<PAGE>
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
.
Commission File Number: 000-26357
LOOKSMART, LTD.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3904355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Second Street
San Francisco, California 94107
(Address of Principal Executive Offices and Zip Code)
(415) 348-7000
(Registrant's Telephone Number, Including Area Code)
----------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [_]
As of August 1, 2000, there were 89,632,799 shares of the registrant's common
stock outstanding.
===============================================================================
<PAGE>
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000............................................. 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and six months ended
June 30, 1999 and 2000........................................ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 2000........ .................. 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk..... 23
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.............................................. 24
ITEM 2: Changes in Securities and Use of Proceeds...................... 24
ITEM 3: Defaults Upon Senior Securities................................ 24
ITEM 4: Submission of Matters to a Vote of Security Holders............ 24
ITEM 5: Other Information.............................................. 25
ITEM 6: Exhibits and Reports on Form 8-K............................... 25
ITEM 7: Signatures..................................................... 26
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOOKSMART, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 75,971 $ 74,969
Restricted cash................................ - 46,300
Short term investments......................... 28,038 3,983
Trade accounts receivable, net................. 8,039 13,875
Accounts receivable from related parties....... 980 1,049
Other current assets........................... 4,675 7,820
-------- ---------
Total current assets......................... 117,703 147,996
Property and equipment, net...................... 11,595 13,727
Goodwill and intangible assets, net.............. 29,301 21,101
Investment in joint venture...................... - 5,153
Other assets..................................... 2,920 5,106
-------- ---------
Total assets..................................... $161,519 $ 193,083
======== =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilites:
Trade accounts payable......................... $ 4,002 $ 5,927
Other accrued liabilities...................... 12,915 16,949
Deferred revenue............................... 16,705 16,004
Income taxes payable........................... 650 484
Capital lease obligations--current portion..... 743 751
-------- ---------
Total current liabilities.................... 35,015 40,115
Deferred revenue................................. 4,919 -
Capital lease obligations........................ 1,423 1,052
Credit facility--joint venture partner........... - 50,000
Minority interest................................ 610 217
Note payable..................................... - 452
Other liabilities................................ - 3,745
-------- ---------
Total liabilities............................ 41,967 95,581
Stockholders' equity:
Capital stock.................................... 86 89
Additional paid-in capital....................... 211,305 215,113
Deferred stock compensation and other............ (3,904) (3,116)
Accumulated deficit.............................. (87,935) (114,584)
-------- ---------
Total stockholders' equity................... 119,552 97,502
-------- ---------
Total liabilities and stockholders' equity... $161,519 $ 193,083
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising syndication $ 3,433 $ 17,206 $ 5,624 $ 29,471
Licensing 5,237 4,396 9,626 9,763
Ecommerce/distribution 1,820 5,699 1,820 9,566
-------- -------- -------- --------
Total revenues 10,490 27,301 17,070 48,800
Cost of revenues:
Advertising syndication 430 1,134 748 2,087
Ecommerce/distribution 1,130 2,277 1,130 4,164
-------- -------- -------- --------
Total cost of revenues 1,560 3,411 1,878 6,251
-------- -------- -------- --------
Gross profit 8,930 23,890 15,192 42,549
-------- -------- -------- --------
Operating expenses:
Sales and marketing (exclusive of deferred stock compensation
of 740 and 285 in the three months ended June 30, 1999 and 2000,
respectively, and 926 and 771 in the six months ended
June 30, 1999 and 2000, respectively) 10,736 19,595 17,157 36,312
Product development (exclusive of deferred stock compensation
of 591 and 77 in the three months ended June 30, 1999 and 2000,
respectively, and 968 and 376 in the six months ended
June 30, 1999 and 2000, respectively) 5,683 9,445 9,567 18,055
General and administrative (exclusive of deferred stock
compensation of 674 and 27 in the three months ended
June 30, 1999 and 2000, respectively, and 900 and 495 in the
six months ended June 30, 1999 and 2000,
respectively) 2,051 3,266 3,666 6,133
Amortization of goodwill and intangibles 1,523 1,831 1,918 3,776
Amortization of deferred stock compensation 2,005 389 2,795 1,642
-------- -------- -------- --------
Total operating expenses 21,998 34,526 35,103 65,918
-------- -------- -------- --------
Loss from operations (13,068) (10,636) (19,911) (23,369)
Non-operating income (expenses):
Interest and other non-operating income(expense), net 570 (417) 589 (36)
