board of
-------
Directors of the Corporation shall be designated in the Bylaws of the
Corporation.
EIGHTH: In furtherance and not in limitation of the powers conferred by
------
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
NINTH: (a) To the fullest extent permitted by the Delaware General
-----
Corporation Law as the same exists or as it may hereafter be amended, a director
of the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(b) The Corporation may indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that she or he or her or his testator or intestate is or was a
director, officer or employee of the Corporation or any predecessor of the
Corporation or serves or served at any other enterprise as a director, officer
or employee at the request of the Corporation or any predecessor to the
Corporation.
(c) Neither any amendment nor repeal of this Article NINTH, nor
the adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article NINTH, shall eliminate or reduce the effect of
this Article NINTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article NINTH, would accrue
or arise, prior to such amendment, repeal or adoption of an inconsistent
provision, except as required by law.
TENTH: Meetings of stockholders may be held within or without the State of
-----
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
--------
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation."
-13-
<PAGE>
3. The foregoing Restated Certificate of Incorporation has been duly
adopted in accordance with Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware.
-14-
<PAGE>
The undersigned declares under penalty of perjury that the matters set
forth in the foregoing certificate are true of his own knowledge.
IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate
of Incorporation on this 22nd day of July, 1999.
/s/ EVAN THORNLEY
----------------------------------------
Evan Thornley, Chief Executive Officer
Attest By: /s/ HENRY V. BARRY
----------------------------------
Henry V. Barry, Secretary
-15-
<PAGE>
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
LOOKSMART, LTD.
LookSmart, Ltd., a corporation organized and existing under the laws of the
State of Delaware, hereby certifies as follows:
A. The name of the corporation is LookSmart, Ltd. The corporation was
originally incorporated under the name of NetGet Ltd., and the original
Certificate of Incorporation was filed with the Secretary of the State of
Delaware on July 19, 1996.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
amends the provisions of the Certificate of Incorporation of the corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of this corporation is LookSmart, Ltd.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle, Delaware
19805. The name of its registered agent at such address is Corporate Agents,
Inc.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number of shares that the corporation is authorized
to issue is 205,000,000 shares. The number of shares of Common Stock authorized
<PAGE>
is 200,000,000. The number of shares of Preferred authorized is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the board of directors (authority to do so being hereby expressly vested in the
board). The board of directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The board of directors, within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the board of directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the
number of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative or accruing, and whether the shares of
such class or series shall be entitled to any participating or other dividends
in addition to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
(e) the terms and conditions, if any, upon which shares of such class
or series shall be convertible into, or exchangeable for, shares of capital
stock of any other class or series, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
-2-
<PAGE>
(g) voting rights, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock;
(h) limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
(i) such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the board of directors of the
corporation, acting in accordance with this Restated Certificate of
Incorporation, may deem advisable and are not inconsistent with law and the
provisions of this Restated Certificate of Incorporation.
ARTICLE V
The corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article VII, shall eliminate or reduce the
effect of this Article VII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VII, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
-3-
<PAGE>
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the corporation.
ARTICLE IX
Holders of stock of any class or series of the corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 or 301.5 of the California General
Corporation Law, in which event each such holder shall be entitled to as many
votes as shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the corporation shall be designated in the Amended
and Restated Bylaws of the corporation. The directors shall be divided into
three classes with the term of office of the first class (Class I) to expire at
the annual meeting of stockholders held in 2000; the term of office of the
second class (Class II) to expire at the annual meeting of stockholders held in
2001; the term of office of the third class (Class III) to expire at the annual
meeting of stockholders held in 2002; and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Amended and Restated Bylaws of the corporation shall so
provide.
ARTICLE X
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Amended and Restated Bylaws of the corporation.
ARTICLE XI
-4-
<PAGE>
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
Amended and Restated Bylaws and no action shall be taken by the stockholders by
written consent. The affirmative vote of sixty-six and two-thirds percent (66
2/3%) of the then outstanding voting securities of the corporation, voting
together as a single class, shall be required for the amendment, repeal or
modification of the provisions of Article IX, Article X or Article XII of this
Restated Certificate of Incorporation or Sections 2.3 (Special Meeting), 2.4
(Notice of Stockholders' Meeting), 2.5 (Advanced Notice of Stockholder Nominees
and Stockholder Business), 2.10 (Voting), or 2.12 (Stockholder Action by Written
Consent Without a Meeting), or 3.2 (Number of Directors) of the corporation's
Amended and Restated Bylaws.
ARTICLE XII
Meetings of stockholders may be held within or without the State of
Delaware, as the Amended and Restated Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the statutes)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Amended and Restated
Bylaws of the corporation.
-5-
<PAGE>
IN WITNESS WHEREOF, LookSmart, Ltd. has caused this certificate to be
signed by Evan Thornley, its Chief Executive Officer, this _________ day of
________, 1999.
________________________________________
Evan Thornley
President and Chief Executive Officer
Attest By: ____________________________
Hank V. Barry, Secretary
<PAGE>
EXHIBIT 4.1
LookSmart, Ltd.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
LSL
THIS CERTIFICATE IS TRANSFERABLE IN
NEW YORK, NY OR RIDGEFIELD PARK, NJ
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 543442 10 7
This certifies that is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF
TREASURER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED and registered:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT and registrar
BY
AUTHORIZED SIGNATURE
<PAGE>
LookSmart, Ltd.
The Corporation will furnish to any stockholder, upon request and without
charge, a statement of the powers, designations, preferences, and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights,
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
July 27, 1999
LookSmart, Ltd.
487 Bryant Street
San Francisco, CA
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
80581) filed with the Securities and Exchange Commission on June 11, 1999 as
such may be amended or supplemented, (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of shares of common stock of LookSmart, Ltd. (the "Shares"). The Shares, which
include shares of common stock issuable pursuant to an over
- -allotment option
granted to the underwriters, are to be sold to the underwriters as described in
such Registration Statement for the sale to the public or issued to the
representatives of the underwriters. As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken in connection
with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares, when issued and sold
in the manner referred to in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 10.1
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement ("Agreement") is made as of this _____ day
of _________, 1999 by and between LookSmart, Ltd., a Delaware corporation (the
"Company"), and __________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action or proceeding if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
---------------
presumption that (i) Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in the best interests of the Company, or
(ii) with respect to any criminal
<PAGE>
action or proceeding, Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action or proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the best interests of the Company and
its shareholders, except that no indemnification shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless and only to the extent that the court in which such
action or proceeding is or was pending shall determine upon application that, in
view of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for expenses and then only to the extent that the court
shall determine.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to his right to be indemnified under this Agreement, give the Company
notice in writing as soon as practicable of any claim made against Indemnitee
for which indemnification will or could be sought under this Agreement. Notice
to the Company shall be directed to the Chief Executive Officer of the Company
at the address shown on the signature page of this Agreement (or such other
address as the Company shall designate in writing to Indemnitee). Notice shall
be deemed received three business days after the date postmarked if sent by
domestic certified or registered mail, properly addressed; otherwise notice
shall be deemed received when such notice shall actually be received by the
Company. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
-2-
<PAGE>
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written request of
Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Certificate of Incorporation or By-laws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter bring an action
against the Company to recover the unpaid amount of the claim and, subject to
Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for
the expenses (including attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action or proceeding in advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed, but the burden of proving such defense shall be on the
Company, and Indemnitee shall be entitled to receive interim payments of
expenses pursuant to Subsection 2(a) unless and until such defense may be
finally adjudicated by court order or judgment from which no further right of
appeal exists. It is the parties' intention that if the Company contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be for the court to decide, and neither the failure of the
Company (including its Board of Directors, any committee or subgroup of the
Board of Directors, independent legal counsel, or its shareholders) to have made
a determination that indemnification of Indemnitee is proper in the
circumstances because Indemnitee has met the applicable standard of conduct
required by applicable law, nor an actual determination by the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its shareholders) that Indemnitee has
not met such applicable standard of conduct, shall create a presumption that
Indemnitee has or has not met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a
------------------
claim pursuant to Section 2(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to
-3-
<PAGE>
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement,
-----
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's By-laws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of Indemnitee's rights and Company's obligations, under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its Board of
Directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its By-laws, any agreement,
any vote of shareholders or disinterested directors, the Delaware General
Corporation Law, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action or
other covered proceeding.
4. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
6. Directors' and Officers' Liability Insurance. The Company shall, from
--------------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the
-4-
<PAGE>
officers and directors of the Company with coverage for losses from wrongful
acts, or to ensure the Company's performance of its indemnification obligations
under this Agreement. Among other considerations, the Company will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of directors' and officers' liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
7. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. Exceptions. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or
-------------
omissions or transactions from which a director may not be relieved of liability
under the Delaware General Corporation Law.
(b) Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
-5-
<PAGE>
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any whatsoever (including, but not limited to, judgments, fines,
ERISA excise taxes or penalties, and amounts paid in settlement) which have been
paid directly to Indemnitee by an insurance carrier under a policy of directors'
and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for
--------------------------
expenses and the securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. Effectiveness of Agreement. This Agreement shall be effective as of
--------------------------
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Company, or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect
-6-
<PAGE>
to such action, unless as a part of such action, a court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
as a basis for such action were not made in good faith or were frivolous. In the
event of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses, including
attorneys' fees, incurred by Indemnitee in defense of such action (including
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court of competent jurisdiction
determines that each of Indemnitee's material defenses to such action were made
in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications
-------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
LOOKSMART, LTD.
By: /s/ Evan Thornley
---------------------------
Evan Thornley
Chief Executive Officer
LookSmart, Ltd.
487 Bryant Street
San Francisco, CA 94107-1316
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
Name:
Address: _____________________
_____________________
-8-
<PAGE>
regulation or stock exchange rule), the Company shall obtain shareholder
approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval or
the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being
-9-
<PAGE>
purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned applicable provisions of
law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
LOOKSMART, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
____ Original Application Enrollment Date: ___________
____ Change in Payroll Deduction Rate
____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the LookSmart, Ltd.
1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to _____%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the
--------
<PAGE>
disposition of the Common Stock. The Company may, but will not be obligated
-------------------------------
to, withhold from my compensation the amount necessary to meet any
applicable withholding obligation including any withholding necessary to
make available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year and 1-year holding
periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_______________________________________________________
(First) (Middle) (Last)
_________________________ _____________________________________________
Relationship
_____________________________________________
(Address)
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:________________________ _____________________________________________
Signature of Employee
_____________________________________________
Spouse's Signature (If beneficiary other
than spouse)
-2-
<PAGE>
EXHIBIT B
---------
LOOKSMART, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the LookSmart, Ltd.
1999 Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
_____________________________________
_____________________________________
_____________________________________
Signature:
_____________________________________
Date:________________________________
<PAGE>
EXHIBIT 10.2
LOOKSMART, LTD.
AMENDED AND RESTATED
1998 STOCK PLAN
(July 1999)
1. Purposes of the Plan. The purposes of this Amended and Restated 1998
--------------------
Stock Plan are:
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means LookSmart, Ltd., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
<PAGE>
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice
---------------
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The notice of Grant is part of the Option Agreement.
(q) "Office" means a person who is an officer of the Company within
------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Amended and Restated 1998 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
-3-
<PAGE>
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 20,850,000 Shares, plus an annual increase to be added on each
anniversary date of the adoption of the Plan equal to the lesser of (i)
3,750,000 Shares, (ii) 4% of the outstanding Shares on such date, or (iii) a
lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administration Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board, or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
-4-
<PAGE>
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but not limited to, the exercise
price, the time or times when Options or Stock Purchase Rights may be exercised
(which may be based on performance criteria), any vesting acceleration or waiver
of forfeiture restrictions, and any restriction or limitation regarding any
Option or Stock Purchase Right or the shares of Common Stock relating thereto,
based in each case on such factors as the Administrator, in its sole discretion,
shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
-5-
<PAGE>
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 1,500,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider many be granted Options to purchase up to an additional
1,000,000 Shares which shall not count against the limit set forth in subsection
(i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of
the Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For
-6-
<PAGE>
this purpose, if the exercise price of an Option is reduced, the transaction
will be treated as a cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect for
a term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
-7-
<PAGE>
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the
-8-
<PAGE>
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for the sale
under the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
-9-
<PAGE>
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the Stock Purchase Right is exercised, except as provided
in Section 13 of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustment Upon Changes in Capitalization, Dissolution, Merger or
-----------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and
-10-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
-11-
<PAGE>
merger or sale of assets by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
-12-
<PAGE>
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
Exhibit 10.3
LOOKSMART, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock
Purchase Plan of LookSmart, Ltd.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean LookSmart, Ltd. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
------------
earnings and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has
---------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
--------
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each
-------------
Purchase Period.
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock prior
to the date of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately twenty-four
----------------
(24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after June 1 and December 1
of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before May 31,
2001. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a share of
--------------
Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower;
provided however, that the Purchase Price may be adjusted by the Board pursuant
to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock covered by
--------
each option under the Plan which have not yet been exercised and the number of
shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
-2-
<PAGE>
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after June 1 and December 1 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
May 31, 2001. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall re-commence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 2,500
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
-4-
<PAGE>
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall
occur as provided in Section 8 hereof, unless the participant has withdrawn
pursuant to Section 10 hereof. The option shall expire on the last day of the
Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the number
of shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Enrollment Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Exercise Date, the Board may in
its sole discretion (x) provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the
-5-
<PAGE>
participant's payroll deductions credited to his or her account shall be paid to
such participant promptly after receipt of notice of withdrawal and such
participant's option for the Offering Period shall be automatically terminated,
and no further payroll deductions for the purchase of shares shall be made for
such Offering Period. If a participant withdraws from an Offering Period,
payroll deductions shall not resume at the beginning of the succeeding Offering
Period unless the participant delivers to the Company a new subscription
agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or she
shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be Seven Hundred Fifty Thousand (750,000) shares, plus an annual increase
to be added on the first day of the Company's fiscal year beginning in 2000
equal to the lesser of (i) 1,500,000 shares, (ii) 3% of the outstanding shares
on such date or (iii) a lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination
-6-
<PAGE>
made by the Board or its committee shall, to the full extent permitted by law,
be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by
-------------------------
the shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be
-7-
<PAGE>
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as
provided in Section 19 and this Section 20 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law,
-8-
<PAGE>
regulation or stock exchange rule), the Company shall obtain shareholder
approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval or
the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
-9-
<PAGE>
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
LOOKSMART, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
____ Original Application Enrollment Date: ___________
____ Change in Payroll Deduction Rate
____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the LookSmart, Ltd.
1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to _____%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the
--------
<PAGE>
disposition of the Common Stock. The Company may, but will not be obligated
-------------------------------
to, withhold from my compensation the amount necessary to meet any
applicable withholding obligation including any withholding necessary to
make available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year and 1-year holding
periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________________
(First) (Middle) (Last)
_________________________ ___________________________________________
Relationship
___________________________________________
(Address)
Employee's Social
Security Number: ______________________________________
Employee's Address: ______________________________________
______________________________________
______________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:________________________ ___________________________________________
Signature of Employee
___________________________________________
Spouse's Signature (If beneficiary other
than spouse)
-2-
<PAGE>
EXHIBIT B
---------
LOOKSMART, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the LookSmart, Ltd.
1999 Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
_____________________________________
_____________________________________
_____________________________________
Signature:
_____________________________________
Date:________________________________
<PAGE>
EXHIBIT 10.10A
[LETTERHEAD OF THIRTEEN.WNET APPEARS HERE]
June 18, 1999
Mr. Val Landi
Vice President, Marketing
Look Smart
487 Bryant Street
San Francisco, CA 94107
Dear Mr. Landi:
This Agreement, made as of the 18/th/ day of June 1999, will confirm our mutual
understanding with respect to a Grant of Two Million Three Hundred Fifty
Thousand Dollars ($2,350,000) by Look Smart ("Look Smart") to Educational
Broadcasting Corporation ("EBC") for the production of the television series
presently entitled CHEFS OF CUCHINA AMORE (the "Series"), to be distributed
nationally to public television stations by the Public Broadcasting Service
("PBS"). The parties agree as follows:
1. The Term
: The Grant for the Series is for a period of five broadcast
--------
seasons (i.e. 1999-2000, 2000-2001, 2001-2002, 2002-2003, 2003-2004)
commencing with the season-opening broadcast in October, 1999. Either party
may terminate this Agreement after the third broadcast season of the
Series, by giving written notice to the non-terminating party on or before
April 1, 2002. If this Agreement continues for the 2002-2003 broadcast
season, either party may terminate this Agreement after the fourth
broadcast season, by giving written notice to the non-terminating party on
or before April 1, 2003.
