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As filed with the Securities and Exchange Commission on August 19, 1999
Registration No. 333-80581
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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Amendment No. 3
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)................ 10,350,000 $13.00 $134,550,000 $37,405
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes 1,350,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) This amount was previously paid. Estimated solely for the purpose of
computing the amount of the registration fee pursuant to Rule 457(a) under
the Securities Act.
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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 August 19, 1999.
9,000,000 Shares
[LOGO OF LOOKSMART(SM) APPEARS HERE]
LookSmart, Ltd.
Common Stock
-----------
This is an initial public offering of shares of common stock of LookSmart,
Ltd. All of the 9,000,000 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. The common stock has been approved for quotation on the Nasdaq
National Market under the symbol "LOOK", subject to notice of issuance.
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 9,000,000 shares of common
stock, the underwriters have the option to purchase up to an additional
1,350,000 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 websites. 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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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................ 9,000,000 shares
Shares outstanding after this offering(1).. 85,359,138 shares
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: 12,126,253 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)
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<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:
Revenues................ $ 949 $ 8,785 $ 17,070 $ 24,184 $ 20,797
Loss from operations.... (7,329) (11,898) (19,911) (14,639) (22,652)
Net loss................ (7,514) (12,858) (19,374) (15,601) (22,115)
Net loss per share,
basic and diluted..... $ (0.08) $ (0.68) $ (0.91) $ (0.73) $ (0.93)
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) $ (0.35) $ (0.34) $ (0.40)
Pro forma weighted
average shares, basic
and diluted............ 41,080 55,496 45,947 55,496
</TABLE>
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<CAPTION>
At June 30, 1999
----------------------
Pro Forma
Actual As Adjusted(2)
Consolidated Balance Sheet Data: ------- --------------
<S> <C> <C>
Cash and cash equivalents.............................. $42,731 $143,708
Working capital........................................ 26,262 127,239
Total assets........................................... 90,086 191,063
Long-term debt and capital lease obligations, net of
current portion....................................... 322 322
Total stockholders' equity............................. $58,838 $159,815
</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 9,000,000 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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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 $19.4 million for the six months ended June 30, 1999. As of June
30, 1999, we had an accumulated deficit of approximately $42.6 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 advertising, 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 do not expect net proceeds from this offering to be sufficient to meet
all of our long-term business development requirements. Although 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,
unanticipated developments in the short-term may also require additional
financing. 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 55
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, and acquisitions may result in
dilution to our existing stockholders
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
We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and after June 8, 2000, either party may terminate the
agreement for any reason on six months' notice. In December 1998, we entered
into the agreement with Microsoft 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 56.4% 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.
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.
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Our failure to succeed in one or more of these areas may harm our business,
results of operations and financial condition.
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 and syndication revenues accounted for 63.3% and 33.0% of our total
revenues. We expect that revenues from advertising and syndication 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.
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<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.
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<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 decrease demand for our
services or increase our cost of doing 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 limit the ways we currently
collect and use personal information which could decrease our advertising
revenues or increase our costs
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.
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<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 85,359,138 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>
9,000,000 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 the shares issued under the 1998 Stock Plan may be sold for a period of 180
days after the date of this prospectus. As of June 30, 1999, there were
outstanding options to purchase 12,126,253 shares of common stock, of which
1,478,951 were exercisable within 60 days of June 30, 1999. 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 9,000,000 shares of common stock
are estimated to be approximately $99,140,000 at an assumed initial public
offering price of $12.00 per share (approximately $114,206,000 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.
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<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; 85,359 issued and outstanding,
pro forma as adjusted(1)..................... 24 77 86
Additional paid-in capital.................... 105,146 112,088 211,219
Warrants...................................... 7,114 1,996 1,996
Unearned compensation......................... (10,811) (10,811) (10,811)
Cumulative translation adjustment............. (29) (29) (29)
Accumulated deficit........................... (42,646) (42,646) (42,646)
-------- -------- --------
Total stockholders' equity.................. 58,838 60,675 159,815
-------- -------- --------
Total capitalization...................... $ 59,302 $ 61,139 $160,279
======== ======== ========
</TABLE>
- --------
(1) The following shares at June 30, 1999 are excluded from the number:
12,126,253 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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<PAGE>
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 $31,296,000, or $0.41 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 9,000,000 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 $130,436,000, or
$1.53 per share. This represents an immediate increase in the net tangible book
value of $1.12 per share to existing stockholders and an immediate dilution of
$10.47 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........................................ $0.41
Increase per share attributable to new investors............. 1.12
-----
Pro forma net tangible book value per share after this
offering...................................................... 1.53
------
Dilution per share to new investors............................ $10.47
======
</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 89.5% $ 95,158,000 46.8% $ 1.25
New investors........... 9,000,000 10.5 108,000,000 53.2 $12.00
---------- ----- ------------ -----
Total................. 85,359,138 100.0% $203,158,000 100.0%
========== ===== ============ =====
</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 12,126,253 shares of common stock at a
weighted average exercise price of $1.20 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 pro forma net tangible book value on that date, adjusted for
this offering, would have been $151,606,000 or $1.50 per share, the increase in
net tangible book value attributable to new investors (including the holders of
the options and warrants and the investors in this offering) would have been
$1.09 per share and the dilution in net tangible book value to new investors
would have been $10.50 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:
Advertising and
syndication........... $ 3 $ 939 $ 5,559 $ 1,820 $ 5,624 $ 6,246 $ 6,016
Licensing.............. -- 10 3,226 25 9,626 3,226 9,626
Ecommerce.............. -- -- -- -- 1,820 14,712 5,155
-------- ------- -------- ------- -------- -------- --------
Total Revenues....... 3 949 8,785 1,845 17,070 24,184 20,797
Cost of revenues........ 90 430 1,586 495 1,878 4,164 3,177
-------- ------- -------- ------- -------- -------- --------
Gross profit (loss).... (87) 519 7,199 1,350 15,192 20,020 17,620
-------- ------- -------- ------- -------- -------- --------
Operating expenses:
Sales and marketing.... 1,115 3,668 10,848 3,085 17,158 18,243 19,058
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 1,918 6,893 4,589
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 35,103 34,659 40,272
-------- ------- -------- ------- -------- -------- --------
Loss from operations.... (2,826) (7,329) (11,898) (3,970) (19,911) (14,639) (22,652)
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) $(19,374) $(15,601) $(22,115)
======== ======= ======== ======= ======== ======== ========
Basic and diluted net
loss per share......... $ (0.03) $ (0.08) $ (0.68) $ (0.25) $ (0.91) $ (0.73) $ (0.93)
======== ======= ======== ======= ======== ======== ========
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) $ (0.35) $ (0.34) $ (0.40)
======== ======== ======== ========
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) $26,262
Total assets............ 2,825 2,275 14,090 90,086
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) 58,838
</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 revenues 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 in cash 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. The
agreements do not guarantee LookSmart a minimum number of impressions.
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 and Syndication. 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 revenues 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.
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 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
26
<PAGE>
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.
The extent to which fluctuations in syndication 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.
Licensing. We license our database content to a number of parties, including
Microsoft as described above and Excite@Home. We expect revenues from licensing
to fluctuate from period to period because these revenues are dependent upon
the particular terms of our licensing arrangements and the expiration, renewal
and addition of agreements with current and future partners.
Ecommerce. We began generating ecommerce revenues with our purchase of the
business operations of Guthy-Renker Internet in April 1999. Our ecommerce
revenues sources include sales of ecommerce websites, and related 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 advertising and
syndication 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. Generally, we do not anticipate recurring cost of
licensing revenues in connection with our licensing activities.
The principal components of cost of ecommerce revenues are product costs
paid in connection with our "As Seen on TV" merchandise sales and direct costs
of activating and maintaining Choice Mall web pages discussed above. These
costs will fluctuate with the level of these activities.
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 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
27
<PAGE>
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.
As a result of the Guthy-Renker asset purchase transaction, beginning in
April 1999 our sales and marketing expenses also contain the cost of hosting
ecommerce website development seminars which focus on selling web pages and
related services. These cost will fluctuate from period to period based on the
level of seminar activity.
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
28
<PAGE>
period of the applicable option, typically four years. Amortization of unearned
compensation 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 $17.2 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 $3.5 million of the remainder in
1999, $6.7 million in 2000, $6.5 million in 2001, $5.7 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:
Advertising and syndication.................... 99 % 63 % 99 % 33 %
Licensing...................................... 1 37 1 56
Ecommerce...................................... -- -- -- 11
---- ---- ----- -----
Total revenues............................... 100 100 100 100
Cost of revenues................................. 45 18 27 11
---- ---- ----- -----
Gross margin................................. 55 82 73 89
Operating expenses:
Sales and marketing............................ 387 123 167 101
Product development............................ 274 50 62 56
General and administrative..................... 123 31 48 22
Amortization of goodwill and intangibles....... 43 7 11 11
Amortization of unearned compensation.......... -- 2 -- 16
Write-off of in-process research and
development................................... -- 4 -- --
---- ---- ----- -----
Total operating expenses..................... 827 217 288 206
---- ---- ----- -----
Loss from operations............................. (772) (135) (215) (117)
Non-operating income (expense), net.............. (2) (10) (31) 4
---- ---- ----- -----
Loss before income taxes......................... (774) (145) (246) (113)
Income taxes..................................... (18) (1) (4) --
---- ---- ----- -----
Net loss......................................... (792)% (146)% (250)% (113)%
==== ==== ===== =====
</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 825% to $17.1 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 $1.8 million resulting from the Guthy-Renker Internet
asset purchase transaction in April 1999. In the first six months of 1999,
advertising and syndication revenues increased by $3.8 million, or 209%, as
compared to the same period of 1998. This increase is the result of increased
traffic, better inventory management and new syndication agreements.
Cost of Revenues
Cost of revenues increased 279% to $1.9 million for the six months ended
June 30, 1999 from $495,000 for the same period in 1998. The largest portion of
the increase in cost of revenues for the first half of 1999 was attributable to
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. There were no such costs for the comparable period in 1998. 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 employees in advertising
operations have contributed to the increase in cost of advertising and
syndication 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 11% for the six
months ended June 30, 1999 compared to 27% for the same period in 1998. As a
percentage of advertising and syndication revenues, cost of advertising and
syndication revenues decreased to 13% 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. 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 advertising and syndication 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 advertising and
syndication revenues was partially offset by a decrease in fees paid to the
outside advertising agency. As a percentage of ecommerce revenues, cost of
ecommerce revenues was 62% for the six months ended June 30, 1999. There were
no ecommerce revenues or cost of revenues for the comparable period in 1998. As
discussed above, these costs are the result of the Guthy-Renker Internet asset
purchase transaction in April 1999. These activities typically operate at lower
margins compared to advertising and syndication and licensing.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 456% to $17.2
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 101% 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. Seminar costs for the six months ended
June 30, 1999 were $1.0 million as a result of the Guthy-Renker Internet asset
purchase transaction in April 1999. There were no costs for the same period in
1998. 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
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<PAGE>
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.
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 56% 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 22% 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 836%
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 increase of $4.6 million, or 492%, in advertising and
syndication revenues as compared to the 1997 period. This increase was the
result of increased traffic, better advertising inventory management and new
31
<PAGE>
syndication agreements. 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. Cost of advertising and
syndication revenues increased $656,000, or 153%, for the year ended December
31, 1998 compared to the same period in 1997. Agency commissions paid to
outside advertising sales organizations, costs associated with advertising
operations personnel and depreciation on related ad serving software and
hardware contributed to the absolute dollar increase in cost of advertising and
syndication revenues. As a percentage of advertising and syndication revenues,
cost of advertising and syndication revenues decreased to 20% for the year
ended December 31, 1998 compared to 46% for the same period in 1997. This
decrease can be attributed primarily to economies of scale associated with
higher traffic volume and higher yields on saleable traffic.