Share of joint venture loss - (1,973) - (3,547)
-------- -------- -------- --------
Loss before income taxes (12,498) (13,026) (19,322) (26,952)
Income taxes - (47) (52) (93)
Minority interest - 206 - 395
-------- -------- -------- --------
Net loss (12,498) (12,867) (19,374) (26,650)
Other comprehensive income
Change in foreign currency translation adjustment
during the period 19 (48) 26 (100)
Change in unrealized gains/losses during
The period - (341) - 8
-------- -------- -------- --------
Comprehensive loss $(12,479) (13,256) $(19,348) $(26,742)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.54) $ (0.14) $ (0.91) $ (0.30)
========= ========= ======== ========
Weighted average shares outstanding
used in per share calculation 23,072 89,292 21,266 87,982
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1999 2000
----------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(19,374) $(26,650)
Adjustments to reconcile net loss to cash used in
operating activities:
Share of joint venture loss .............................. - 3,547
Depreciation and amortization............................. 2,648 5,907
Warrant non-cash charge................................... - 157
Amortization of deferred stock compensation............... 2,794 1,642
Changes in operating assets and liabilities:
Trade accounts receivable............................... (1,487) (5,160)
Other assets............................................ (6,463) (4,389)
Trade accounts payable.................................. 676 1,925
Other accrued liabilities and payables.................. 3,049 7,605
Deferred revenues....................................... 12,501 (3,151)
Minority interest....................................... - (393)
----------- ---------
Net cash used in operating activities................. (5,656) (18,960)
----------- ---------
Cash flows provided (used) by investing activities:
Acquisitions................................................ (10,204) (125)
Purchase of short-term investments.......................... - (1,978)
Proceeds from sale of short-term investments................ - 26,105
Restricted cash............................................. - (46,300)
Funding to joint venture.................................... - (8,700)
Purchase of property and equipment.......................... (4,361) (4,268)
----------- ---------
Net cash provided (used) by investing activities...... (14,565) (35,266)
Cash flows from financing activities:
Proceeds from note.......................................... - 472
Repayment on notes.......................................... (1,500) (20)
Repayments on equipment lease............................... - (362)
Proceeds from joint venture partner credit facility......... - 50,000
Proceeds from issuance of preferred stock, net.............. 60,887 -
Proceeds from issuance of common stock...................... 38 3,234
----------- ---------
Net cash provided by financing activities............. 59,425 53,324
Effect of exchange rate changes on cash....................... 26 (100)
----------- ---------
Increase in cash and cash equivalents and restricted cash..... 39,230 (1,002)
Cash and cash equivalents, beginning of period................ 3,501 75,971
----------- ---------
Cash and cash equivalents and restricted cash, end of
period........................................................ $ 42,731 $ 74,969
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
LOOKSMART, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Nature of Business and Principles of Consolidation
LookSmart offers its business partners and consumers comprehensive Internet
search infrastructure services. LookSmart distributes its proprietary directory
to a large number of Internet users through LookSmart owned web properties, as
well as its strategic partners, including portals, Internet service providers
and media companies.
The consolidated financial statements include the accounts of the Company and
its subsidiaries: LookSmart International Pty Ltd, Futurecorp International Pty
Ltd, BeSeen.com, Inc., LookSmart Netherlands B.V. and LookSmart Holdings
(Delaware), Ltd. Investments in 20% to 50% owned partnerships and affiliates are
accounted for on the equity method and investments in less than 20% owned
affiliates are accounted for on the cost method. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company generates revenues from advertising syndication, licensing and
ecommerce/distribution activities. Advertising syndication revenues are derived
from the sale of advertisements on the websites of the Company and its
distribution affiliates in conjunction with returning search content.
Advertising syndication 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 a minimum number of "impressions," or times that an advertisement
appears in pages viewed by users of the Company's or its partners' 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 also include barter transactions which are the exchange of
advertising space on the Company's websites for advertising space on other
websites. These transactions are recorded at the fair value of similar
advertisement for which cash was received. For the three months ended June 30,
1999 and 2000 the Company recognized $0 and $1.2 million, respectively, for
barter transactions. For the six months ended June 30, 1999 and 2000 the Company
recognized $198,000 and $1.4 million, respectively, for barter transactions.