2. The Series:
----------
(a) Description: Each season of the Series will consist of fifty-two (52)
-----------
half-hour weekly broadcasts comprised of twenty-six (26) original
programs and twenty-six (26) repeat programs on the subject of Italian
cooking.
(b) Distribution and Scheduling: It is anticipated that t
he Series will be
---------------------------
distributed by PBS to local television stations throughout the United
States. It is expressly understood that local scheduling and broadcast
of the Series is within the sole discretion of local television
stations, and that the same applies to EBC's local
1
<PAGE>
scheduling. EBC will notify, and will cause PBS to notify, all PBS
stations of Look Smart's partial national funding and request that any
local funders not be from businesses competitive with Look Smart,
namely, Internet Search engine/directory companies. Local funders on
EBC's facilities will not be competitive with Look Smart.
3. The Grant: Look Smart, as partial national funder, will pay EBC the sum
---------
total of Two Million Three Hundred Fifty Thousand Dollars ($2,350,000) for
the production and presentation of the Series. The Series will also be
supported by other corporations, government, foundations, individuals and
public television sources, provided they are not businesses competitive
with Look Smart.
4. Payment:
-------
(a) Look Smart will make payment to EBC of the Grant as follows:
1999-2000
---------
One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) on
contract signing;
One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) on the
date of PBS' first transmission of the Series;
One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) no
later than three months after the date of PBS' first transmission of
the Series;
and, One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) no
later than six months after the date of PBS' first transmission of the
Series.
2000-2004
---------
Two Hundred Thirty-five Thousand Dollars ($235,000) on the date of
PBS's first transmission of the Series in each season;
One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) no
later than three months after the date of PBS's first transmission of
the Series in each season;
One Hundred Seventeen Thousand Five Hundred Dollars ($117,500) no
later than six months after the date of PBS' first transmission of the
Series in each season.
2
<PAGE>
All payments shall be made to Educational Broadcasting Corporation,
450 West 33/rd/ Street, New York, NY 10001. Attention: Thomas A.
Conway, Treasurer
(b) Nothing herein shall be deemed to require EBC to produce the Series.
(c) In the event that the Series is terminated before the end of any
season during the Term, EBC and Look Smart will negotiate in good
faith as to an appropriate reduction in the Grant for that season, and
no payments for subsequent seasons will be due.
5. Underwriting Credit:
--------------------
(a) Each program in the Series, including any and all repeat broadcasts,
during the Term, will carry an underwriting credit, not to exceed
fifteen seconds (:15) in length, at the beginning and conclusion, in
both audio and visual form, stating that Look Smart helped make the
Series possible, in part, by its Grant. Look Smart's announcement will
appear before that of any other underwriter. All underwriting credits
are subject to FCC regulations, PBS and EBC guidelines, and are
subject to approval by EBC and PBS.
(b) Look Smart will be responsible for all the costs of producing such
underwriting credits and understands that public television stations
will have the right to repeat a program in the Series, including the
Look Smart credits, for a period of up to two (2) years after the
initial release of the program by PBS. Look Smart will deliver the
completed and fully-approved credit to EBC in Beta format no later
than twelve weeks before the scheduled release of the first program of
each broadcast season.
6. Promotion/Advertising:
----------------------
(a) EBC and Look Smart will make a joint announcement of Look Smart's
funding of the Series. Look Smart will also have recognition on all
promotional and press materials for the Series that are created or
controlled by EBC. Inadvertent failure to identify Look Smart in any
particular instance will not be a breach of this Agreement.
(b) EBC will assign a client service person as a liaison to Look Smart in
connection with the implementation of this Agreement.
(c) EBC will cause PBS to provide a hot link to the Look Smart site at the
PBS website www.pbs.org.
-----------
(d) Look Smart may make reference to its role as an underwriter of the
Series in program promotion and institutional promotion provided that
Look Smart affords EBC prior approval of any and all promotional
materials. Look Smart will not act in any manner so as to express or
imply institutional endorsement by EBC, its officers
3
<PAGE>
and employees, or others who appear on or are connected with the
Series, without the prior permission of such parties.
7. Representation, Warranty and Indemnity:
--------------------------------------
(a) Look Smart represents and warrants, with respect to any material or
information which it provides in connection with the underwriting
credit, or for advertising or promotion of the Series, that it will
obtain the necessary permissions and releases and that the use of such
material or information as contemplated by this Agreement will not
violate or infringe upon the personal or proprietary rights of any
third parties. EBC represents and warrants, with respect to any
material or information which it provides in connection with the
underwriting credit or for advertising or promotion of the Series,
that it will obtain the necessary permissions and releases and that
the use of such material or information will not violate or infringe
upon the personal or proprietary rights of any third parties.
(b) Look Smart will at all times indemnify, defend and hold EBC, its
trustees, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with any
breach or alleged breach of any warranty, representation, obligation,
undertaking or agreement made by Look Smart herein. EBC will at all
times indemnify, defend and hold Look Smart, its subsidiaries,
affiliates, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with (i)
any breach or alleged breach of any warranty, representation,
obligation, undertaking or agreement made by EBC herein, and (ii) all
content, production, distribution and broadcast of the programs in the
Series.
(c) The parties agree that notwithstanding anything to the contrary set
forth above, neither party will be liable for indirect; special or
consequential damages even in the event that the party being charged
was advised of the possibility of the same.
8. Miscellaneous:
-------------
(a) This Agreement is governed by the laws of the State of New York
applicable to contracts entered into and to be fully performed
therein. Any and all matters of dispute of any nature whatsoever
arising out of, or in any way connected with this Agreement, or the
relationship between the parties hereto, will be subject to
determination only by the Federal or State courts located in the State
of New York, within the County of New York. Look Smart and EBC hereby
consent and submit to the jurisdiction of such courts.
4
<PAGE>
(b) Nothing herein shall be deemed to create any association, partnership,
or joint venture between EBC and Look Smart.
(c) Neither party shall assign its rights or obligations hereunder without
the written consent of the other party.
(d) All notices given by either party under this Agreement must be in
writing and sent postage pre-paid to the other party at its address
given above, with notices to EBC sent with a courtesy copy to the
Office of General Counsel.
(e) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and may not be amended or
modified except in writing signed by the parties.
If the foreg
oing accords with your understanding, please so indicate by signing
below at the place indicated.
Very truly yours, Accepted and Agreed:
EDUCATIONAL BROADCASTING LOOK SMART
CORPORATION
By: /s/ Thomas Conway, VP & CFO By: /s/ Val Landi
---------------------------- ------------------------------
Date: 7-7-99 Date: 6/28/99
-------------- ---------------------
5
<PAGE>
EXHIBIT 10.10B
[LOGO OF THIRTEEN.WNET APPEARS HERE]
June 18, 1999
Mr. Val Landi
Vice President, Marketing
Look Smart
487 Bryant Street
San Francisco, CA 94107
Dear Mr. Landi:
This Agreement, made as of the 18/th/ day of June 1999, will confirm our mutual
understanding with respect to a Grant of Two Million Eight Hundred Thousand
Dollars ($2,800,000) by Look Smart ("Look Smart") to Educational Broadcasting
Corporation ("EBC") for the production of the television series presently
entitled GREAT FOOD (the "Series"), to be distributed nationally to public
television stations by the Public Broadcasting Service ("PBS"). The parties
agree as follows:
1. The Term: The Grant for the
Series is for a period of five years (i.e.
--------
2000-2005) commencing in January, 2000. Either party may terminate this
Agreement as of January, 2003, by giving written notice to the non-
terminating party on or before July 1, 2002. If this Agreement continues
for the fourth broadcast year, either party may terminate this Agreement as
of January, 2004, by giving written notice to the non-terminating party on
or before July 1, 2003.
2. The Series:
----------
(a) Description: Each broadcast year of the Series will consist of not
-----------
less than thirty-nine (39) half-hour weekly broadcasts featuring chefs
from around the world.