Cost of licensing revenues was $500,000 for the year ended December 31,
1998. This amount represents a one-time finder's fee related to a licensing
agreement. There was no cost of licensing revenues for the comparable period in
1997.
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.
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
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<PAGE>
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:
Advertising and
syndication........... $ 102 $ 545 $ 805 $ 1,015 $ 1,359 $ 2,381 $ 2,191 $ 3,433
Licensing.............. -- 10 -- 25 364 2,836 4,389 5,237
Ecommerce.............. -- -- -- -- -- -- -- 1,820
------- ------- ------- ------- ------- ------- ------- --------
Total revenues....... 102 555 805 1,040 1,723 5,217 6,580 10,490
Cost of revenues:
Advertising............ 93 183 250 245 226 365 318 430
Licensing.............. -- -- -- -- -- 500 -- --
Ecommerce.............. -- -- -- -- -- -- -- 1,130
------- ------- ------- ------- ------- ------- ------- --------
Total cost of
revenues............ 93 183 250 245 226 865 318 1,560
Gross margin......... 9 372 555 795 1,497 4,352 6,262 8,930
------- ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing.... 1,067 821 1,124 1,961 3,317 4,446 6,422 10,736
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 1,523
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 21,998
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (2,358) (1,250) (1,563) (2,407) (3,799) (4,129) (6,843) (13,068)
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) (12,498)
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) $(12,498)
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
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<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 $10.5 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 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 $395,000 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;
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<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 $26.3 million. Current assets
included $42.7 million in cash and cash equivalents and current liabilities
included $22.5 million in deferred revenues. Deferred revenues primarily
reflects payments in excess of the revenues we have recognized under our
agreement with Microsoft as well as payments in excess of revenues we have
recognized for Guthy-Renker website building. 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 Completed July 30, 1999
Status Assessment and Review
. Business Criticality (core flow
identification)
. COTS (commercial off-the-shelf products)
. Internally developed/maintained systems
. Hardware/network components
Y2K Action Plan
Review of Action Plan
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 August 9, 1999.......... 13 -- 25 38
--- --- ---- ----
Remaining budget.................... $30 $50 $185 $265
=== === ==== ====
</TABLE>
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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 websites. 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
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
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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.
. 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
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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 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
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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 3,059,798 shares of our Series C preferred stock
(representing approximately 15% of our fully vested capitalization at the time
of the alleged breach) to Hollinger for $2.33 per share. The complaint also
asserts claims for promissory and equitable estoppel and seeks specific
performance of the proposed terms of the alleged Series C transaction, which
included a right to pro rata participation in future financings prior to our
initial public offering. 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. If we are required to issue
shares of our capital stock in connection with Hollinger's claims, however, our
investors will suffer dilution.
Except for the Hollinger litigation, we are not a party to any material
legal proceedings.
Employees
We had 151 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.
52
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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 2,009,098 shares of
common stock had been exercised and options to purchase 12,126,253 shares of
common stock were outstanding under the 1998 Plan with a weighted average
exercise price of $1.20, and 6,714,649 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
59
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$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) Dr. 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.
Dr. 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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<PAGE>
(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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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 each of LookSmart's directors;
and
. all of our executive officers and directors as a group.
Except as otherwise noted, the address of each stockholder listed in the
table is c/o LookSmart, Ltd., 487 Bryant Street, San Francisco, California
94107. The table includes all shares of common stock issuable within 60 days of
June 30, 1999 upon the exercise of options and other rights beneficially owned
by the indicated stockholder on that date. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as indicated, the
stockholders named in the table have sole voting and sole investment control
with respect to all shares beneficially owned. The applicable percentage of
ownership for each stockholder is based on 63,880,465 shares of common stock
outstanding as of June 30, 1999, together with applicable options for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the stockholder holding those options and other
rights, but are not deemed outstanding for computing percentage ownership of
any other stockholder.
<TABLE>
<CAPTION>
Shares Beneficially Owned
----------------------------
Percent Percent
Prior to After
Beneficial Owner Number Offering Offering
- ---------------- ---------- -------- --------
<S> <C> <C> <C>
Five Percent Stockholders
Cox Interactive Media, Inc.(1)................... 18,987,801 29.0% 25.5%
1400 Lake Hearn Drive
Atlanta, GA 30319
The Reader's Digest Association, Inc.(2)......... 9,000,000 12.3 11.0
Reader's Digest Road
Pleasantville, NY 10570
Evan Thornley(3)................................. 7,725,000 12.1 10.6
Tracey Ellery(3)................................. 7,725,000 12.1 10.6
Entities Affiliated with Macquarie Bank
Limited(4)...................................... 5,608,438 8.5 7.5
Macquarie Bank Limited
Level 16, 20 Bond Street
Sydney, NSW, 2000 Australia
Entities Affiliated with Australian Mezzanine
Investments Pty Limited(5)...................... 4,610,524 7.2 6.3
Australian Venture Capital Nominee Pty Ltd
Level 2, The Terrace
155 George Street
Sydney, NSW, 2000 Australia
Named Executive Officers and Directors
Scott Whiteside(6)............................... 18,987,801 29.0 25.5
Cox Interactive Media, Inc.
1400 Lake Hearn Drive
Atlanta, GA 30319
Evan Thornley(3)................................. 7,725,000 12.1 10.6
Tracey Ellery(3)................................. 7,725,000 12.1 10.6
Anthony Castagna(7).............................. 5,608,438 8.5 7.5
Macquarie Bank Limited
Level 16, 20 Bond Street
Sydney, NSW, 2000 Australia
Paul Riley(8).................................... 4,610,524 7.2 6.3
Australian Venture Capital Nominee Pty Ltd.
Level 2, The Terrace
155 George Street
Sydney, NSW, 2000 Australia
Brian Cowley(9).................................. 1,181,250 1.8 1.6
Robert J. Ryan(10)............................... 1,228,747 1.9 1.7
77 Storm King Road
Hamilton, MT 59840
Barbara Bergin Read(11).......................... 118,125 * *
Michael Reaves(12)............................... 71,250 * *
All current directors and executive officers as a
group (17 persons)(3)(13)....................... 50,102,385 73.1% 64.6%
</TABLE>
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<PAGE>
- --------
* Less than 1% of LookSmart's outstanding common stock.
(1) Includes 750,000 shares of common stock, 16,737,801 shares of preferred
stock and 1,500,000 shares of common stock issuable upon exercise of a
warrant.
(2) Consists of a warrant to purchase 9,000,000 shares of common stock.
(3) 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.
(4) Includes 484,217 shares of preferred stock and 1,952,461 shares of common
stock issuable upon exercise of warrants 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.
(5) Includes 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 400,000 shares of preferred
stock owned by Perpetual Trustee Company Limited as Trustee of the
Australian Mezzanine Investments No. 2 Trust.
(6) 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, 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.
(7) 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.
(8) Mr. 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.
(9) Includes 202,500 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 30, 1999.
(10) 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.
(11) Includes 11,250 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 30, 1999.
(12) Includes 26,250 shares of common stock issuable upon the exercise of
options exercisable within 60 days of June 30, 1999.
(13) Includes 3,452,461 shares of common stock issuable upon exercise of
warrants and 1,218,750 shares of common stock issuable upon the exercise
of options exercisable within 60 days of June 30, 1999.
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<PAGE>
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.
69
<PAGE>
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
85,359,138 shares of common stock, assuming the issuance of 9,000,000 shares of
common stock offered hereby and no exercise of options after June 30, 1999. Of
these shares, the 9,000,000 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 12,126,253
shares of common stock were issuable under outstanding options under our 1998
Stock Plan. None of the shares issued under the 1998 Stock Plan may be sold for
a period of 180 days after the date of this prospectus. 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 2,797,966 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 853,591 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, and
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 4,382
Prepaid Distribution Costs......... -- 546 3,274
Prepaid expenses................... 10 245 1,808
Other assets....................... 4 61 139
-------- -------- -------- --------
Total current assets............. 103 7,248 52,334 54,171
Property and equipment, net........ 707 1,979 6,174
Goodwill and intangible assets,
net of accumulated amortization
of $615, $1,220 and $3,992 in
1997, 1998 and June 30, 1999...... 1,435 4,744 29,379
Other assets....................... 30 119 2,199
-------- -------- -------- --------
Total assets..................... $ 2,275 $ 14,090 $ 90,086 $ 91,923
======== ======== ======== ========
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 17,700
Income taxes payable............... 217 323 215
Capital lease obligation--current
portion........................... -- -- 142
Note payable--current.............. -- -- --
-------- -------- --------
Total current liabilities........ 1,228 13,755 26,072
Deferred revenue.................... -- 96 4,854
Capital lease obligation............ -- -- 322
Note payable to former stockholder
................................... 1,500 1,500 --
-------- -------- --------
Total liabilities................ 2,728 15,351 31,248
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) (42,646) (42,646)
-------- -------- -------- --------
Total stockholders' equity
(deficit)....................... (453) (1,261) 58,838 60,675
-------- -------- -------- --------
Total liabilities and
stockholders' equity (deficit).. $ 2,275 $ 14,090 $ 90,086 $ 91,923
======== ======== ======== ========
</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>
Revenues:
Advertising and
syndication............. $ 3 $ 939 $ 5,559 $ 1,820 $ 5,624
Licensing................ -- 10 3,226 25 9,626
Ecommerce................ -- -- -- -- 1,820
------- ------- -------- ------- --------
Total revenues.......... 3 949 8,785 1,845 17,070
Cost of revenues:
Advertising and
syndication............. 90 430 1,086 495 748
Licensing................ -- -- 500 -- --
Ecommerce................ -- -- -- -- 1,130
------- ------- -------- ------- --------
Total cost of revenues.. 90 430 1,586 495 1,878
------- ------- -------- ------- --------
Gross profit (loss)..... (87) 519 7,199 1,350 15,192
------- ------- -------- ------- --------
Operating expenses:
Sales and marketing...... 1,115 3,668 10,848 3,085 17,158
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 1,918
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 35,103
------- ------- -------- ------- --------
Loss from operations.... (2,826) (7,329) (11,898) (3,970) (19,911)
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) (19,322)
Income taxes............... 64 166 146 76 52
------- ------- -------- ------- --------
Net loss................ (2,900) (7,514) (12,858) (4,613) (19,374)
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) $(19,348)
======= ======= ======== ======= ========
Basic and diluted loss per
share..................... $ (0.03) $ (0.08) $ (0.68) $ (0.25) $ (0.91)
======= ======= ======== ======= ========
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) $ (0.35)
======== ========
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)..... -- -- -- -- -- -- -- -- (19,374) (19,374)
--------- ------ -------- ----- -------- ------ -------- ---- -------- --------
Balance at June
30, 1999
(unaudited)..... 40,265 $ 40 23,616 $ 24 $105,146 $7,114 $(10,811) $(29) $(42,646) $ 58,838
========= ====== ======== ===== ======== ====== ======== ==== ======== ========
</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) $(19,374)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 259 679 956 346 2,648
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) (1,487)
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 -- 12,501
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
advertising, syndication, licensing and ecommerce activities.
Advertising and syndication revenues are derived principally from the sale
of banner advertisements displayed on the Company's websites and other online
properties. 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 licensing 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.
The Company's ecommerce revenue is generated by the sale of merchandise and
the design, construction and hosting of commercial websites. Revenue from the
sale of merchandise is recognized at the time title transfers. Revenue from the
design and construction of websites is recognized when the website is delivered
to the customer, or when the Company's obligation terminates. Hosting revenue
is recognized in the period in which hosting occurs and the related costs are
incurred.