Revenues associated with licensing contracts are recognized as delivery occurs
as specified under the contracts, and where no refund obligations exist.
Payments from customers received in advance of delivery are recorded as deferred
revenues.
The Company's ecommerce/distribution revenue is generated by the sale of
merchandise and the design, construction and hosting of commercial websites as
well as from the distribution of "contributing links" (URLs) in the LookSmart
directory. Revenue from the sale of merchandise is reported on a gross basis if
the Company acts as the principal in the transaction with associated product
cost reported as cost of revenues. Revenue is recognized at the time goods are
shipped. 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 revenues are recognized in the period in which hosting
occurs. Ecommerce/distribution revenues include fees received for the expedited
review of URLs for inclusion in the LookSmart database. Revenues associated with
expedited reviews are recognized upon the completion of the expedited review
provided that collection of any resulting receivable is probable. Upon
completion of an expedited review, no refund obligations exist.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 becomes effective for the fourth quarter of the year ending
December 31, 2000. The Company is in the process of determining the impact, if
any, that adoption of SAB 101 will have on the consolidated financial
statements.
In December 1999, the Emerging Issues Task Force issued EITF No. 99-17,
"Accounting for Advertising Barter Transactions" (EITF 99-17). EITF 99-17 is
effective for years ended December 31, 2000. The Company believes that the
adoption of EITF 99-17 will not have a material effect on its consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (Interpretation 44). Interpretation 44 is effective July 1, 2000.
The Company believes that the adoption of Interpretation 44 will not have a
material effect on its consolidated financial statements.
In March 2000, the Emerging Issues Task Force issued EITF No. 00-2,
"Accounting for Web Site Development Costs" (EITF 00-2). EITF 00-2 is effective
for years beginning after June 30, 2000. The Company believes that the adoption
of EITF 00-2 will not have a material effect on its consolidated financial
statements.
2. Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements reflect
all adjustments which are normal and recurring in nature, and in the opinion of
management, are necessary for a fair statement of the results of operations for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for any full fiscal year or for
any future period.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. These unaudited interim condensed
consolidated financial statements be read in conjunction with LookSmart's
audited financial statements and notes thereto for the year ended December 31,
1999 as included in LookSmart's Annual Report to Shareholders on Form 10-K, as
filed with the Securities and Exchange Commission.
3. Restricted Cash
On February 15, 2000, the Company drew down $50.0 million from the British
Telecommunications credit facility. In accordance with the BT LookSmart joint
venture agreement, draw downs on the credit facility may
6
<PAGE>
LOOKSMART LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
be used only for the purpose of funding the BT LookSmart joint venture. As of
June 30, 2000, cash drawn down on this credit facility has been classified as
restricted cash on the balance sheet and $3.7 million of the cash drawn down has
been used to fund the joint venture (see Note 8).
4. 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 per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator--Basic and diluted:
Net loss...................................... $(12,498) $(12,867) $(19,374) $(26,650)
======== ======== ======== ========
Denominator--Basic and diluted:
Weighted average common shares outstanding.... 23,072 89,292 21,266 87,982
======== ======== ======== ========
Basic and diluted loss per share.............. $ (0.54) $ (0.14) $ (0.91) $ (0.30)
======== ======== ======== ========
Pro forma net loss per share:
Weighted average common shares outstanding... 75,445 67,573
======== ========
Basic and diluted loss per share............. $ (0.17) $ (0.29)
======== ========
</TABLE>
The pro forma net loss per share calculation assumes the conversion of all
preferred stock into common shares and the exercise of all warrants which
expired upon the Company's initial public offering that were outstanding as of
June 30, 1999.
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common and common equivalent shares outstanding
during the period, if dilutive. Common equivalent shares consist of the
incremental common shares issuable upon conversion of the convertible preferred
stock and shares issuable upon the exercise of stock options and warrants. For
all periods, common equivalent shares are not included in the computation of
diluted loss per share because they are antidilutive. Common stock equivalents
relating to preferred stock, stock options and warrants to purchase common and
preferred shares are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
--------------------
Common stock equivalents 1999 2000
------------------------ --------- ---------
<S> <C> <C>
(unaudited)
Preferred stock....................................... 40,264 -
Options............................................... 12,152 11,842
Warrants.............................................. 15,995 2,062
--------- ---------
Total dilutive shares................................. 68,411 13,904
========= =========
</TABLE>
5. Related Party Transactions
The Company has a distribution agreement with Guthy Renker Corporation (GRC),
one of the Company's stockholders. At June 30, 2000, the Company had a
receivable of $304,000 from GRC arising from transactions under the distribution
agreement. Additionally, during the quarter ended June 30, 2000, the Company
paid GRC $29,000 for marketing and administrative support.