(b) Distribution and Scheduling: It is anticipated that the Series will be
---------------------------
distributed by PBS to local television stations throughout the United
States in January, 2000. It is expressly understood that local
sched
uling and broadcast of the Series is within the sole discretion
of local television stations, and that the same applies to EBC's local
scheduling. EBC will notify, and will cause PBS to notify, all PBS
stations of Look Smart's partial national funding and request that
any local funders not be from businesses competitive
1
<PAGE>
with Look Smart, namely, Internet Search engine/directory companies.
Local funders on EBC's facilities will not be competitive with Look
Smart.
3. The Grant: Look Smart, as partial national funder, will pay EBC the sum
---------
total of Two Million Eight Hundred Thousand Dollars ($2,800,000) for the
production and presentation of the Series. The Series will also be
supported by other corporations, government, foundations, individuals and
public television sources, provided they are not businesses competitive
with Look Smart.
4. Payment:
-------
(a) Look Smart will make payment to EBC of the Grant as follows:
2000-2001
---------
One Hundred Forty Thousand Dollars ($140,000) on contract signing;
One Hundred Forty Thousand Dollars ($140,000) on the date of PBS'
first transmission of the Series;
One Hundred Forty Thousand Dollars ($140,000) no later than three
months after the date of PBS' first transmission of the Series;
and, One Hundred Forty Thousand Dollars ($140,000) no later than six
months after the date of PBS' first transmission of the Series.
2001-2005
---------
Two Hundred Eighty Thousand Dollars ($280,000) on the date of PBS'
first transmission of the Series in each broadcast year;
One Hundred Forty Thousand Dollars ($140,000) no later than three
months after the date of PBS' first transmission of the Series in each
broadcast year;
One Hundred Forty Thousand Dollars ($140,000) no later than six months
after the date of PBS' first transmission of the Series in each
broadcast year.
All payments shall be made to Educational Broadcasting Corporation,
450 West 33/rd/ Street, New York, NY 10001. Attention: Thomas A.
Conway, Treasurer.
2
<PAGE>
(b) Nothing herein shall be deemed to require EBC to produce the Series.
(c) In the event that the Series is terminated before the end of the third
quarter of any broadcast year during the Term, EBC and Look Smart will
negotiate in good faith as to an appropriate reduction in the Grant
for that year, and no payments for subsequent years will be due.
5. Underwriting Credit:
-------------------
(a) Each program in the Series, including any and all repeat broadcasts,
during the Term, will carry an underwriting credit, not to exceed
fifteen seconds (:15) in length, at the beginning and conclusion, in
both audio and visual form, stating that Look Smart helped make the
Series possible, in part, by its Grant. Look Smart's announcement will
appear before that of any other underwriter. All underwriting credits
are subject to FCC regulations, PBS and EBC guidelines, and are
subject to approval by EBC and PBS.
(b) Look Smart will be responsible for all the costs of producing such
underwriting credits and understands that public television stations
will have the right to repeat a program in the Series, including the
Look Smart credits, for a period of up to two (2) years after the
initial release of the program by PBS. Look Smart will deliver the
completed and fully-approved credit to EBC in Beta format no later
than twelve weeks before the scheduled release of the first program of
each broadcast year.
5. Promotion/Advertising:
---------------------
(a) EBC and Look Smart will make a joint announcement of Look Smart's
funding of the Series. Look Smart will also have recognition on all
promotional and press materials for the Series that are created or
controlled by EBC. Inadvertent failure to identify Look Smart in any
particular instance will not be a breach of this Agreement.
(b) EBC will assign a client service person as a liaison to Look Smart in
connection with the implementation of this Agreement.
(c) EBC will cause PBS to provide a hot link to the Look Smart site at the
PBS website www.pbs.org.
-----------
(d) Look Smart may make reference to its role as an underwriter of the
Series in program promotion and institutional promotion provided that
Look Smart affords EBC prior approval of any and all promotional
materials. Look Smart will not act in any manner so as to express or
imply institutional endorsement by EBC, its officers and employees, or
others who appear on or are connected with the Series, without the
prior permission of such parties.
3
<PAGE>
7. Representation, Warranty and Indemnity:
--------------------------------------
(a) Look Smart represents and warrants, with respect to any material or
information which it provides in connection with the underwriting
credit, or for advertising or promotion of the Series, that it will
obtain the necessary permissions and releases and that the use of such
material or information as contemplated by this Agreement will not
violate or infringe upon the personal or proprietary rights of any
third parties. EBC represents and warrants, with respect to any
material or information which it provides in connection with the
underwriting credit or for advertising or promotion of the Series,
that it will obtain the necessary permissions and releases and that
the use of such material or information will not violate or infringe
upon the personal or proprietary rights of any third parties.
(b) Look Smart will at all times indemnify, defend and hold EBC, its
trustees, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with any
breach or alleged breach of any warranty, representation, obligation,
undertaking or agreement made by Look Smart herein. EBC will at all
times indemnify, defend and hold Look Smart, its subsidiaries,
affiliates, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with (i)
any breach or alleged breach of any warranty, representation,
obligation, undertaking or agreement made by EBC herein, and (ii) all
content, production, distribution and broadcast of the programs in the
Series.
(c) The parties agree that notwithstanding anything to the contrary set
forth above, neither party will be liable for indirect, special or
consequential damages even in the event that the party being charged
was advised of the possibility of same.
8. Miscellaneous:
-------------
(a) This Agreement is governed by the laws of the State of New York
applicable to contracts entered into and to be fully performed
therein. Any and all matters of dispute of any nature whatsoever
arising out of, or in any way connected with this Agreement, or the
relationship between the parties hereto, will be subject to
determination only by the Federal or State courts located in the State
of New York, within the County of New York. Look Smart and EBC hereby
consent and submit to the jurisdiction of such courts.
(b) Nothing herein shall be deemed to create any association, partnership,
or joint venture between EBC and Look Smart.
4
<PAGE>
(c) Neither party shall assign its rights or obligations hereunder without
the written consent of the other party.
(d) All notices given by either party under this Agreement must be in
writing and sent postage pre-paid to the other party at its address
given above, with notices to EBC sent with a courtesy copy to the
Office of General Counsel.
(e) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and may not be amended or
modified except in writing signed by the parties.
If the foregoing accords with your understanding, please so indicate by signing
below at the place indicated.
Very truly yours,
Accepted and Agreed:
EDUCATIONAL BROADCASTING LOOK SMART
CORPORATION
BY: /s/ Thomas Conway By: /s/ Val Landi
--------------------------- ---------------------------
Date: 7-7-99 Date: 6/28/99
------------------------- --------------------------
5
<PAGE>
EXHIBIT 10.10C
[LETTERHEAD OF THIRTEEN.WNET APPEARS HERE]
June 18, 1999
Mr. Val Landi
Vice President, Marketing
Look Smart
487 Bryant Street
San Francisco, CA 94107
Dear Mr. Landi:
This Agreement, made as of the 18/th/ day of June 1999, will confirm our mutual
understanding with respect to a Grant of Two Million One Hundred Thousand
Dollars ($2,100,000) by Look Smart ("Look Smart") to Educational Broadcasting
Corporation ("EBC") for the production of the television series presently
entitled MASTERCHEF USA (the "Series"), to be distributed nationally to public
television stations by the Public Broadcasting Service ("PBS"). The parties
agree as follows:
1. The Term: The Grant for the
Series is for a period of five years (i.e.
--------
2000-2005) commencing in May, 2000. Either party may terminate this
Agreement as of May, 2003, by giving written notice to the nonterminating
party on or before November 1, 2002. If this Agreement continues for the
fourth broadcast year, either party may terminate this Agreement as of
May, 2004, by giving written notice to the nonterminating party on or
before November 1, 2003.
2. The Series:
----------
(a) Description:
-----------
(i) Each broadcast year of the Series will consist of not less than
thirteen (13) half-hour weekly broadcasts featuring a
competition to find the best amateur chef in the USA.
(ii) EBC contemplates producing a one (1) hour special broadcast
(the "Special") for the Series which may be broadcast in
addition to the thirteen (13) broadcasts referred to in Section
2(a)(i) above, or in lieu of, one of the said broadcasts. In
the event that EBC produces the Special, some portion of the
Grant shall be applied to it and Look
1
<PAGE>
Smart shall receive underwriting credit for the Special in
accordance with the terms and conditions of this Agreement.