F-9
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-10
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
F-11
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
F-12
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-13
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-14
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. This warrant was exercised in July 1999.
During 1998, the Company also issued warrants to purchase 2,510,412 shares
of Series A preferred stock at $0.35625 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 $0.41911 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. All of these warrants were exercised in July and August 1999.
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.
F-17
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 July 1999, 42,000 of these warrants were
exercised.
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. In August 1999, 25,000 of
these warrants were exercised.
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, 12,126,253 options were outstanding and 6,714,649
shares remained available for grant under the Company's stock option plan. At
June 30, 1999, 856,391 options were exercisable at exercise prices ranging from
$0.00953 to $7.333, with an average exercise price of $0.02807.
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)................................... 5,200 $2.6692
Canceled (unaudited).................................. (317) $0.5123
Exercised (unaudited)................................. (1,607) $0.0246
------
Balance at June 30, 1999................................ 12,117 $1.2033
======
</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) $(19,374)
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) $ (0.91)
</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 -- 9,267
Warrants.................................... -- 2,287 9,484 9,398 15,347
--- ----- ------ ----- ------
Total dilutive shares....................... -- 7,645 26,120 9,398 58,844
=== ===== ====== ===== ======
</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
$17.3 million including direct costs and expenses related to the acquisition,
of which $17.2 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>
Revenues:
Advertising and
syndication............ $ 5,559 $298 $ -- $389 $ 6,246 $ -- $ 6,246
Licensing.............. 3,226 -- -- -- 3,226 -- 3,226
Ecommerce.............. -- -- 14,712 -- 14,712 -- 14,712
-------- ---- ------ ---- ------- ------- --------
Total revenues....... 8,785 298 14,712 389 24,184 -- 24,184
Cost of revenues........ 1,586 83 2,376 119 4,164 -- 4,164
-------- ---- ------ ---- ------- ------- --------
Gross profit (loss)..... 7,199 215 12,336 270 20,020 -- 20,020
Operating expenses:
Sales and marketing.... 10,848 23 7,348 24 18,243 -- 18,243
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 6,288 (1) 7,026
-------- ---- ------ ---- ------- ------- --------
Total operating
expenses............. 19,097 241 8,880 153 28,371 6,288 34,659
-------- ---- ------ ---- ------- ------- --------
Income (loss) from
operations.............. (11,898) (26) 3,456 117 (8,351) (6,288) (14,639)
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) 3,451 116 (9,318) (6,283)(3) (15,601)
Change in foreign
currency translation
adjustment during the
period.................. (16) -- -- -- (16) -- (16)
-------- ---- ------ ---- ------- ------- --------
Comprehensive income
(loss).................. $(12,874) $(27) $3,451 $116 $(9,334) $(6,283)(3) $(15,617)
======== ==== ====== ==== ======= ======= ========
Basic and diluted net
loss per share.......... $ (0.68) (3) $ (0.73)
======== ========
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) $ (0.34)
======== ========
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>
Revenues:
Advertising and
syndication.......... $ 5,624 $ -- $392 $ 6,016 $ -- $ 6,016
Licensing............. 9,626 -- -- 9,626 -- 9,626
Ecommerce............. 1,820 3,335 -- 5,155 -- 5,155
-------- ----- ---- -------- ------- --------
Total revenues....... 17,070 3,335 392 20,797 -- 20,797
Cost of revenues........ 1,878 1,171 128 3,177 -- 3,177
-------- ----- ---- -------- ------- --------
Gross profit (loss)..... 15,192 2,164 264 17,620 -- 17,620
Operating expenses:
Sales and marketing... 17,158 1,793 107 19,058 -- 19,058
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......... 4,712 -- -- 4,712 2,671(1) 7,383
-------- ----- ---- -------- ------- --------
Total operating
expenses............ 35,103 2,214 284 37,601 2,671 40,272
-------- ----- ---- -------- ------- --------
Loss from operations.... (19,911) (50) (20) (19,981) (2,671) (22,652)
Other income/(expense),
net.................... (8) -- -- (8) -- (8)
Interest
income/(expense), net.. 597 -- -- 597 -- 597
Income Taxes............ (52) (5) (57) 5(2) (52)
-------- ----- ---- -------- ------- --------
Net loss............. (19,374) (55) (20) (19,449) (2,666) (22,115)
Change in foreign
currency translation
adjustment during the
period................. 26 -- -- 26 -- 26
-------- ----- ---- -------- ------- --------
Comprehensive loss...... $(19,348) $ (55) $(20) $(19,423) $(2,666) $(22,089)
======== ===== ==== ======== ======= ========
Basic and diluted net
loss per share......... $ (0.91) $ (0.93)
======== ========
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.................. $ (0.35) $ (0.40)
======== ========
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 31,
1999 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable............................... $ 127,000 $ 89,000
Supplies inventory................................ 8,000 --
------------ ------------
Total current assets............................ 135,000 89,000
Equipment......................................... 241,000 212,000
Accumulated depreciation.......................... (167,000) (90,000)
------------ ------------
74,000 122,000
------------ ------------
Total assets.................................... $ 209,000 $ 211,000
============ ============
Liabilities and members' equity (deficit)
Current liabilities:
Accounts payable.................................. $ 1,016,000 $ 854,000
Amounts due to member............................. 735,000 192,000
Deferred revenue.................................. 19,128,000 23,286,000
------------ ------------
Total current liabilities....................... 20,879,000 24,332,000
Contingencies
Members' deficit.................................... (20,670,000) (24,121,000)
------------ ------------
Total liabilities and members' deficit.......... $ 209,000 $ 211,000
============ ============
</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 31,
1999 1997
----------- ------------
<S> <C> <C>
Revenues............................................. $14,712,000 $ 7,533,000
Cost of revenues..................................... 2,376,000 1,618,000
----------- ------------
Gross profit......................................... 12,336,000 5,915,000
Cost and expenses:
Sales and marketing expenses....................... 7,348,000 13,352,000
General and administrative expenses................ 1,532,000 2,763,000
----------- ------------
Total costs and expenses......................... 8,880,000 16,115,000
----------- ------------
Income (loss) before tax expense..................... 3,456,000 (10,200,000)
Income tax expense................................... 5,000 5,000
----------- ------------
Net income (loss) ............................... $ 3,451,000 $(10,205,000)
=========== ============
</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................... $ (6,190,000) $(2,064,000) $(2,064,000) $(10,318,000)
Net loss.............. (6,123,000) (2,041,000) (2,041,000) (10,205,000)
Distributions to
members.............. (2,618,000) (490,000) (490,000) (3,598,000)
------------ ----------- ----------- ------------
Balance at December 31,
1997................... (14,931,000) (4,595,000) (4,595,000) (24,121,000)
Net income............ 2,761,000 690,000 -- 3,451,000
Transfer of negative
equity of selling
member............... (4,595,000) -- 4,595,000 --
------------ ----------- ----------- ------------
Balance at January 3,
1999................... $(16,765,000) $(3,905,000) $ -- $(20,670,000)
============ =========== =========== ============
</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) ................................ $ 3,451,000 $(10,205,000)
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
Accounts payable.............................. 162,000 241,000
Deferred revenues............................. (4,158,000) 11,179,000
----------- ------------
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,
selling Internet websites throughout the United States, and hosting Choice
Mall, an Internet website. The Company also receives revenues from sales,
purchased through the Internet, of GRC products.
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
Equipment
Equipment is stated at cost and is depreciated using the straight-line
method based on an estimated useful life of three years.
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 Web site design and construction, subscription sales to the
virtual mall and product sales. The Company records revenues from Web site
design and construction when the Web site is constructed and the customer has
accepted it or the contractual obligation has expired. Revenues for the
subscription sales are recorded on a monthly basis. Revenues for product sales
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 revenues represent amounts received from Web site design and
construction which are recognized as revenue when the Web site is constructed
and the customer has accepted it or the contractual obligation has expired.
Deferred revenues related to subscriptions are recognized over the subscription
period of up to 12 months.
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.
2. Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expenses. Advertising expenses were $3,212,000 and $5,456,000 for the
years ended 1998 and 1997, respectively.
3. Related-Party Transactions
In accordance with the Agreement (Note 1), the Company pays fees to the
members for providing management and other services to the Company. Total fees
recognized as expense for amounts 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.
The Company purchases products from GRC and markets them over the Internet.
Cost of revenues paid to GRC approximate $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.
F-40
<PAGE>
GUTHY-RENKER INTERNET, LLC
(a California limited liability company)
NOTES TO FINANCIAL STATEMENTS
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. 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
Supplies inventory................................ 8,000 8,000
------------ ------------
Total current assets............................ 135,000 13,000
Equipment........................................... 241,000 255,000
Accumulated depreciation............................ (167,000) (183,000)
------------ ------------
74,000 72,000
------------ ------------
Total assets.................................... $ 209,000 $ 85,000
============ ============
Liabilities and members' equity (deficit)
Current liabilities:
Accounts payable.................................. $ 1,016,000 $ 789,000
Amounts due to member............................. 735,000 773,000
Deferred revenue.................................. 19,128,000 19,248,000
------------ ------------
Total current liabilities....................... 20,879,000 20,810,000
Contingencies
Members' deficit.................................... (20,670,000) (20,725,000)
------------ ------------
Total liabilities and members' deficit.......... $ 209,000 $ 85,000
============ ============
</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>
Revenues........................................... $3,335,000 $2,514,000
Cost of revenues................................... 1,171,000 271,000
---------- ----------
Gross profit....................................... 2,164,000 2,243,000
Costs and Expenses:
Sales and marketing expenses..................... 1,793,000 1,743,000
General and administrative expenses.............. 421,000 407,000
---------- ----------
Total costs and expenses....................... 2,214,000 2,150,000
---------- ----------
Income (loss) before tax expense................... (50,000) 93,000
Income tax expense................................. (5,000) (5,000)
---------- ----------
Net income (loss).............................. $ (55,000) $ 88,000
========== ==========
</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)................................... $ (55,000) $88,000
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)
Accounts payable................................... (227,000) (94,000)
Deferred revenues.................................. 120,000 (19,000)
--------- -------
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 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.
F-51
<PAGE>
ITW NEWCORP, INC.
NOTES TO FINANCIAL STATEMENTS
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
F-59
<PAGE>
HOMEBASE DIRECTORIES PTY LTD.
(Predecessor to LookSmart, Ltd.)
NOTES TO FINANCIAL STATEMENTS
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.
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..................................................... 9,000,000
================
</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 1,350,000 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>
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 will be
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, will be 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.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LOOK", subject to notice of issuance.
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 $1,300,000.
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 an aggregate of 18,500 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. The shares of Series C preferred stock beneficially owned
by Hambrecht & Quist LLC and its affiliates have been deemed by the National
Association of Securities Dealers, Inc. to be underwriting compensation.
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9,000,000 Shares
LookSmart, Ltd.
Common Stock
---------------
[LOGO OF LOOKSMART(SM) APPEARS HERE]
---------------
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..................................... 250,000
Legal fees and expenses............................................. 400,000
Accounting fees and expenses........................................ 300,000
Transfer agent and registrar fees................................... 10,000
Miscellaneous expenses.............................................. 176,686
----------
Total............................................................. $1,300,000
==========
</TABLE>
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 12,285,139 shares of
common stock with exercise prices ranging from $0.00953 to $12.00 per
share. Since our incorporation, options to purchase 2,313,212 shares of
common stock have been exercised for an aggregate consideration of
$49,910.02.