On June 12, 2000, the Company issued a $400,000 secured promissory note
receivable to an officer of the Company for purchase of a personal residence.
The loan bears no interest and is payable in full upon the earliest of 120 days
after the officer's resignation, 180 days after termination by the Company, or
30 days after the closing of the sale of the property which is collateral for
the promissory note.
During the quarter ended June 30, 2000, the Company paid $254,000 to MacQuarie
Bank Limited, one of the Company's stockholders, for listing, advertising,
legal, and public relations expenses incurred on behalf of the Company for its
listing of CDIs on the Australian stock exchange.
During the quarter ended June 30, 2000, the Company received $125,000 from
QSound for advertising sales as part of a two year agreement. This agreement
calls for QSound to purchase a total of $3.0 million of advertising. The Company
has an investment in Qsound, as a result of the contribution of certain assets
and liabilities related to its Choicemall property to Qsound in May,
2000. See Note 10.
During the quarter ended June 30, 2000, the Company received $593,000 from
Redband Broadcasting for advertising sales. The Company is a minority owner in
Redband Broadcasting.
7
<PAGE>
LOOKSMART LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
The Company receives licensing revenues from the BT LookSmart joint venture
for the licensing of LookSmart database content. Revenues from the BT LookSmart
joint venture amounted to $0 and $375,000 for the six months ended June 30, 1999
and 2000, respectively. As of June 30, 2000 the Company had a related party
receivable of $745,000 from the BT LookSmart joint venture. This receivable
represents reimburseable costs incurred by the Company on behalf of the BT
LookSmart joint venture and has been recorded as an accounts receivable from
related parties in the balance sheet as of June 30, 2000.
6. 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. The Company operates in three segments:
advertising syndication, licensing and ecommerce/distribution. In the
Condensed Consolidated Statements of Operations and Comprehensive Loss, the
Company reports revenue and cost of revenues along these three segments based on
the services currently provided by each. With the exception of accounts
receivable and deferred revenue, information available to the chief operating
decision makers of the Company does not include allocations of assets and
liabilities or operating costs to the Company's segments. As of December 31,
1999 and June 30, 2000, accounts receivable by segments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
<S> <C> <C>
(unaudited)
Advertising syndication........... $8,368 $15,332
Licensing......................... 269 640
Ecommerce/distribution............ 992 619
------------ --------
Total............................. 9,629 16,591
Allowance for doubtful accounts... (610) (2,412)
------------ --------
Accounts receivable, net.......... $9,019 $14,179
============ ========
</TABLE>
As of June 30, 2000, accounts receivable from related parties includes a
$745,000 receivable from BT which has not been allocated to the Company's
segments
As of December 31, 1999 and June 30, 2000, deferred revenue by segments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
<S> <C> <C>
(unaudited)
Advertising syndication....... $ 239 $ 114
Licensing..................... 18,597 15,834
Ecommerce/distribution........ 2,788 56
------------ --------
Total......................... $ 21,624 $ 16,004
============ ========
</TABLE>
8
<PAGE>
LOOKSMART LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
7. Stock Option Plan
During the six months ended June 30, 2000, the Company granted 4,710,280 stock
options at the then current fair market value. During such period employees
exercised an aggregate of 2,397,311 options, and 1,956,797 options were
cancelled. Total outstanding stock options were 11,841,875 as of June 30, 2000.
8. British Telecommunications Joint Venture
In February 2000, LookSmart entered into a joint venture agreement with
British Telecommunications (BT). LookSmart and BT have equal equity interests
in the joint venture, BT LookSmart, which will provide localized directory
services in Europe and Asia. The Company accounts for its investment in the
joint venture using the equity method of accounting. The Company's share of the
joint venture's net income or loss is reported as non-operating income or
expense.