Nothing herein shall be deemed to require EBC to produce the
Special.
(b) Distribution and Scheduling: It is anticipated that the Series will be
---------------------------
distributed by PBS to local television stations throughout the United
States in April, 2000. It is expressly understood that local
scheduling and broadcast of the Series is within the sole discretion
of local television stations, and that the same applies to EBC's local
scheduling. EBC will notify, and will cause PBS to notify, all PBS
stations of Look Smart's partial national funding and request that any
local funders not be from businesses competitive with Look Smart,
namely, Internet Search engine/directory companies. Local funders on
EBC's facilities will not be competitive with Look Smart.
3. The Grant: Look Smart, as partial national funder, will pay EBC the sum
---------
total of Two Million One Hundred Thousand Dollars ($2,100,000 for the
production and presentation of the Series. The Series will also be
supported by other corporations, government, foundations, individuals and
public television sources, provided they are not businesses competitive
with Look Smart.
4. Payment:
-------
(a) Look Smart will make payment to EBC of the Grant as follows:
2000-2001
---------
One Hundred Five Thousand Dollars ($105,000) on contract signing;
One Hundred Five Thousand Dollars ($105,000) on the date of PBS' first
transmission of the Series;
One Hundred Five Thousand Dollars ($105,000) no later than three
months after the date of PBS' first transmission of the Series;
and, One Hundred Five Thousand Dollars ($105,000) no later than six
months after the date of PBS' first transmission of the Series;
2001-2005
---------
Two Hundred Ten Thousand Dollars ($210,000) on the date of PBS' first
transmission of the Series in each broadcast year;
2
<PAGE>
One Hundred Five Thousand Dollars ($105,000) no later than three
months after the date of PBS' first transmission of the Series in each
broadcast year;
One Hundred Five Thousand Dollars ($105,000) no later than six months
after the date of PBS' first transmission of the Series in each
broadcast year.
All payments shall be made to Educational Broadcasting Corporation,
450 West 33/rd/ Street, New York, NY 10001. Attention: Thomas A.
Conway, Treasurer.
(b) Nothing herein shall be deemed to require EBC to produce the Series.
(c) In the event that the Series is terminated before the end of the
scheduled broadcast period in any broadcast year during the Term, EBC
and Look Smart will negotiate in good faith as to an appropriate
reduction in the Grant for that year, and no payments for subsequent
years will be due.
5. Underwriting Credit:
-------------------
(a) Each program in the Series, including any and all repeat broadcasts,
during the Term, will carry an underwriting credit, not to exceed
fifteen seconds (:15) in length, at the beginning and conclusion, in
both audio and visual form, stating that Look Smart helped make the
Series possible, in part, by its Grant. Look Smart's announcement will
appear before that of any other underwriter. All underwriting credits
are subject to FCC regulations, PBS and EBC guidelines, and are
subject to approval by EBC and PBS.
(b) Look Smart will be responsible for all the costs of producing such
underwriting credits and understands that public television stations
will have the right to repeat a program in the Series, including the
Look Smart credits, for a period of up to two (2) years after the
initial release of the program by PBS. Look Smart will deliver the
completed and fully-approved credit to EBC in Beta format no later
than twelve weeks before the scheduled release of the first program of
each broadcast year.
6. Promotion/Advertising:
---------------------
(a) EBC and Look Smart will make a joint announcement of Look Smart's
funding of the Series. Look Smart will also have recognition on all
promotional and press materials for the Series that are created or
controlled by EBC. Inadvertent failure to identify Look Smart in any
particular instance will not be a breach of this Agreement.
3
<PAGE>
(b) EBC will assign a client service person as a liaison to Look Smart in
connection with the implementation of this Agreement.
(c) EBC will cause PBS to provide a hot link to the Look Smart site at the
PBS website www.pbs.org.
-----------
(d) Look Smart may make reference to its role as an underwriter of the
Series in program promotion and institutional promotion provided that
Look Smart affords EBC prior approval of any and all promotional
materials. Look Smart will not act in any manner so as to express or
imply institutional endorsement by EBC, its officers and employees, or
others who appear on or are connected with the Series, without the
prior permission of such parties.
7. Representation, Warranty and Indemnity:
--------------------------------------
(a) Look Smart represents and warrants, with respect to any material or
information which it provides in connection with the underwriting
credit, or for advertising or promotion of the Series, that it will
obtain the necessary permissions and releases and that the use of such
material or information as contemplated by this Agreement will not
violate or infringe upon the personal or proprietary rights of any
third parties. EBC represents and warrants, with respect to any
material or information which it provides in connection with the
underwriting credit or for advertising or promotion of the Series,
that it will obtain the necessary permissions and releases and that
the use of such material or information will not violate or infringe
upon the personal or proprietary rights of any third parties.
(b) Look smart will at all times indemnify, defend and hold EBC, its
trustees, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with any
breach or alleged breach of any warranty, representation, obligation,
undertaking or agreement made by Look Smart herein. EBC will at all
times indemnify, defend and hold Look Smart, its subsidiaries,
affiliates, officers and employees, harmless from and against any and
all claims, damages, costs, liabilities and expenses, including
reasonable attorney's fees, arising out of or in connection with (i)
any breach or alleged breach of any warranty, representation,
obligation, undertaking or agreement made by EBC herein, and (ii) all
content, production, distribution and broadcast of the programs in the
Series.
(c) The parties agree that notwithstanding anything to the contrary set
forth above, neither party will be liable for indirect, special or
consequential damages even in the event that the party being charged
was advised of the possibility of same.
4
<PAGE>
8. Miscellaneous:
-------------
(a) This Agreement is governed by the laws of the State of New York
applicable to contracts entered into and to be fully performed
therein. Any and all matters of dispute of any nature whatsoever
arising out of, or in any way connected with this Agreement, or the
relationship between the parties hereto, will be subject to
determination only by the Federal or State courts located in the State
of New York, within the County of New York. Look Smart and EBC hereby
consent and submit to the jurisdiction of such courts.
(b) Nothing herein shall be deemed to create any association, partnership,
or joint venture between EBC and Look
Smart.
(c) Neither party shall assign its rights or obligations hereunder
without the written consent of the other party.
(d) All notices given by either party under this Agreement must be in
writing and sent postage pre-paid to the other party at its address
given above, with notices to EBC sent with a courtesy copy to the
Office of General Counsel.
(e) This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and may not be amended or
modified except in writing signed by the parties.
If the foregoing accords with your understanding, please so indicate by signing
below at the place indicated.
Very truly yours, Accepted and Agreed:
EDUCATIONAL BROADCASTING LOOK SMART
CORPORATION
By: /s/ Thomas A. Conway, By: /s/ Val Landi
------------------------------ -------------------------------
Thomas A. Con
way, VP & CPO
Date: 7-7-99 Date: 6/28/99
---------------------------- -----------------------------
5
<PAGE>
EXHIBIT 10.10D
[LETTERHEAD APPEARS HERE] [LOGO OF WGBH APPEARS HERE]
UNDERWRITING AGREEMENT
----------------------
Underwriting Agreement entered into this 7th day of June, 1999, between
the WGBH Educational Foundation, a non-profit charitable Massachusetts
corporation having its principal place of business at 125 Western Avenue,
Boston, Massachusetts 02134 ("WGBH"), and:
Company: LookSmart ("LookSmart")
Address: 487 Bryant Street
San Francisco, CA 94107
Attn: Val Landi, Vice President, Marketing
In consideration of the mutual covenants set forth herein, LookSmart, and
WGBH hereby agree to the terms and conditions in The Schedule set forth below
and the attached General Terms and Conditions (collectively, the "Agreement").
THE SCHEDULE
------------
1. Series (the "Series"):
(a) Title of the Series: MYSTERY!
(b) Broadcast Season(s): 1999-2000, 200-20001, 2001-2002
(c) Approximate Length of each Program in the Series: Sixty minutes (60:00)
(d) Series Description: A weekly mystery series mixing period and
contemporary drama.
2. Amount of Contribution: Two Million Two Hundred Fifty Thousand Dollars
($2,250,000) (NET) (the "Grant").