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
10.9A+* 1999-2000 U.S. Net Search Premier Provider Agreement 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.
II-4
<PAGE>
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.
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 August
19, 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 August 19, 1999
______________________________________ Officer and Director
(Evan Thornley) (Principal Executive
Officer)
Tracey Ellery* President, Director August 19, 1999
______________________________________
(Tracey Ellery)
/s/ Patricia Cole Chief Financial Officer August 19, 1999
______________________________________ (Principal Financial and
(Patricia Cole) Accounting Officer)
Anthony Castagna* Director August 19, 1999
______________________________________
(Anthony Castagna)
Paul Riley* Director August 19, 1999
______________________________________
(Paul Riley)
Robert J. Ryan* Director August 19, 1999
______________________________________
(Robert J. Ryan)
Scott Whiteside* Director August 19, 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 4,657 -- 8,834
------ ------ ----- ------
Total............................ $4,177 $4,784 $ -- $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
10.9A+* 1999-2000 U.S. Net Search Premier Provider Agreement 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 10.4
LICENSE & UPDATE AGREEMENT
--------------------------
This License & Update Agreement (the "Agreement") is entered into and
effective as of December 4, 1998 (the "Effective Date") by and between Microsoft
Corporation, a Washington corporation located at One Microsoft Way, Redmond,
Washington 98052 and Looksmart, Ltd., a Delaware corporation located at 487
Bryant Street, San Francisco, California 94107, each a "Party" and collectively,
the "Parties".
Recitals
--------
Whereas, LookSmart is the developer, owner and operator of a Web site known
as www.looksmart.com and other similar international versions of such Web site
-----------------
which Web sites are a directory(ies) of global, national, local, and
international URL links along with associated content and commentary regarding
each such URL link;
Whereas, Microsoft desires to obtain from LookSmart the below specified
grant of license rights to LookSmart's directory(ies) of URL links and
associated content and commentary;
Whereas, Microsoft further desires to be entitled to obtain updates and
enhancements made by or for LookSmart to LookSmart's directory(ies) of URL links
and associated content and commentary as set forth herein; and
Whereas, LookSmart is willing to grant Microsoft such rights to its
directory(ies) and updates and enhancements thereto, all on the terms and
conditions set forth herein.
Now Therefore, the Parties agree as follows.
Agreement
---------
1. DEFINITIONS. As used herein, the following terms shall have the
-----------
following meanings:
1.1 "Licensed Database" shall collectively refer to [**] The Licensed
Database shall not, however, in any event be deemed to include any CIM Content
or any work in progress (i.e., links still in the process of creation or links
which have been created but that LookSmart's editorial process has not yet
approved or rejected) or any internal workflow data from LookSmart's editorial
process, e.g. identity of editors, stage of editorial process, etc.
1.2 "Database Updates" shall mean the Licensed Database as it exists
at any given time, including, but not limited to, any and all updates,
enhancements, additions, modifications, deletions and/or error corrections to
any previously delivered version of the Licensed Database and/or Database
Update.
Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as *****. A complete version of this exhibit
has been filed separately with the Securities and Exchange Commission.
<PAGE>
1.3 "Database" shall refer to the Licensed Database including any and
all Database Updates.
1.4 "CIM Content" shall mean any local content included in the
Database that was included by LookSmart directly and solely for Cox Interactive
Media, Inc. or its Affiliates ("CIM") under the Development, Licensing and
Affiliation Agreement between CIM and LookSmart entered into as of the 7th day
of May, 1998, as the same may be amended from time to time, provided that such
amendments do not materially adversely affect Microsoft's rights under this
Agreement as they exist prior to any such amendment executed after the Effective
Date.
1.5 "Update Term" shall mean the period of time beginning on the
Effective Date and ending five (5) Years thereafter, unless earlier terminated
in accordance with Section 3.2, provided that for the avoidance of doubt the
Update obligations under Section 3 below for Year 1 shall not commence until the
date that is ninety (90) days from the Effective Date, provided that all such
obligations shall be met within the remaining 275 Days of Year 1, and further
provided that nothing in this Agreement including the foregoing proviso shall in
any way affect any right, obligation or date triggered off of the Effective
Date.
1.6 "Year" shall mean each successive twelve (12) month period
starting on the Effective Date, and each anniversary of the Effective Date
(i.e., Year 1 shall start on the Effective Date and end twelve (12) months
later, Year 2 shall start on the first anniversary of the Effective Date and end
twelve (12) months later, Year 3 shall start on the second anniversary of the
Effective Date and end twelve (12) months later, etc.). A "one-half Year period"
shall refer to either the first six (6) months or the last six (6) months of a
given Year, except that with respect to LookSmart's obligations under Section 3
for Year 1 only, "one-half Year period" shall mean either the first one hundred
thirty-eight (138) days after the date that is ninety (90) days after the
Effective Date or the one hundred thirty-seven (137) days prior to the first day
of Year 2. In addition, with respect to LookSmart's obligations under Section 3
for Year 1 only, a quarter shall mean as appropriate one of (a) the sixty-nine
(69) day periods starting on each of the date that is ninety (90) days from the
Effective Date, the date that is one hundred fifty-nine (159) days from the
Effective Date and the date that is two hundred twenty-eight (228) days from the
Effective Date or (b) the sixty-eight (68) day period starting on the date that
is two hundred ninety-seven (297) days from the Effective Date.
1.7 "Financing Agreement" shall refer to that certain Financing
Agreement and Note between the Parties dated September 10, 1998, as amended in
the Letter of Intent between the Parties dated as of October 9, 1998.
1.8 "Listed Companies" shall mean those companies set forth on the
attached Exhibit A attached hereto and incorporated herein by this reference.
1.9 "Restricted Period" shall mean the two and one-half (2 1/2) Year
period beginning on the Effective Date or if Microsoft makes the election in
Section 5.4.2 the two (2) Year period beginning on the Effective Date.
1.10 "Affiliate" shall mean, with respect to any legally recognizable
entity, any other such entity directly or indirectly Controlling, Controlled by,
or under common "Control" with such entity. "Control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a legally recognizable entity, whether through the
ownership of voting shares, by contract, or otherwise. Where such entity is a
partnership, limited liability company, corporation, or similar entity and has
partners, members, or shareholders with equal ownership interests or equal
control interests, by contract or otherwise, then each such partner, member, or
shareholder will be deemed to possess Control.
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1.11 "Microsoft" shall mean Microsoft Corporation and any and all
Microsoft Affiliates.
1.12 "Looksmart" shall mean LookSmart, Ltd. and any and all LookSmart
Affiliates.
1.13 "Looksmart Primary Web Site" shall mean LookSmart's primary web
site (currently located at http://www.looksmart.com) and all localized and/or
international versions thereof and/or any successor web site(s) of any of them,
having substantially similar features and functions, regardless of how such
successor web site(s) is named or denominated. A screen image of the home page
at http://www.looksmart.com as of the Effective Date is attached at Exhibit C.
1.14 "day" shall mean a calendar day unless otherwise noted.
1.15 "URL Link" means a unique uniform resource locator address, e.g.,
www.msn.com and www.msn.com/news and www.carpoint.msn.com are each a URL link.
- ----------- ---------------- --------------------
For the avoidance of doubt delivery of a URL link or inclusion of a URL link in
the Database shall at all times be accompanied by all appropriate content,
commentary, taxonomy and documentation associated with such URL link. For the
further avoidance of doubt, it is understood by the parties that URL links that
are contained in the Database but which are not made available to users of the
LookSmart Primary Web Site may not have or need the level of content,
commentary, taxonomy and documentation associated with URL links made available
to users of the LookSmart Primary Web Site, provided Microsoft shall receive any
such existing content, commentary, taxonomy and documentation associated with
such URL links.
All other terms shall have the meanings hereinafter assigned to them.
2. Delivery Of The Licensed Database.
---------------------------------
2.1 Initial Delivery. Looksmart agrees to provide Microsoft with one
(1) copy of the Licensed Database, current as of the Effective Date and
including as of the Effective Date a minimum of [**] unique URL links that are
also available to users of the LookSmart Primary Web Sire, as SQL Server data in
character-mode BCP format, including BCP scripts, any table and view scripts and
the agreed data, on a CD-ROM no later than three (3) business days following the
Effective Date.
2.2 Additional Delivery. Within ninety (90) days of the Effective
Date and without limiting any other of LookSmart's obligations under this
Agreement, LookSmart agrees to add an additional [**] unique published URL links
with all appropriate associated content, commentary, taxonomy and documentation
(the "Additional Links") to the Licensed Database. (For purposes of this Section
2.2, "published/ing" means available to users of the LookSmart Primary Web
Site.) Such Additional Links: (a) shall be on topics and in amounts specifically
directed by Microsoft in its sole discretion as further set forth in Exhibit D
attached hereto and incorporated herein by this reference (the Additional Links
Specifications), provided that Microsoft shall have the right in its sole
discretion to provide to LookSmart within one (1) business day of the Effective
Date, with ongoing updates through the tenth (10th) business day following the
Effective Date, a list of sub-topics and sub-amounts as determined by Microsoft
in its sole discretion of the topics and amounts set forth in Exhibit D, for
LookSmart's use in meeting its obligations hereunder; (b) shall be added to the
Licensed Database according to the schedule attached hereto as Exhibit E
attached hereto and incorporated herein by this reference (the Additional Links
Delivery Schedule) and according to the priority designations appearing in
Exhibit D; and (c) shall in all ways meet quality standards determined by
Microsoft in its sole discretion. LookSmart's addition of the Additional Links
to the Licensed Database will be the top priority for LookSmart's editorial team
and the engineering group required to support them (including, without
limitation, any other work not
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covered by this Agreement), provided that nothing herein shall limit LookSmart's
obligations under this Agreement. Microsoft shall have the right to reject any
Additional Link or any part of it if Microsoft in its good faith sole discretion
determines that such Additional Link or part thereof does not meet the Microsoft
quality standards as required by sub-Section (c) above, provided that if any
Additional Link or part of it is not rejected within forty-five (45) days of the
delivery of the Additional Link, then such Additional Link is deemed accepted.
In the event Microsoft rejects within the forty-five (45) day period any given
Additional Link or part thereof, LookSmart shall, at Microsoft's option and
direction, (i) replace within thirty (30) days from the date of rejection by
Microsoft the Additional Link with a substitute Additional Link on the same
topic, which replacement Additional Link shall be acceptable to Microsoft in its
sole discretion in accordance with subsection (c) above; (ii) revise within
thirty (30) days from the date of rejection by Microsoft, to Microsoft's
satisfaction, the text, description, content or commentary accompanying such
Additional Link; (iii) replace within thirty (30) days from the date of
rejection by Microsoft the Additional Link with a substitute Additional Link on
a new topic specified by Microsoft which such Additional Link shall be subject
to Microsoft's acceptance as set forth above; or (iv) remove the URL link
entirely from the Database within thirty (30) days from the date of rejection by
Microsoft and not get paid for that URL link. For the avoidance of doubt
rejection by Microsoft of any Additional Link in its entirety under sub-Sections
(i), (iii) or (iv) above shall result in such URL link's removal from the
Database delivered to Microsoft, but shall not require LookSmart to cease
publishing the URL link on its web sites or in any other form. Furthermore, if
Microsoft rejects any Additional Link in its entirety under sub-Sections (i),
(iii) or (iv) above, Microsoft may not in the future request that LookSmart add
such rejected Additional Link to the Database, provided that nothing shall
prevent Microsoft from adding such rejected Additional Link to the Database
itself as permitted under Section 4 of this Agreement.