The agreement establishing the joint venture requires that both LookSmart and
BT contribute up to $108.0 million in cash through March 2003. Under the
agreement, BT extended a $50.0 million unsecured credit facility accruing
interest at 20% per annum. LookSmart drew down $50.0 million from the credit
facility in February 2000. Borrowings under the credit facility, including
accrued interest, are convertible into LookSmart common stock at $35.00 per
share at BT's discretion. The fair market value of LookSmart common stock on the
commitment date was $32.875. The credit facility is due in full by February
2003, unless converted to LookSmart common stock prior to that time. LookSmart's
total funding to the joint venture as of June 30, 2000 was $8.7 million.
9. Note Payable
In January 2000 the Company issued an unsecured promissory note in the
principal amount of $472,000 to its landlord. The note bears interest at 9% per
annum and is payable in equal monthly installments over a term of 10 years. As
of June 30, 2000 the balance of this note is $452,000.
10. Investments
In May 2000 Looksmart contributed certain assets and liabilities related to its
Internet radio division to Redband Broadcasting, Inc. in exchange for 2,000,000
shares of Series A preferred stock. The investment is accounted for under the
equity method. Losses during the second quarter of 2000 have reduced the
investment balance to zero.
In May 2000 Looksmart contributed certain assets and liabilities related to
its Choicemall property to Qsound Labs, Inc. in exchange for 1,000,000 shares
of common stock. At the time of the transaction the shares were valued at
$2,094,000. The shares are classified as available for sale and carried at
market value in accordance with SFAS 115. With regards to this investment,
$406,000 of unrealized loss was recorded as a component of other comprehensive
income during the second quarter of 2000. In connection with this transaction
the Company also applied $2.5 million of deferred revenue towards the purchase.
Accordingly, goodwill associated with our Choicemall property was reduced by a
total of $4.6 million as a result of this transaction.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements included in this Form 10Q and the notes to
those statements. 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 Quarterly Report on Form 10-Q, particularly in the
section below entitled "Factors Affecting Operating Results".
Overview
LookSmart is a leading global Internet search infrastructure company. We have
built a robust suite of scalable, customizable and high-quality search products
and have distributed these products, in varying forms, to our network of
partners and affiliates. First and foremost, we build our search solutions to
provide our partners' Internet users with a fast, effective and high-quality
environment to find the most relevant results. Second, we craft our search
solutions to maximize the generation of revenue for our partners. Third, because
of the scale of our distributed search solution network, we believe we are able
to drive significant amounts of traffic to various destinations throughout the
Internet. Finally, we build private-label search solutions for our partners that
are highly customized and deeply integrated to meet each of our partners'
specific goals. Because our search solutions leverage our existing Internet
directory, we believe we are able to deploy our search solutions in a cost-
effective and scalable manner.
Results of Operations
Revenues
Looksmart's core asset is its directory of Internet content and the associated
search systems we provide that allows companies to search through it. Our
revenue streams are created from the use of this directory and search system by
LookSmart and by other companies who contract to use the directory. We divide
these revenues into three distinct segments:
Licensing. Some companies choose to simply license LookSmart's directory for a
fee. The licensing fee generally entitles a company to make use of the data
written in LookSmart's directory in a contractually-limited manner, and to
retain the advertising fees that displaying search results may generate.
Licensing revenues were $4.4 million for the second quarter and $9.8 million for
the first half of 2000, respectively, which represent a decrease of 16% and an
increase of 1% when compared with the corresponding periods in 1999. The
decrease in year over year second quarter licensing revenues is due primarily to
the timing of the delivery of LookSmart's annual contracted URLs to Microsoft.
Advertising Syndication. Advertising syndication revenues are derived from the
display of advertising in conjunction with returning search content. This
advertising is distinct and generally differentiated from the content. These
revenues were $17.2 million for the second quarter and $29.5 million for the
first half of 2000, respectively, which represent increases of 401% and 424%
when compared with the corresponding periods in 1999. The increases were due
primarily to the increasing number of advertisers purchasing space on the
Company's and its affiliates' web pages, increased traffic resulting from
increased branding and new syndication deals, as well as higher effective yields
resulting from better advertising inventory management and increased targeting
of advertising sales.
Ecommerce/distribution. The source of LookSmart's ecommerce/distribution
revenues are its merchandising activities as well as the revenues it derives
from the distribution of "contributing links" (URLs) in its directory.