3. Payment Schedule (the "Payment Schedule"): LookSmart shall make payment of
the Grant to WGBH as follows:
(a) 1999-2000 Broadcast Season
(i) $187,500 payable
no later than fifteen (15) days after the
execution of this Agreement;
(ii) $187,500 payable no later than September 15, 1999;
(iii) $187,500 payable no later than December 15, 1999; and
(iv) $187,500 payable no later than March 15, 2000.
(b) 2000-2001 Broadcast Season
(i) $187,500 payable no later than September 15, 2000;
(ii) $187,500 payable no later than December 15, 2000;
(iii) $187,500 payable no later than March 15, 2001; and
(iv) $187,500 payable no later than June 1, 2001.
<PAGE>
LookSmart
Underwriting Agreement
Page 2
(c) 2001-2002 Broadcast Season
(i) $187,500 payable no later than September 15, 2001;
(ii) $187,500 payable no later than December 15, 2001;
(iii) $187,500 payable no later than March 15, 2002; and
(iv) $187,500 payable no later than June 15, 2002.
WGBH shall invoice LookSmart according to this Payment Schedule. Invoices shall
be addressed to Val Landi at the address indicated above,
4. Credit Length: Fifteen seconds (00:15)
5. Where any matter contained in The Schedule may be so read as to alter, amend,
or supersede any part of the General Terms and Conditions, then The Schedule
shall be deemed to be the definitive and over-ruling part of this Agreement.
6. Additional Conditions:
(a) Additional Funder(s): LookSmart shall have the right to approve any
additional corporate funder(s), such approval not to be unreasonably withheld.
However, LookSmart's only reason for withholding approval of an additional
corporate funder(s) shall be based on a demonstration that such additional
corporate funder(s) or a product line of such additional corporate funder(s)
competes directly with LookSmart in the marketplace.
(b) Termination: In the event WGBH does not obtain sufficient funding for
the 2000-2001 and/or 2001-2002 Broadcast Season(s) of the Series, WGBH shall
have the right to terminate this Agreement.
(c) Subsequent Season of the Series:
(i) Should WGBH intend to produce the 2002-2003 and 2003-2004
Season(s) of the Series, WGBH agrees to afford LookSmart the first right to
underwrite such additional season(s), provided that LookSmart agrees at such
time to provide to WGBH a non-returnable grant in the amount of $1,500,000
($750,000 per Season) to meet the production, broadcast, and promotion costs of
such additional season(s) of the Series.
(ii) In the event LookSmart does not agree to provide WGBH a non-
returnable grant in the amount of $1,500,000 by November 1,2001, WGBH shall be
free to seek the support of and enter into agreements with other funders without
any further obligation to LookSmart.
<PAGE>
LookSmart
Underwriting Agreement
Page 3
(d) The following is added to the end of Paragraph 5 of the General
Terms and Conditions:
"(c) WGBH shall include LookSmart's logo on any Series online site,
subject to PBS guidelines. Such logo will be a 'hyper link' to the
LookSmart online site."
ACCEPTED AND AGREED TO effective as of the date first herein above shown by
WGBH Educational Foundation LookSmart
By: /s/ Andrew S. Griffiths By: /s/ Val Landi
---------------------------- ----------------------
Andrew S. Griffiths Val Landi,
Treasurer Vice President, Marketing
<PAGE>
LookSmart
Underwriting Agreement
Page 4
GENERAL TERMS AND CONDITIONS
----------------------------
The Series
- ----------
1. (a) WGBH agrees to produce the Series and use its best efforts to
arrange for broadcast distribution thereof to public television stations during
the Broadcast Season(s) set forth in Paragraph 1(b) of the Schedule.
(b) WGBH agrees to notify LookSmart of the initial broadcast dates for
each program in the Series promptly upon the scheduling thereof.
(c) LookSmart, understands and agree that the Public Broadcasting
Service ("PBS") retains sole responsibility for the scheduling of the Series and
may occasionally pre-empt a program for re-scheduling at a later date. WGBH will
use its best efforts to notify LookSmart, of pre-emption and the rescheduled
date.
2. WGBH shall have sole responsibility for the production of the Series and
all of its contents and elements. The parties agree that as between LookSmart,
and WGBH, WGBH shall own all right, title, and interest, including the
copyright, in and to the Series and all materials related thereto, to be used
and disposed of as WGBH shall in its sole discretion determine.
Compensation
- ------------
3. (a) LookSmart, shall pay WGBH and WGBH shall accept as full
compensation for WGBH's obligations herein, the Grant set forth in Paragraph 2
of The Schedule. Payment of the Grant to WGBH shall be made in accordance with
the Payment Schedule set forth in Paragraph 3 of The Schedule.
(b) Without limiting any of WGBH's rights and remedies, interest on
late payments will be charged at the Fleet Bank Massachusetts N.A. Prime Rate
and shall start accruing as of the first day after a payment is due. A payment
shall be deemed late if it is not received by WGBH within thirty (30) days after
the applicable date set forth in this Payment Schedule.
4. To facilitate WGBH's public broadcasting reporting requirements,
LookSmart, agrees to use its best efforts to supply WGBH with a written
statement in the form attached as Exhibit A, regarding all of LookSmart's
in-Kind expenditures on the Series, including those for promotion and
advertising.
LookSmart's Credits
- -------------------
5. (a) LookSmart shall receive an audio and video credit at the beginning
and end of each program contained in the Series as an underwriter of the Series
on all public television broadcasts of each program of the Series during the
Broadcast Season(s), in accordance with the Communications Act, rules and
regulations of the Federal Communications Commission ("FCC") and PBS, and such
credit shall appear for the length set forth in Paragraph 4 of The Schedule.
(b) WGBH shall have the right to use LookSmart's corporate name and
symbol in connection with LookSmart's underwriting credit only, with LookSmart's
permission.
<PAGE>
LookSmart
Underwriting Agreement
Page 5
Promotion
- ---------
6. The parties acknowledge and agree that the Grant includes the costs for
the preparation and distribution of basic promotional materials for the Series
including press releases and on-air promotional spots for use by public
television stations. WGBH agrees to credit LookSmart as a funder of the Series
in all print promotion thereof produced by WGBH after the date of full execution
of this Agreement.
7. LookSmart agrees to submit any plans it may have for the promotion of
the Series (including the text of press releases and text and layouts for
advertisements) to WGBH for approval to ensure the accuracy and appropriateness
of all promotional and advertising materials issued in connection with the
Series. WGBH agrees to respond promptly to, and will not unreasonably withhold
approval of, all materials so submitted. When notified by WGBH, LookSmart,
agrees to include in all such materials, the appropriate trade/service mark
registration symbol in uses of the Series' name.
LookSmart's Copy of the Series
- ------------------------------
8. WGBH shall provide, at its cost and expense, one (1) videocassette copy
of each program in the Series to LookSmart, which LookSmart agrees to use for
private, in-house screening purpose only. LookSmart understands and agrees that,
due to certain union restrictions which may limit the use of the Series, any use
of these cassettes other than the limited screening use referenced herein is
subject to the prior written approval of WGBH, and as appropriate, individual
unions and guilds. LookSmart further agrees that it does not hold any
distribution rights as a result of its receipt and possession of these
videocassette copies of the programs in the Series.
Representations, Warranties, and Indemnities
- --------------------------------------------
9. WGBH represent and warrants that it has the legal right and authority
to enter into this Agreement and to observe and perform fully its obligations
set forth herein, and that its performance hereunder will not conflict with or
violate any commitment, agreement, or understanding it has or will have to or
with any other person or entity.
10. WGBH shall pay and indemnify and hold harmless LookSmart, and its
grantors, officers, trustees, assignees, directors, agents, licensees, and
employees from and against all claims, losses, costs, expenses, settlements,
demands, and liabilities of every kind, including reasonable attorneys' fees and
expenses, arising out of or incurred by reason of the inaccuracy, alleged
breach, or actual breach of any representation, warranty, covenant, agreement,
or undertaking made by WGBH herein, or involving any matter in connection with
or caused by the Series or under its control; provided, however, that if any
claim shall be made or action taken which, if true, would constitute a breach of
any representation, warranty, covenant, agreement, or undertaking made by WGBH
herein, LookSmart agrees to give WGBH prompt notice thereof and LookSmart shall
have the right to contest or join in the contest of such claim or action and may
be represented by counsel chosen by LookSmart.