2.3 User Created URL Links. LookSmart agrees that no URL link(s)
added to the Licensed Database by any user(s) of the LookSmart Primary Web Site
will be counted towards the number of URL links, including Additional Links,
delivered under Sections 2.1 or 2.2 above, unless such URL link(s) has been
reviewed and submitted by LookSmart as independently meeting the criteria
required by this Agreement. For the avoidance of doubt, if LookSmart submits
such a URL link(s), Microsoft shall have all rights to accept and/or reject as
are provided under this Agreement.
3. Creation And Delivery Of Database Updates.
-----------------------------------------
3.1 Database Updates. Subject to Section 3.2, during the Update Term,
LookSmart shall provide Microsoft with Database Updates. LookSmart shall deliver
the Database Updates to Microsoft as frequently as may be reasonably requested
by Microsoft, provided that LookSmart agrees that: (i) starting no later than as
soon as is reasonably practicable, but in any event no later than three (3)
months (for the purposes of this Section 3.1, the "Update Start-up Period")
following the Effective Date, Microsoft will receive Database Updates from
LookSmart once per day at a mutually agreed upon time of day by delivery of a
complete refreshed copy of the Database (as delivered by LookSmart up to the
time of the delivery) as more completely set forth in Exhibit B attached hereto
and incorporated herein by this reference and (ii) prior to the Update Start-up
Period, Microsoft will receive Database Updates from LookSmart once per week on
a mutually agreed upon day and at a mutually agreed upon time of day by delivery
of a complete refreshed copy of the Database (as delivered by LookSmart up to
the time of the delivery) in the format set out in Section 2 of this Agreement.
If, after the Update Start-up Period, LookSmart does not provide Microsoft with
a Database Update at least once daily for more than five (5) days in any one-
half Year period, Microsoft may, upon Microsoft's notice to LookSmart made
within ninety (90) days of the end of such one-half Year period, as Microsoft's
sole remedy for such non-performance, receive a payment of the following amount
from LookSmart:
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(i) if the total number of days during the one-half Year
period for which LookSmart does not deliver a Database Update is thirty-five
(35) or fewer, a per day amount of [**] for day six (6) and each additional
day over six (6) days;
(ii) if the total number of days during the one-half Year
period for which LookSmart does not deliver a Database Update is thirty-six (36)
or more, a per day amount of [**] for day six (6) and each additional day
over six (6) days.
Any amounts due under this Section 3.1, shall have no affect on any amounts due
under Section 7 and shall be due and payable within ten (10) business days of
Microsoft's submitting an invoice to LookSmart for the applicable amount, and
the election of Microsoft to receive such amount shall prohibit Microsoft from
pursuing any other remedy that may be available to Microsoft under Section 12 of
this Agreement or otherwise.
3.2 Termination Of Database Updates. Either Party may terminate
Microsoft's right to receive Database Updates prior to the expiration of the
Update Term by giving six (6) months prior written notice to the other Party,
provided neither Party may give such notice any earlier than the date that is
eighteen (18) months following the Effective Date. In addition, if LookSmart
undergoes a material change in its capital structure, control or ownership
(including by way of an initial public offering of stock) this Agreement and
Microsoft's rights hereunder, including without limitation, the right to receive
Database Updates, shall survive such a change. For the avoidance of doubt,
termination or expiration of Microsoft's right to receive Database Updates as
contemplated by this Section 3.2, shall not affect in any way Microsoft's
license of rights set forth in Section 4.1 to the Database as delivered to
Microsoft prior to any such termination or expiration.
3.3 Database Update Requirements.
3.3.1 LookSmart will deliver Database Updates containing a total
of no less than [**] new (as opposed to edited, modified, re-categorized, re-
named or otherwise) URL links (hereinafter "Gross Links") during each Year
during the Update Term, all such URL links (i) shall be reviewed by LookSmart's
editors prior to delivery to Microsoft, (ii) shall be of sufficient quality that
they have been approved by LookSmart pursuant to LookSmart's Standards and
Policies (as defined below) prior to delivery to Microsoft, and (iii) shall be
links available to users of the LookSmart Primary Web Site. LookSmart has, prior
to the Effective Date, made its standards and policies as of the Effective Date
("Standards and Policies") available to Microsoft and hereby agrees (A) that
such Standards and Policies will not during the Update Term substantially depart
from those in place as of the Effective Date and (B) to timely notify Microsoft
during the Update Term of any and all changes made by LookSmart to such
Standards and Policies. At no time during the Update Term shall the Database
contain more than [**] percent [**] Inactive Links (as defined hereunder) and
no Database Update shall be delivered containing more than [**] percent [**]
Inactive Links. An "Inactive Link" shall mean a URL that does not successfully
return a web page when requested on three (3) or more days out of five (5)
consecutive days, provided that Microsoft shall only check for such Inactive
Links once per day on any given link. If, after the Update Start-up Period, the
Database contains more than [**] percent [**] Inactive Links, Microsoft may, at
Microsoft's request made within ninety (90) days of such non-performance and
provided that Microsoft has delivered to LookSmart a listing of the Inactive
Links within twenty-four (24) hours of Microsoft's determination that the
Database has more than [**] percent [**] Inactive Links, as Microsoft's sole
remedy for such non-performance, receive a payment of the following amount from
LookSmart:
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(i) if the total number of days for which the Database
contains more than [**] percent [**] Inactive Links as contained on the list
provided by Microsoft to LookSmart is thirty-five (35) or fewer, a per day
amount of [**] for day six (6) and each additional day over six (6) days;
or
(ii) if the total number of days for which the Database
contains more than [**] percent [**] Inactive Links as contained on the list
provided by Microsoft to LookSmart is thirty-six (36) or more, a per day amount
of [**] for day six (6) and each additional day over six (6) days.
Any amounts due under this Section 3.3.1, shall have no affect on any amounts
due under Section 7 and shall be due and payable within ten (10) business days
of Microsoft's submitting an invoice to LookSmart for the applicable amount, and
the election of Microsoft to receive such amount shall prohibit Microsoft from
pursuing any other remedy that may be available to Microsoft under Section 12 of
this Agreement or otherwise.
3.3.2 Of the [**] Gross Links required to be delivered by
LookSmart during any given one Year period during the Update Term, a subset of
up to [**] of such Gross Links may be specifically requested by Microsoft
as provided in Section 3.3.3 (hereinafter such a specifically requested subset
of links is referred to as "Directed Links"). With respect to the Directed
Links, Microsoft will have the right to specify the topics and/or the specific
sites which LookSmart will research consistent with Section 3.1 and add to the
Database as part of a Database Update. Microsoft may request as Directed Links,
local links (i.e. links relevant to a given geographic locale), and such local
links may, in Microsoft's discretion, be URL links which are the same as those
contained in the CIM Content. The Gross Links and Directed Links will at all
times be of a high grade, nature and quality and will comply with LookSmart's
Standards and Policies as described in Section 3.1 and for the avoidance of
doubt all Gross Links and Directed Links shall be URL links available to users
of the LookSmart Primary Web Site and such URL links shall be available no less
prominently on the LookSmart Primary Web Site than any other comparable quality
URL link(s) available on the LookSmart Primary Web Site
3.3.3 When Microsoft requests Directed Links, Microsoft will also
specify that the addition of the Directed Links to the Database must occur
within a specific six (6) month period, one (1) month period or twenty-four (24)
hour period, or any combination of the foregoing, as follows:
(i) Microsoft may in a single request specify up to [**]
Directed Links for addition to the Database within a given one-half Year period,
by specifying the specific topics and/or specific sites for such one-half Year
period no later than two (2) weeks prior to the beginning of the one-half Year
period, except that with respect to the first one-half Year period following the
Effective Date, Microsoft shall specify the specific topics and/or specific
sites for such one-half Year period no later than thirty (30) days after the
Effective Date;
(ii) Microsoft may specify up to [**] Directed Links for
addition to the Database by LookSmart in any given one (1) month period, by
specifying the specific topics and/or specific sites for such one month period
not later than two (2) weeks prior to the beginning of such one (1) month
period, provided that Microsoft may not specify Direct Links for monthly
delivery for the first three (3) months of Year 1; and
(iii) Microsoft may specify up to [**] Directed Links for
addition to the Database in any given 24 hour period;
provided, however, that the total number of Directed Links required in a single
Year shall in no event exceed [**] (regardless of whether such Directed
Links were ordered pursuant to (i), (ii) or (iii) above, any
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combination thereof or otherwise). LookSmart shall add the specified Directed
Links to the Database within the corresponding time period, after review
pursuant to Section 3.1.
3.3.4 Upon receiving any Microsoft specification of Directed
Links under Sections 3.3.2 and 3.3.3 above, LookSmart shall have the right to
inform Microsoft that LookSmart in good faith believes that LookSmart's
provision of such links ("Questioned Links") is impossible because the
corresponding sites do not exist or would violate LookSmart's Standards and
Policies. In the event that LookSmart so informs Microsoft, the Parties will
work together in good faith to find mutually acceptable substitutes for the
Questioned Links; provided that if the Parties do not mutually agree, (i)
LookSmart need not deliver the Questioned Links and (ii) the number of requested
Directed Links for purposes of Section 7.2.2 shall not include the Questioned
Links unless on two (2) prior occasions, Microsoft has provided ((A) within
eight (8) months of the time that the Parties determine that they cannot
mutually agree, for Questioned Links that are part of a six (6) month request,
(B) within three (3) months of the time that the Parties determine that they
cannot mutually agree, for Questioned Links that are part of a one (1) month
request, and (C) within eight (8) days of the time that the Parties determine
that they cannot mutually agree, for Questioned Links that are part of a twenty-
four (24) hour request) a list of links that would have satisfied the
specification as evidence to LookSmart that the requested links should not have
been Questioned Links because the corresponding sites do exist and would not
violate LookSmart's Standards and Policies, in which case the number of
requested Directed Links for purposes of Section 7.2.1 shall be at all times
thereafter the number so requested by Microsoft; and further provided that
nothing in this sub-Section 3.3.4 shall effect or diminish (i) Microsoft's right
to request links under Sections 3.3.2 and 3.3.3 or (ii) LookSmart's obligation
to deliver (A) the links requested by Microsoft under Sections 3.3.2 and 3.3.3
during the relevant periods, (B) up to [**] Directed Links per Year or (C) the
Gross Links per Year.
3.3.5 As used in this Section 3.3.5, links "created specifically
for a given country" means a separate, distinct set of links that may be in the
primary language(s) of a named country and have been specifically selected
and/or targeted at the citizens of that country. In the event Microsoft desires
to have a portion of its Directed Links created specifically for non-English
speaking countries which countries are not then in the Database, Microsoft shall
either: (i) request such Directed Links as part of a six month request pursuant
to Section 3.3.3(i); or (ii) give LookSmart three (3) months prior written
notice of the name(s) of such country(ies) prior to requesting Directed Links
for such country pursuant to either Section 3.3.3(ii) or (iii). Once there are
links for a given non-English speaking country contained in the Database,
Microsoft may order additional Directed Links for that country without further
prior notice, other than that normally required under Section 3.3.3.
3.3.6 Upon receiving any delivery of Gross Links or Directed
Links, Microsoft shall have the right to inform LookSmart that Microsoft in good
faith believes that the Gross Links or Directed Links do not contain URL links
in existence that Microsoft believes are of such a quality that they should have
been included in the delivered Gross links or Directed Links. In the event that
Microsoft so informs LookSmart, the Parties will work together in good faith to
review the URL links that Microsoft believes should have been included and if
LookSmart agrees that such URL links meet LookSmart's Standards and Policies
then LookSmart will include such links in the Database.