11. LookSmart represents and warrants that it has the legal right and
authority to enter into this Agreement and to observe and fully perform its
obligations set forth herein, and that LookSmart's performance hereunder, will
not conflict with or violate any commitment, agreement, or understanding it has
or will have to or with any other person or entity.
<PAGE>
LookSmart
Underwriting Agreement
Page 6
12. LookSmart shall defend, indemnify and hold harmless WGBH and its
grantors, officers, trustees, assignees, agents, licensees, and employees from
and against all claims, losses, costs, expenses, settlements, demands, and
liabilities of every kind, including reasonable attorneys' fees and expenses,
arising out of or incurred by reason of the accuracy, alleged breach, or actual
breach of any representation, warranty, covenant, agreement, or undertaking made
by LookSmart herein, or involving any matter in connection with LookSmart's
advertising or promotion of the Series; provided, however that if any claim
shall be made or action taken which, if true, would constitute a breach of any
representation, warranty, covenant, agreement, or understanding made by
LookSmart herein, WGBH agrees to give LookSmart prompt notice thereof and WGBH,
shall have the right to contest or join in the contest of such claim or action
and may be represented by counsel chosen by WGBH.
Force Majeure
- -------------
13. In the event that production or broadcast of the Series or any program
in the Series is delayed or canceled by reason of act of God, fire, lockout,
strike, or other labor dispute, riot or civil disorder, war or armed
insurrection, enactment, rule, act or order of government, mechanical failure,
or any other force majeure cause or reason demonstrably beyond WGBH's control,
then WGBH shall use its best efforts to produce and/or arrange for broadcast
distribution as soon as possible after any such event.
Miscellaneous
- -------------
14. The parties shall notify each other in writing in the event that either
deems this Agreement to be breached and shall give the other part thirty (30)
days to cure such breach before taking action or making a claim on the basis of
such breach.
15. This Agreement is complete and embraces the entire understanding
between the parties. All prior and contemporaneous understandings in connection
with the subject matter herein contained, either oral or written, are null and
void unless expressly set forth herein. No alteration, modification, or waiver,
in whole or in part, of any provision of this Agreement shall be of any effect
unless set forth in writing and signed by both parties hereto.
16. Whenever notice is required to be given or may appropriately be given
hereunder, such notice shall be in writing and shall be delivered to the person
or parties to whom intended at their addresses first stated above.
17. This Agreement is entered into within the Commonwealth of Massachusetts
and shall be governed and construed in accordance with Massachusetts law as if
this Agreement were to be fully performed within the Commonwealth of
Massachusetts, without giving effect to principles of conflicts of laws. The
parties agree to submit solely and exclusively to the jurisdiction of the state
and federal courts of the Commonwealth of Massachusetts to resolve any disputes
arising hereunder.
END OF GENERAL TERMS AND CONDITIONS
<PAGE>
LookSmart
Underwriting Agreement
Page 7
EXHIBIT A
WGBH Educational Foundation
125 Western Avenue
Boston, MA 02134
Attention: Director of Client Services
Dear Sir/Madam:
In addition to LookSmart's direct grant, LookSmart has spent $________________
on promotion, advertising, and related costs.
Sincerely yours,
/s/ Val Landi
Val Landi
Vice President, Marketing
LookSmart
<PAGE>
Exhibit 10.10E
This Agreement dated June 28, 1999, is made by and between Children's Television
Workshop ("CTW") a New York not-for-profit corporation with offices located at
One Lincoln Plaza, New york, NY 10023, and LookSmart Ltd ("LookSmart"), a
closely held private company with offices located at 487 Bryant Street, San
Francisco, CA 94107, and, solely with respect to paragraphs 4(a)(ii), 4(a)(iii),
4(b), 4(c) 7(b), 7(c), 11, 12 and 14, the Public Broadcasting Service ("PBS"), a
non-profit District of Columbia corporation having its principal place of
business at 1320 Braddock Place, Alexandria, VA 22314 (collectively, the
"Parties").
In consideration for the mutual obligations described below, the Parties hereby
agree as follows:
1. Television Series (the "Program")
(a) Title of the Program: "Sesame Street"
(b) Approximate length of each program: Sixty minutes (60:00)
(c) Broadcast distribution: Sesame Street is made available by PBS for
broadcast to all PBS member stations in the United States no less than
twice each weekday and once on Sundays.
2. Term
The "Term" of this Agreement shall be three years as follows:
. Year 1 - Season 31 of the Program (spanning approximately all of
calendar year 2000)
. Year 2 - Season 32 of the Program (spanning approximately all of
calendar year 2001)
. Year 3 - Season 33 of the Program (spanning approximately all of
calendar year 2002)
Unless either CTW or LookSmart provides the other with a written
notification terminating this Agreement upon the conclusion of Year 3 (i.e.,
-----
Season 33 of the Program) by September 1, 2001, the "Term" shall also include
the following:
. Year 4 - Season 34 of the Program (spanning approximately all of
calendar year 2003)
. Year 5 - Season 35 of the Program (spanning approximately all of
calendar year 2004)
In the event that the Term concludes with Year 3, CTW shall be free to
seek a new sponsor(s) without restriction and without further obligation of any
kind whatsoever to LookSmart for the Seasons 34 and 35 of the Program.
3. National Underwriting Credit
<PAGE>
(a) CTW and LookSmart agree that LookSmart will receive a 15-second
underwriting credit appearing before and after each broadcast of
the Program on PBS (the "Billboard"). LookSmart's Billboard will be
rotated with other sponsors of the Program. LookSmart and CTW will
mutually determine the content and form of the Billboard. All
aspects of LookSmart's sponsorship of the Program, including the
Billboard, shall be in accordance with PBS sponsorship guidelines
and policies and FCC rules and regulations in force at the time of
broadcast. LookSmart will produce and deliver its Billboard to CTW
according to a mutually agreed upon schedule.
(b) LookSmart will be the exclusive national underwriter (i.e.,
receiving sponsorship credits before and after the show) for the
PBS broadcast of the Sesame Street TV series in the category of
Internet search engine/directory.
(c) Parties agree that LookSmart will be recognized as a sponsor of the
Program on all appropriate press materials for the Program on PBS,
as determined by CTW.
4. PBS
(a) Promotional Benefits on www.PBS.org
-----------
(i) CTW agrees to place a sponsor button on the homepage of the
Sesame Street content on PBS's website, located at
www.PBS.org, linking to a bridge page which shall in turn
link to the homepage of LookSmart's website,
www.looksmart.com ("Sponsor Button"). Parties shall agree
-----------------
upon the location, size, font, and format of such Sponsor
Button, which must comply with the PBS Kids Sponsorship
Guidelines, as may be modified from time to time by PBS.
(ii) PBS and CTW agree that no other company in LookSmart's
category (i.e., Internet search engine/directory) will be
----
promoted within the Sesame Street site on PBS's website as
a sponsor or in a banner advertisement, if any, during the
Term. PBS currently does not allow banner advertising on
any kids sites within PBS Online.
(iii) Parties agree to discuss in good faith further promotional
opportunities within the Sesame Street content on PBS's
website for LookSmart's sponsorship of the Program.
(b) Other Promotional Efforts
Page 2 of 8
<PAGE>
(i) Parties agree to cooperate on a press effort announcing
LookSmart's sponsorship of the Program and LookSmart's
relationship with PBS.
(ii) PBS, on behalf of the PBS Sponsorship Group, agrees to
assign a client service person to LookSmart in connection
with its sponsorship of the Program.
(c) Payment to PBS
Any payments due to PBS from CTW based on this Agreement shall be made
in accordance with prior agreement between PBS and CTW.
5. Payments and Expenses
(a) In consideration for the underwriting credit and other sponsorship
benefits (including the promotional benefits), LookSmart guarantees it
will pay CTW One Million Nine Hundred and Fifty Thousand Dollars
($1,950,000.00) per year, in accordance with the following payment
schedule:
Year 1:
$487,500.00 Upon execution of this Agreement
$487,500.00 Upon initial broadcast of Year 1 (currently
scheduled for December 1999)
$487,500.00 Three months after initial broadcast
$487,500.00 Six months after initial broadcast
Years 2 and 3 (and 4 and 5, if applicable)
$975,000.00 Upon initial broadcast of each Year
$487,500.00 Three months after initial broadcast
$487,500.00 Six months after initial broadcast
LookSmart will make any such other payments as specifically provided
elsewhere in this Agreement, if any.