3.4 Audit And Quarterly Review.
3.4.1 Microsoft shall have the right upon twenty-four (24) hours
notice, and with a frequency no more than once in each one-half Year, to engage
an independent third party to audit and/or inspect (a) the URL links and all
assocciated content, commentary, taxonomy and documentation contained in the
relevant database(s) underlying the LookSmart Primary Web Site from time to time
via human or automated review of the components, structure and any other part(s)
of such database solely as necessary in
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order to confirm LookSmart's compliance with the provisions of this Agreement
and (b) all usual and proper records, books of account, all usual and proper
entries and all contracts between LookSmart and third parties, as relevant,
relating to the amounts payable by Microsoft under Section 7.3 in order to
verify the invoices sent and the amounts owed and/or paid to LookSmart under
Section 7.3. The independent third party shall be selected by Microsoft and
approved by LookSmart, such approval not to be unreasonably withheld. Any such
review shall be conducted within normal business hours, shall be limited to the
subject matter of the Agreement, and shall be subject to an appropriate Non-
Disclosure Agreement. In the event Microsoft makes a claim as a result of such
audit, LookSmart shall be provided with a copy of any such final audit report.
The cost of performing such audit shall be paid by Microsoft, unless material
non-compliance is found by Microsoft, in which case the cost of the audit shall
be paid by LookSmart. The audit and any report or correspondence from the
auditors to Microsoft shall be solely for the purpose of confirming LookSmart's
compliance with this Agreement and shall contain only material and information
relating to the subject matter of this Agreement. In the event that any audit
under sub-Section (b) above reveals an over payment by Microsoft of more than
[**] or more than [**] percent [**] of the amounts due pursuant to any invoice
presented to Microsoft by LookSmart, LookSmart, in addition to recomputing and
making immediate refund to Microsoft of all amounts overpaid, plus interest at
the highest prime rate set forth from time to time in the Wall Street Journal in
the United States plus two percentage points (or, if less, at a rate equal to
the highest rate permitted under applicable law), shall pay Microsoft's
reasonable costs and expenses incurred by MS in conducting such audit,
including, but not limited to, any amounts paid to any auditor or attorney.
3.4.2 Microsoft shall have the right upon fourteen (14) days
notice, and with a frequency no more than once per calendar quarter, to visit
LookSmart's at its premises to run queries against and otherwise test the
relevant database(s) underlying the LookSmart's Primary Web Site solely for
purposes of reviewing (a) the number and quality of unique URL links and (b)
LookSmart's compliance with the provisions of this Agreement. Notwithstanding
the foregoing, Microsoft shall accommodate LookSmart's reasonable scheduling
requests, provided that in no event shall LookSmart fail to find a date
acceptable to Microsoft that is more than thirty (30) days from Microsoft's
notice. Each Microsoft visit shall last no longer than one (1) full business day
and LookSmart shall provide such assistance to Microsoft during such visit as
Microsoft reasonably requests. In addition, LookSmart agrees nothing shall
prevent Microsoft from running queries against, crawling or otherwise testing
the LookSmart Primary Web Site from remote locations and that LookSmart does not
and will not object to Microsoft doing so in Microsoft's discretion.
4. LICENSE OF RIGHTS.
-----------------
4.1 License Of Rights To The Database. Subject to Section 4.3 below,
effective upon delivery of the Licensed Database and any Database Update(s),
LookSmart shall simultaneously grant to Microsoft the irrevocable, non-
exclusive, worldwide, perpetual, non-terminable, royalty-free rights to: (i)
make, use, copy, modify, edit, add to, delete from, extract from, combine with
other materials, create derivative works of the Database or any portion thereof;
(ii) publicly perform or display, import, broadcast, transmit, distribute,
publish, license, offer to sell, sell, rent, lease or lend copies of the
Database or any portion thereof; and (iii) subject to Section 5, sublicense to
third parties the foregoing rights, including the right to sublicense to further
third parties. For the avoidance of doubt, the foregoing license shall be
cumulative with respect to each delivery of the Database or any version or part
thereof and no subsequent delivery of the Database or any version or part
thereof shall void any right(s) to any previously delivered version of the
Database or any part thereof.
4.2 Branding. Nothing herein shall in any way obligate Microsoft to
brand, name or label the Database or any derivative technology of the Database
in any given manner or fashion, and Microsoft and its licensees shall at all
times be free to brand, name and label their Web sites, pages and any other
implementation containing or based on the Database as they in their discretion
deem appropriate.
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4.3 Third Party Supplied Content And Commentary. With respect to
Section 1.1(ii), in the event that LookSmart licenses or otherwise acquires the
right to any such content and/or commentary, that would otherwise be included in
the Database, from any third party not Affiliated with LookSmart and as part of
such license LookSmart is required to pay such third party for such content
and/or commentary on a per use, royalty or other usage basis, then with respect
to such content or commentary Microsoft will elect either to (a) pay LookSmart
the actual amount LookSmart pays the third party for each use attributable to
Microsoft as a result of use of the Database by Microsoft or its permittees
pursuant to this Agreement or (b) give up all rights to such content and/or
commentary under this Agreement unless and until LookSmart is no longer required
to pay the third party on a per use, royalty or other usage basis (at which time
Microsoft shall have all rights under this Agreement to such content and/or
commentary).
5. USE RESTRICTIONS.
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5.1 Third Party Licenses. Subject to Sections 5.3 and 5.5, and
notwithstanding anything to the contrary set forth in this Agreement, during the
Restricted Period, Microsoft may not sublicense or otherwise affirmatively
provide any of the rights (including, but not limited to, the right to brand or
market the Database or any part thereof) granted by LookSmart under Section 4.1
above as to the Database to any of the Listed Companies; provided that: (i)
nothing herein shall obligate Microsoft or its sublicensees to prohibit any
Listed Company from linking to or accessing any Microsoft or third party sites
or any page(s) within them including any page(s) containing or permitting access
to the Database other than by means of a sublicense or other affirmative
provision of rights by Microsoft; and (ii) nothing herein shall permit Microsoft
to sublicense to any third party during the Restricted Period the right to
exercise any rights with respect to the Database that Microsoft itself would be
restricted from exercising under this Section 5. For the avoidance of doubt, the
Parties agree that the foregoing restriction: (a) does not obligate Microsoft or
its sublicensees to prohibit any Listed Company from advertising or being
referenced on any Microsoft or third party sites or any page(s) within them
including any page(s) containing or permitting access to the Database, so long
as Microsoft does not also sublicense or otherwise affirmatively provide any of
the rights to the Database granted by LookSmart under Section 4.1 above to such
Listed Company; (b) does not prevent Microsoft from advertising or being
referenced on any Listed Company Web site or other product or offering as long
as Microsoft is not sublicensing or otherwise affirmatively providing any of the
rights granted by LookSmart under Section 4.1 above as to the Database to any of
the Listed Companies; (c) does not prevent Microsoft from granting any Listed
Company any rights to any Microsoft Web site, product or other offering as long
as Microsoft is not sublicensing or otherwise affirmatively providing any of the
rights granted by LookSmart under Section 4.1 above as to the Database to any of
the Listed Companies; and (d) does not prevent any Listed Company from appearing
in the Database or in any results page from a search of the Database on any
Microsoft or third party site.
5.2 Prevention Of End User Confusion. Subject to Section 5.5, during
the Restricted Period, Microsoft shall use good faith efforts not to use a user
interface with respect to the Database the appearance of which (e.g., color,
font, visual arrangement) is likely to cause confusion as to the affiliation of
the Database as presented by Microsoft and the home page of the LookSmart
Primary Web Site located at http://www.looksmart.com as of the Effective Date.
------------------------
Notwithstanding the foregoing, nothing in this Section 5.2 shall limit
Microsoft's right to use any functionality (including, but not limited to,
cascading menus), technology, language, format or other available method to
create any user interface(s) used with respect to the Database. A screen image
of the home page at http://www.looksmart.com as of the Effective Date is
------------------------
attached at Exhibit C and incorporated herein by this reference.
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5.3 General.
5.3.1 The restrictions in Section 5.1 shall not apply to any
Listed Company if such Listed Company undergoes a material change in its capital
structure, control or ownership through any transaction with Microsoft.
5.3.2 The restrictions in Section 5.1 shall apply not only to
each Listed Company but to its corresponding Listed Company domain name(s) set
out in Exhibit A regardless of any material change in the Listed Company's
capital structure, control or ownership, except a transaction with Microsoft as
described in Section 5.3.1 (in which case Section 5.3.1 applies); provided that
in the event of any material change in a Listed Company's capital structure,
control or ownership, Microsoft shall continue to be restricted during the
Restricted Period with respect to the Listed Company but shall not be restricted
from doing business of any kind with any company ("Owning Company") investing in
or acquiring a Listed Company, except that Microsoft may not during the
Restricted Period sublicense or otherwise affirmatively provide any of the
rights (including, but not limited to, the right to brand or market) to the
Database granted by LookSmart under Section 4.1 above to such Owning Company for
use primarily in connection with the corresponding Listed Company or Listed
Company domain name(s) listed on Exhibit A. For the avoidance of doubt, (A)
nothing in this Agreement shall prevent Microsoft from providing the Database or
any part thereof to the Owning Company if it is used by the Owning Company in
its business other than in the Listed Company's business or in association with
a Listed Company's domain name(s) and (B) nothing in this Agreement shall
obligate Microsoft or its sublicensees to prohibit any Owning Company from
linking to or accessing any Microsoft or third party sites or any page(s) within
them including any page(s) containing or permitting access to the Database other
than by means of a sublicense or other affirmative provision of rights by
Microsoft..
5.3.3 Nothing in this Agreement, including this Section 5, shall
prevent Microsoft from (i) sharing taxonomy for or any part of the Database or
any knowledge derived therefrom, with any party solely for the purpose of
creating or improving Microsoft's own branded search service, or (ii) providing
any party including a Listed Company with access to the Database solely for the
purpose of assisting Microsoft with Microsoft's exercise of its rights to the
Database set forth in Section 4.1.
5.4 Notification Of Certain Transactions. Notwithstanding anything
contained in this Agreement including this Section 5, if Microsoft enters into
an agreement with any Listed Company(ies) under which Microsoft will provide
such Listed Company with any rights to the Database and such agreement is to
begin within thirty (30) days of the end of the Restricted Period (which for the
avoidance of doubt is (a) for purposes of Section 5.4.1, the thirty (30) day
period following expiration of two and one-half (2 1/2) Years from the Effective
Date and (b) for purposes of Section 5.4.2, the thirty (30) day period following
the expiration of two (2) Years from the Effective Date), Microsoft shall either
at its discretion:
5.4.1 Give LookSmart twelve (12) months prior written notice of
the start date of such agreement, in which case, LookSmart will continue to
provide Database Updates for six (6) months from the date of Microsoft's notice
(or longer at LookSmart's discretion) but LookSmart may opt to stop providing
Database Updates after such six (6) month period by providing Microsoft with
written notice as provided in Section 3.2; or
5.4.2 Give LookSmart six (6) months prior notice of the start
date of such agreement, in which case, notwithstanding Section 3, LookSmart may
(i) elect, within five (5) business days of Microsoft's notice, to immediately
stop providing Database Updates and if LookSmart so elects, Microsoft will
nonetheless pay LookSmart as if Database Updates were delivered for six (6)
months following
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Microsoft's notice or (ii) after such five (5) business day period, opt to stop
providing Database Updates by providing Microsoft with written notice as
provided in Section 3.2.
No notice given under this Section 5.4 may be given earlier than eighteen (18)
months from the Effective Date.