(b) LookSmart shall make such payments to CTW by (i) check payable to
Children's Television Workshop and sent to Children's Television
Workshop, P.O. Box 5539 GPO, New York, NY 10087-5539, or (ii) sending
a wire transfer the amount due to Morgan Guaranty Trust Company, ABA
Number 031-100-238, for the account of Children's Television Workshop,
Account No. 162-54-451.
Page 3 of 8
<PAGE>
(c) All sums payable to CTW under this Agreement that are not paid
within 30 days of the due date will accrue interest from the date
until the date paid, at the highest rate permissible by law.
(d) Except as expressly stated, each party will be responsible for
paying its own costs and clearing all third party rights in
connection with fulfilling its obligations under this Agreement.
6. Ownership
(a) As between the parties, CTW shall own all rights, title and interest
(including all copyrights and all renewals and extensions of such
copyrights) throughout the world in perpetuity in all current and
future media to the "Sesame Street" programs, the Sesame Street Muppet
characters, "Sesame Street" name, any sponsorship tagline or logo
created (excluding any LookSmart trademark incorporated into the
tagline or logo), and all materials created in connection with the
foregoing. Except as expressly stated in the Agreement, CTW shall be
free to exercise such rights at any time without any obligation to the
other parties.
(b) Except as provided in Paragraph 7(a), LookSmart shall own all rights,
title and interest (including all copyrights and all renewals and
extensions of such copyrights) throughout the world in perpetuity in
all current and future media to its underwriting credit, any trademark
or trade name owned or controlled by LookSmart and any materials
created by LookSmart in connection with the foregoing.
7. Approvals
(a) CTW shall have prior written approval over LookSmart's Billboard.
(b) Each party shall have prior written approval over any use by any other
party, in accordance with this Agreement, of trade names, trademarks
or copyrights owned or controlled by it. CTW's approval rights include
approval of any reference to LookSmart's sponsorship of the Program in
any LookSmart materials.
(c) Each party will be reasonable in exercising its approval rights under
this Agreement.
8. Termination
In addition to any other grounds for termination specifically provided for
in this Agreement, CTW and LookSmart shall have the right to terminate this
Agreement if
Page 4 of 8
<PAGE>
the other party breaches any of its material obligations and fails to cure
such breach within 30 days of written notice of the breach. Except just as
stated no party has the right to cancel any of its obligations under this
Agreement. Upon termination of the Agreement, LookSmart will immediately
discontinue using any material referring to LookSmart's sponsorship of the
Program and return all such materials belonging to CTW. In the event that
the termination is due to a material breach by LookSmart, all payments not
yet made shall become immediately due and payable to CTW.
9. No Sublicensing or Assignment
(a) Neither CTW nor LookSmart may sublicense or assign any of its rights
or obligations under the Agreement without the prior written consent
of the other parties.
(b) In the event that LookSmart intends to enter into a transaction or
series of transactions that will result in the transfer of (i) all or
substantially all of LookSmart's assets, stock or indicia of ownership
to any entity other than an existing affiliate, (ii) 25% or more of
the outstanding voting securities of LookSmart, or (iii) the right to
name 25% or more of the member of the board of directors or other
managing body of LookSmart, LookSmart shall immediately give written
notice to CTW and CTW shall have the right to elect not to continue
this Agreement with the newly controlling entity, thereby immediately
terminating this Agreement. If CTW does not elect to terminate this
Agreement, then this Agreement will continue with the newly
controlling entity. LookSmart shall cooperate with CTW and provide
relevant information to CTW to assist CTW in making such
determination.
10. Representations and Warranties
Each of CTW and LookSmart represents and warrants that the materials it
furnishes for use by the other party under this Agreement will not infringe
or violate the rights of any third party if used as authorized. LookSmart
represents and warrants that it will use the Sesame Street brand and
materials furnished by CTW only as permitted under this Agreement and will
exercise its rights under this Agreement in compliance with all applicable
laws and regulations.
11. Indemnity
Each of CTW and LookSmart and PBS shall at all times indemnify and hold
harmless the other party and their trustees, directors, officers, employees
and agents from and against the full amount of all losses, liabilities and
expenses (including reasonable attorney's fees) of any kind due to a third
party claim arising out of the indemnifying party's breach of any of its
agreements, representations or warranties under this
Page 5 of 8
<PAGE>
Agreement. The indemnified party will give the indemnifying party prompt
written notice of any claim and the indemnifying party will have full
control of the defense of such litigation. The indemnified party will have
the right, at its sole cost and expense, to participate in the defense of
any such claim.
12. Notice
All notices, requests for approvals, and approvals under this Agreement
shall be in writing and mailed, express delivered, or faxed to the other
party.
To CTW:
Sherrie Rollins Westin
Executive Vice President, Marketing and Communications
Children's Television Workshop
One Lincoln Plaza
New York, NY 10023
With a copy to
Dan Victor, Esq.
Executive Vice President and General Counsel
Children's Television Workshop
One Lincoln Plaza
New York, NY 10023
To LookSmart:
To PBS:
Michael Diefenbach
Vice President, Sponsor Development
PBS
1320 Braddock Place
Alexandria, VA 22314
With a copy to
Office of the General Counsel
PBS
1320 Braddock Place
Alexandria, VA 22314
Page 6 of 8
<PAGE>
13. Force Majeure
In the event that production or broadcast of the Program is delayed or
canceled by reason of act of God, fire, lockout, strike or other labor
dispute, riot or civil disorder, war or armed insurrection, enactment,
rule, act or order of government, mechanical failure, or any other force
majeure cause or reason beyond CTW's control, then CTW shall produce and/or
arrange for broadcast distribution as soon as practicable after any such
event.
14. Entire Agreement
(i) This Agreement constitutes the entire agreement between the parties
and the parties may make any changes only in writing. This Agreement, and
its construction and effect, will be determined and construed in accordance
with the substantive laws of the state of New York (without reference to
conflict of laws) with respect to agreements to be fully performed in New
York State.
(ii) This Agreement in no way alters the agreement between CTW and PBS with
respect to underwriting of the Program.
ACCEPTED AND AGREED
CHILDREN'S TELEVISION WORKSHOP
By /s/ Daniel Victor
-------------------------------------
Name Daniel Victor
-----------------------------------
Title EVP, Legal and Business Affairs
and General Counsel
---------------------------------
LOOKSMART, LTD
By /s/ Val Landi
-------------------------------------
Name Val Landi
-----------------------------------
Title SR VP/Marketing & Media Services
----------------------------------
Page 7 of 8
<PAGE>
AS TO PARAGRAPHS 4(a)(ii), 4(a)(iii), 4(b), 4(c), 7(b), 7(c), 11, 12 and 14
ONLY:
PUBLIC BROADCASTING SERVICE
By /s/ Michael Diefenbach
--------------------------------------
Name Michael Diefenbach
------------------------------------
Title Vice Pres., Sponsor Development
-----------------------------------
Page 8 of 8
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 7, 1999, relating to
the consolidated financial statements and financial statement schedule of
LookSmart, Ltd. and Subsidiaries. We also consent to the references to us under
the headings "Experts" and "Selected Consolidated Financial Data" in such
prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 27, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 7, 1999, relating
to the financial statements of BeSeen.com, Inc., which appears in such
prospectus. We also consent to the reference to us under the heading "Experts"
in such prospectus.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 27, 1999
<PAGE>
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 24, 1999 (except for Note 6, as to which the
date is April 9, 1999), with respect to the financial statements of Guthy-
Renker Internet, LLC included in the Registration Statement (Form S-1 No. 333-
80581) and related Prospectus of LookSmart, Ltd. for the registration of
13,800,000 shares of its common stock.
/s/ Ernst & Young LLP
Riverside, California
July 27, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 4, 1999, relating
to the financial statements of ITW NewCorp, Inc. which appears in such
prospectus. We also consent to the reference to us under "Experts" in such
prospectus.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 27, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 4, 1999, relating
to the financial statements of HomeBase Directories Pty Ltd., which appears in
such prospectus. We also consent to the reference to us under the heading
"Experts" in such prospectus.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 27, 1999
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