5.5 In the event that either or both of the restrictions described in
Sections 5.1 and or 5.2 are still in effect on the date this Agreement
terminates, the restriction(s) still in effect (i.e., Section 5.1 and/or 5.2)
shall survive or not survive such termination as follows:
5.5.1 In the event that the Agreement is terminated by Microsoft
under Section 12.1.1 or 12.1.2 (except if the material breach leading to the
termination is as a result of an unauthorized breach of the confidentiality
provision by non-management personnel acting other than in the scope of their
duties to LookSmart): the remaining effective restriction(s), if any, shall
continue until the earlier of (i) six (6) months from the earlier of (A) the
date of termination and (B) the date Microsoft received the last Database Update
and (ii) the end of the Restricted Period (which for the avoidance of doubt may
be two and one-half (2 1/2) Years from the Effective Date if Microsoft has given
notice under Section 5.4.1 or two (2) years from the Effective Date if Microsoft
has given notice under Section 5.4.2).
5.5.2 In the event that the Agreement is terminated by either
party as a result of LookSmart's being subject to any of the events set forth in
12.1.3 or is terminated by Microsoft as set forth in Section 12.1.4: the
remaining effective restrictions, if any, shall terminate with the Agreement.
5.5.3 In the event that the Agreement is terminated for any
other reason not covered by Sections 5.5.1 or 5.5.2: the remaining effective
restrictions, if any, shall continue for the Restricted Period (which for the
avoidance of doubt may be two and one-half (2 1/2) Years from the Effective Date
if MS has given notice under Section 5.4.1 or two (2) years from the Effective
Date if Microsoft has given notice under Section 5.4.2).
6. TECHNICAL SUPPORT. For a period of three (3) months following the
-----------------
Effective Date, LookSmart shall provide, at its expense, technical and other
assistance as reasonably requested by Microsoft to allow Microsoft to use the
Database effectively in its business. Such assistance shall include without
limitation a "walkthrough" of the data schema of the Licensed Database
immediately after the Effective Date. During the Update Term, LookSmart will
provide reasonable advance warning of changes to the Database schema and such
technical support and other assistance necessary to understand those changes
such that Microsoft can continue to receive and use the Database including the
Database Updates. During the Update Term, LookSmart shall respond to and use
best efforts to promptly correct any issue raised by Microsoft.
7. PAYMENTS.
--------
7.1 Licensed Database Payment. In consideration of the rights granted
Microsoft as to the Licensed Database in Section 4.1 above and the technical
support to be provided Microsoft as set forth in Section 6 above, Microsoft will
pay LookSmart on the Effective Date the sum of [**] (the "Licensed Database
Consideration"). The total amount of principal and accrued interest owed by
LookSmart to Microsoft as of the Effective Date under the Financing Agreement
shall be applied as an offset against the Licensed Database Consideration, and
as of the Effective Date (i) no further draw downs under the Financing Agreement
shall be permitted, (ii) the Financing Agreement shall automatically be
terminated, and (iii) neither Party shall have any further obligation to the
other under the Financing Agreement. For each Additional Link delivered by
LookSmart pursuant to Section 2.2 that is not
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rejected by Microsoft in its sole discretion in accordance with section 2.2
above, Microsoft will pay LookSmart a fee of [**] In the event LookSmart has not
met the Additional Link Delivery Schedule, then the amount owed by Microsoft for
each Additional Link shall be reduced by [**] per week per Additional Link for
each Additional Link that is delivered late. By way of example, if 10,000
Additional Links are delivered 2 weeks late, then the amount owed LookSmart for
each such late delivered Additional Link accepted by Microsoft would be [**].
Moreover, if at any given milestone set forth on the Additional Link Delivery
Schedule, LookSmart has delivered less than [**] percent [**] of the Additional
Links required to be delivered by such milestone, then Microsoft may immediately
terminate this Agreement upon giving written notice thereof. All payments for
Additional Links shall be made by Microsoft within one hundred thirty-five (135)
days from the Effective Date, provided that if LookSmart delivers [**] or more
Additional Links by the date that is fifty-one (51) days from the Effective Date
(as required under Exhibits D and E), then within sixty-one (61) days of the
Effective Date Microsoft shall pay LookSmart a portion of the payments due for
the Additional Links equal [**.]
7.2 Database Update Payments. Subject to Section 7.2.5 below, in
consideration of LookSmart's creation, delivery and licensing to Microsoft of
the Database Updates as set forth in Sections 3 and 4.1, Microsoft shall pay
LookSmart the sum of [**] per Year (the "Database Update Consideration") during
the Update Term, such sum to be paid by Microsoft in four (4) quarterly
installments of [**] each, payable and paid within ten (10) business days of the
end of quarter comprising such Year. If LookSmart fails to deliver, by the end
of any one-half Year period in any Year, (A) [**] or (B) one hundred percent
(100%) of the Directed Links requested under Sections 3.3.2 and 3.3.3 for
delivery in the one-half Year period of such Year, then LookSmart shall refund
to Microsoft within thirty (30) business days of the end of such one-half Year
period an amount (the "Total Half Year Refund Amount") equal to the sum of the
Half Year Gross Links Refund Amount and the Half Year Directed Links Refund
Amount, as determined below.
7.2.1 Gross Links Refund Amounts. If LookSmart fails to provide,
[**] Gross Links in a given one-half Year period of any Year, then the "Half
Year Gross Links Refund Amount" shall be determined by the following formula:
[**]
provided that the Half Year Gross Links Refund Amount shall never be less than
zero (i.e. LookSmart may not turn the Half Year Gross Links Refund Amount into a
credit).
7.2.2 Directed Links Refund Amounts. If LookSmart fails to
provide the requested number of Directed Links in a given one-half Year period,
the "Half Year Directed Links Refund Amount" shall be determined by the
following formulas:
[**]
provided that Half Year Directed Links Refund Amount shall never be less than
zero (i.e. LookSmart may not turn the Half Year Directed Links Refund Amount
into a credit by delivering more Directed Links in any given Year than Microsoft
requested).
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<PAGE>
7.2.3 REFUND EXAMPLES.
Example 1: By way of a first example, if in the first one-half Year period
of Year 1, Microsoft requested [**] Directed Links out of the [**] minimum
number of links to be provided to Microsoft during such period, and if LookSmart
instead delivered [**] Directed Links on time and only [**] other Gross Links
(for a total of [**] Gross Links) during such period, then LookSmart would owe
Microsoft a Half Year Total Refund Amount of [**] calculated as follows:
Half Year Gross
Links Refund Amount = [**]
Half Year Directed
Links Refund Amount = [**]
Total Half Year Refund Amount = [**]
Example 2: By way of a second example, if in the first one-half Year
period of Year 1, Microsoft requested [**] Directed Links out of the [**]
minimum number of links to be provided to Microsoft during such period, and if
LookSmart instead delivered [**] Directed Links and [**] other Gross Links (for
a total of [**] Gross Links) during such period, then LookSmart would owe
Microsoft a Total Half Year Refund Amount of [**] calculated as follows:
Half Year Gross
Links Refund Amount = [**]
Half Year Directed
Links Refund Amount = [**]
Total Half Year Refund Amount = [**]
*As noted above, the Gross Links Refund Amount may not become a credit by
LookSmart's delivering more than [**] Gross Links.
7.2.4 Termination of Database Update Obligations. If either
Party has terminated LookSmart's obligations to provide Database Updates in
accordance with Section 3.2 above or terminates this Agreement pursuant to
Section 12 prior to the end of any one-half Year period (except where LookSmart
is entitled to continue to be paid under Section 5.4.2), then within thirty (30)
business days following the effective date of any such termination, Microsoft
shall undertake a calculation of the amount of money to be refunded to Microsoft
by LookSmart or to be paid by Microsoft to LookSmart as a result of such early
termination. Such amount shall be determined by comparing the (i) "value" (as
defined below) of the Gross Links and Directed Links delivered by LookSmart
during the portion of the one-half Year period prior to termination, to (ii) the
amount paid by Microsoft to LookSmart during such one-half Year period prior to
termination. As used in this Section 7.2.4, (i) the "value" of the Gross Links
delivered by LookSmart shall be calculated by multiplying [**] by a ratio, of
which the numerator is the number of Gross Links delivered during such period
and the denominator is [**] and (ii) the "value" of the Directed Links delivered
by LookSmart shall be calculated by multiplying [**] by the ratio of which the
numerator is the number of the Directed Links delivered by LookSmart during such
period and the denominator is either (x) [**] (in the instance where Microsoft
has terminated the Agreement) or (y) the number of Directed Links requested by
Microsoft in such "stub" period (in the instance where LookSmart has
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<PAGE>
terminated the Agreement). If the "value" of links delivered by LookSmart during
such period exceeds the amount paid by Microsoft during such period, then
Microsoft will pay LookSmart the amount of the difference. If the "value" of
links delivered by LookSmart during such period is less than the amount paid by
Microsoft during such period, then LookSmart will refund Microsoft the amount of
the difference. By way of example, if Microsoft's right to receive Database
Updates is terminated by Microsoft effective one hundred twenty (120) days after
the end of the Year 2 and LookSmart had delivered during such 120 day period
[**] Directed Links and [**] other Gross Links (for a total of [**] Gross
Links), then LookSmart would owe Microsoft a total early termination refund
amount of [**] calculated as follows:
"Value" of Gross Links = [**]
"Value" of Directed Links = [**]
Total "value" of links delivered = [**]
Amount paid by Microsoft during such 120 day period = [**]
Refund owed to Microsoft = [**]
By way of a second example, if Microsoft's right to receive Database Updates is
terminated by Microsoft effective on sixty (60) days after the end of the Year 2
and LookSmart had delivered during such 60 day period [**] Directed Links and
[**] other Gross Links (for a total of [**] Gross Links), then Microsoft would
owe LookSmart an early termination payment of [**] calculated as follows:
"Value" of Gross Links = [**]
"Value" of Directed Links = [**]
Total "value" of links delivered = [**]
Amount paid by Microsoft during such 60 day period = [**]
Payment owed to LookSmart = [**]
7.2.5 Update Obligations in Year 1. The obligations in this
section 7.2 above shall apply in Year 1 on the following basis: the obligations
remain in their entirety, but all references to the Year shall be translated on
a pro-rata basis to the days 91 through 365. For the avoidance of doubt, the
obligations in terms of number of URL links (including Gross Links and Directed
Links), payment and refunds and all other terms shall be the same in Year 1 as
they are in any other Year, the only difference being that Year 1 obligation
shall be satisfied in during the two hundred seventy-five (275) day period
beginning on the ninety-first (91st) day after the Effective Date and the
meaning of "one-half Year period" and quarter shall be as set out in Section 1.6
above.
7.3 Section 4.3 Payments. Microsoft shall pay LookSmart all amounts
due as a result of any election by Microsoft to proceed under Section 4.3(a)
within thirty (30) days of Microsoft's receipt of an invoice from LookSmart for
such amounts.
8. No Obligation/independent Development. Notwithstanding any other
-------------------------------------
provision of this Agreement, Microsoft shall have no obligation to market, sell,
license or otherwise distribute the Database, either alone or in any Microsoft
product. Nothing in this Agreement will be construed as restricting Microsoft's
ability to acquire, license, develop, manufacture or distribute for itself, or
have others acquire, license, develop, manufacture or distribute for Microsoft,
similar technology, information or data performing
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or having the same or similar functions, features or information as the
Database, or to market and distribute such similar technology, information or
data in addition to, or in lieu of, the Database.
9. Representations, Warranties and Indemnity.
-----------------------------------------
9.1 Representations and Warranties. LookSmart warrants and represents
that:
9.1.1 It has sufficient authority to enter into this Agreement;
9.1.2 All materials delivered by LookSmart to Microsoft pursuant
to this Agreement, including without limitation the Database, including anything
contained therein or arising or produced therefrom, do not infringe the
copyrights, trademarks, service marks or any other proprietary right of any
third party;
9.1.3 The functionality of the Database, the methods used to
collect data for and from the Database, and the structure sequence and
organization of the Database do not infringe the copyrights, trademarks,
patents, service marks or any other proprietary right of any third party;
9.1.4 The Database, including anything contained therein or
arising or produced therefrom, do not and will not contain any libelous, or
materially false or misleading statements and do not otherwise infringe on the
rights of any third party, provided that this representation and warranty by
LookSmart does not extend to anything placed in the Database (i) by Microsoft or
at Microsoft's direction, without LookSmart's consent or instruction, or (ii) by
LookSmart or its agents, over LookSmart's objection, at Microsoft's direction
and in full compliance with Microsoft's instruction;
9.1.5 The Database, including anything contained therein or
arising or produced therefrom, are in compliance with all applicable laws; and
9.1.6 As of the Effective Date LookSmart is not aware of any
third party claims concerning the Licensed Database, which if true, would
constitute of violation of the representations and warranties set forth in
9.1.1, 9.1.2, 9.1.3, 9.1.4 and 9.1.5 above.
9.2 Indemnity. LookSmart will indemnify Microsoft from and against
any loss, claim, liability, damage, action or cause of action (including,
without limitation, reasonable attorneys' fees) brought against Microsoft by a
third party and arising from or related to any breach by LookSmart of the
warranties set forth in Section 9.1 above, provided that Microsoft provides
LookSmart with reasonable cooperation at LookSmart's expense and tenders control
of the defense of the claim to LookSmart. LookSmart's selection of counsel to
defend any such claim under this Section 9.2 shall be subject to Microsoft's
prior approval, such approval not to be unreasonably withheld. Microsoft
reserves the right to immediately discontinue the use of the Database, pending
the satisfactory resolution of such matter, in the event that Microsoft receives
notice which alleges that the Database or any portion thereof or any materials
delivered hereunder (a) violate any applicable laws, and/or (b) infringe the
copyrights, trademarks, service marks or any other proprietary right of any
third party. In the event of an infringement or other claim regarding the
Database, the Party receiving the claim agrees to provide prompt written notice
of the claim to the other Party, and LookSmart's obligations under this Section
9.2 shall be conditioned upon Microsoft's giving of such prompt notice. In the
event of use of the Database or a portion thereof is permanently enjoined, then
LookSmart shall, at LookSmart's option and LookSmart's sole expense, either (i)
acquire a license sufficient for Microsoft to exercise all its license rights
hereunder; (ii) replace or modify the Database as required by such permanent
injunction, provided any replaced or modified portion of Database shall be of an
equivalent quality and quantity to that portion being replaced or modified; or
(iii) pay Microsoft a refund equal to the total Microsoft payments up to the
date of
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the permanent injunction to LookSmart under Sections 7.1 and 7.2, multiplied by
the ratio of the number of links subject to permanent injunction to the total
links in the Database as of the date of the permanent injunction. Any refund due
Microsoft pursuant to the foregoing (iii), shall be due within ten (10) business
days of LookSmart's making its election from the above options.
10. Confidentiality. The Parties agree that the terms and conditions of
---------------
this Agreement are subject to the Non-Disclosure Agreement between the Parties
dated July 8, 1998 ("NDA"). Within ninety (90) days of the Effective Date,
Microsoft and LookSmart shall conduct joint press activities relating to the
conclusion of this Agreement in a form and at a time mutually agreed to by the
Parties. LookSmart shall have the opportunity to provide a quote and/or
information mutually agreed to between the Parties for any press release, if
any, issued by either party in connection with such press activities. Except as
specified above, neither Party will issue any press release or make any public
announcement(s) (including, but not limited to, using the other party's name in
any marketing materials) relating in any way whatsoever to this Agreement or the
relationship established by this Agreement without the express prior written
consent of the other Party.
11. Limitation of Liabilities.
-------------------------
NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL,
CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
12. Termination.
-----------
12.1 Termination for Cause. In addition to any other rights and/or
remedies that either Party may have under the circumstances, all of which are
expressly reserved, either Party may terminate this Agreement immediately upon
written notice at any time if:
12.1.1 The other Party is in material breach of any material
warranty, representation, term, condition or covenant of this Agreement, other
than those contained in Section 10, and fails to cure that breach within twenty
(20) days after written notice thereof; or
12.1.2 The other Party is in material breach of Section 10 or
entitled to terminate as provided in Section 13.7; or
12.1.3 Either Party becomes insolvent or makes any assignment
for the benefit of creditors or similar transfer evidencing insolvency; or
suffers or permits the commencement of any form of insolvency or receivership
proceeding; or has any petition under any bankruptcy law filed against it, which
petition is not dismissed within sixty (60) days of such filing; or has a
trustee or receiver appointed for its business or assets or any part thereof or
12.1.4 If Microsoft elects as set forth in Section 7 above, as a
result of LookSmart's failure to deliver at least [**] of the Additional Links
required to be delivered by a given milestone contained in the Additional Links
Delivery Schedule.
12.2 Effect of Termination. In the event of termination or expiration
of this Agreement for any reason, each and every clause which by its nature is
intended to survive the termination of this Agreement, including without
limitation, Sections 4, 5 (but only as and to the extent specifically set forth
in Section 5.5), 8, 9, 10 and 11, shall survive such termination or expiration.
If either Party terminates the Agreement after the start of but prior to the end
of any one-half Year period (except where LookSmart is entitled to continue to
be paid under Section 5.4.2), then the value of the Database Updates delivered
in such
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one-half Year period shall be calculated immediately and paid or refunded as
provided in Section 7.2.4. Neither Party shall be liable to the other for
damages of any sort resulting solely from terminating this Agreement in
accordance with its terms.
13. General.
-------
13.1 Notices. All notices and requests in connection with this
Agreement shall be deemed given as of the day they are received either by
messenger, delivery service, or in the United States of America mails, postage
prepaid, certified or registered, return receipt requested, and addressed as
follows:
<TABLE>
<CAPTION>
To Microsoft: To LookSmart:
------------ ------------
<S> <C>
Microsoft Corporation LookSmart Ltd.
One Microsoft Way 487 Bryant Street
Redmond, WA 98052-6399 San Francisco, California 94107-1316
Attention: Hyer Bercaw Attention: Evan Thornley
Telephone: (425) 882-8080 Telephone: (415) 597-4850
Facsimile: (425) 936-7329 Facsimile: (415) 597-4860
With a copy to: Law & Corporate Affairs With a copy to:
Telephone: (425) 882-8080
Facsimile: (425) 936-7409 Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Hank Barry, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
</TABLE>
or to such other address as a Party may designate pursuant to this notice
provision.
13.2 No Agency Relationship. Nothing in this Agreement shall be
construed as creating an employer-employee relationship, a partnership, or a
joint venture between the Parties.
13.3 Governing Law. This Agreement shall be governed by the laws of
the State of Washington as though entered into between Washington residents and
to be performed entirely within the State of Washington, and LookSmart consents
to jurisdiction and venue in the state and federal courts sitting in King
County, the State of Washington. In any action or suit to enforce any right or
remedy under this Agreement or to interpret any provision of this Agreement, the
prevailing Party shall be entitled to recover its costs, including reasonable
attorneys' fees.
13.4 Assignment. This Agreement shall be binding upon and inure to
the benefit of each Party's respective successors and lawful assigns; provided,
however, that LookSmart may not assign this Agreement, in whole or in part, or
any rights or obligations hereunder, whether by contract or by operation of law,
except in the context of a material change in LookSmart's capital structure,
control or ownership (including by way of an initial public offering of stock),
without the express written consent of Microsoft, and any attempted assignment
by LookSmart in violation of this Section 13.4 shall be void. In the event of
any such assignment or attempted assignment by LookSmart in violation of this
Section 13.4, Microsoft shall have the right to immediately terminate the Update
Term.
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<PAGE>
13.5 Construction. If for any reason a court of competent
jurisdiction finds any provision of this Agreement, or portion thereof, to be
unenforceable, that provision of the Agreement will be enforced to the maximum
extent permissible so as to effect the intent of the Parties, and the remainder
of this Agreement will continue in full force and effect. Failure by either
Party to enforce any provision of this Agreement will not be deemed a waiver of
future enforcement of that or any other provision. This Agreement has been
negotiated by the Parties and their respective counsel and will be interpreted
fairly in accordance with its terms and without any strict construction in favor
of or against either Party. The section headings used in this Agreement are
intended for convenience only and shall not be deemed to affect in any manner
the meaning or intent of this Agreement or any provision hereof.
13.6 Entire Agreement. This Agreement does not constitute an offer by
Microsoft and it shall not be effective until signed by both Parties. This
Agreement constitutes the entire agreement between the Parties with respect to
the subject matter hereof and merges all prior and contemporaneous
communications, including but not limited to the Letter of Intent between the
Parties dated as of October 9, 1998. It shall not be modified except by a
written agreement dated subsequent to the date of this Agreement and signed on
behalf of LookSmart and Microsoft by their respective duly authorized
representatives. No waiver of any breach of any provision of this Agreement
shall constitute a waiver of any prior, concurrent or subsequent breach of the
same or any other provisions hereof, and no waiver shall be effective unless
made in writing and signed by an authorized representative of the waiving Party.
13.7 Force Majeure. If either Party is in material breach of a term
of this Agreement as a result (wholly or in primary part) of any earthquake,
fire or other natural cause not entirely within such Party's control and which
it could not by reasonable diligence have avoided, then without limiting the
other Party's rights in any such event, such other Party shall have the option,
without liability, to suspend their performance for the duration of any such
breach but in no event longer than twenty (20) consecutive days or thirty (30)
days total ("Suspension Period") with respect to any single or proximately
related cause(s), by giving the other Party written notice thereof detailing the
reason and expected duration of such suspension; provided that during such
Suspension Period the non-notifying Party's obligations (but not its rights)
shall also be suspended; and further provided that if the notifying Party has
not cured its material breach by end of the Suspension Period, the non-notifying
Party may immediately upon notice to the notifying Party terminate this
Agreement pursuant to 12.1.2.
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<PAGE>
In Witness Whereof, the Parties have entered into this Agreement as of the
Effective Date written above.
MICROSOFT CORPORATION LOOKSMART LTD.
/s/ Pete Higgins /s/ Evan Thornley
- ----------------------------- --------------------------------
By (Sign) By (Sign)
Pete Higgins Evan Thornley
- ----------------------------- --------------------------------
Name (Print) Name (Print)
Group OP CEO
- ----------------------------- --------------------------------
Title Title
12-18-98
- ----------------------------- ________________________________
Date Date
-19-
<PAGE>
[EXHIBIT A]
---------
[**]
<PAGE>
[**]
<PAGE>
[EXHIBIT B]
---------
[**]
<PAGE>
EXHIBIT C
---------
LookSmart Primary Web Site Screen Shot
--------------------------------------
[PICTURE OF A SCREENSHOT OF LOOKSMART'S HOMEPAGE]
[On the right, advertising banners from Amazon.Com and lowestfare.com. On the
left, pull down menus to other websites organized in Looksmart's category-based
format. In the center, brief text descriptions linking to top news stories from
December 2, 1998, and websites related to retail purchasing.]
[MICROSOFT LOGO APPEARS HERE]
<PAGE>
[EXHIBIT D]
---------
[**]
<PAGE>
[EXHIBIT E]
---------
[**]
<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
August 19, 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
August 19, 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
10,350,000 shares of its common stock.
/s/ Ernst & Young LLP
Riverside, California
August 19, 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
August 19, 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
August 19, 1999