Contributing links are URLs in LookSmart's directory that generate revenue.
Customers have either paid for the review of a contributing link or LookSmart is
able to earn revenue from the URL. Specifically, revenues from the distribution
of contributing links come from "cost-per-click" arrangements, CPM arrangements,
and fees for expedited reviews of URLs. The Company initiated its
ecommerce/distribution activities in April 1999. Ecommerce/distribution revenues
were $5.7 million for the second quarter and $9.6 million for the first half of
2000, respectively, which represent increases of 213% and 425% compared to
the corresponding periods in 1999. The increases are primarily due to the
continued strength of our on-line merchandise sales, which began in April 1999
and accounted for approximately $5.0 million of this increase. In addition, our
sales in 2000 were bolstered by new revenues from contributing links.
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International revenues accounted for less than 10% of net revenues during the
second quarter and first halves of 1999 and 2000. Barter revenues also
represented less than 10% of net revenues during those periods.
Cost of Revenues
Advertising Syndication. Advertising syndication cost of revenues were $1.1
million, or 7% of advertising syndication revenues, for the second quarter and
$2.1 million, or 7% of advertising syndication revenues, for the first half of
2000. In the corresponding periods of 1999, advertising syndication cost of
revenues were $430,000, or 13% of advertising syndication revenues, and
$748,000, or 13% of advertising syndication revenues, respectively. During the
period from June 30, 1999 to June 30, 2000, we invested in technology
infrastructure and hired advertising operations personnel to improve the
management and sale of our advertising inventory which allows us to monetize our
traffic more effectively. The dollar increase in advertising syndication
cost of revenues was due to the salaries and benefits costs of additional
employees in advertising operations as well as depreciation on additional
capital expenditures related to management of advertising inventory and
increased line rental expenses due to higher traffic levels.
Ecommerce/distribution. Ecommerce/distribution cost of revenues were $2.3
million, or 40% of ecommerce/distribution revenues, for the second quarter and
$4.2 million, or 44% of ecommerce/distribution revenues, for the first half of
2000. In the corresponding periods of 1999, ecommerce/distribution cost of
revenues were $1.1 million, or 62% of ecommerce/distribution revenues, and $1.1
million, or 62% of ecommerce/distribution revenues, respectively.
Ecommerce/distribution cost of revenues are attributable primarily to
merchandise costs.
Operating Expenses
Sales and Marketing. Sales and marketing expense was $19.6 million for the
quarter ended June 30, 2000, or 72% of total revenues, as compared to $10.7
million, or 102% of total revenues, for the quarter ended June 30, 1999. For
the six months ended June 30, 2000, sales and marketing expense was $36.3
million, or 74% of total revenues, as compared to $17.2 million, or 101% of
total revenues for the six months ended June 30, 1999.
The dollar increase in sales and marketing expenses for the six months ended
June 30, 2000 as compared to the same period in 1999 is attributable to a number
of factors. Distribution costs increased approximately $12.4 million, primarily
due to the distribution and syndication agreement we entered into in April 1999
with NetZero and an increase in payments to our ISP, media, and portal partners.
Among the significant new distribution and syndication agreements we entered
into in late 1999 and in 2000 were agreements with Go2Net, Prodigy, and Juno.
Marketing costs also increased approximately $3.0 million for the six months
ended June 30, 2000 compared to the same period in 1999, primarily due to our
sponsorship deals entered into with PBS in late 1999 and Olympics.com in March
2000. In addition, the Company continued to expand its sales staff in 2000,
resulting in an increase to sales and marketing expense of approximately $3.3
million in the six months ended June 30, 2000 as compared to the same period in
1999.
Product Development. Product development expense was $9.4 million for the
quarter ended June 30, 2000, or 35% of total revenues, as compared to $5.7
million, or 54% of total revenues, for the quarter ended June 30, 1999. For the
six months ended June 30, 2000, product development expense was $18.1 million,
or 37% of total revenues, as compared to $9.6 million, or 56% of total revenues.
The dollar increase in product development expenses in the six months ended June
30, 2000 as compared to the same period in 1999 is primarily due to increases of
$3.2 million and $1.8 million in engineering and product design costs,
respectively. These cost increases are attributable to the significant increase
in personnel needed to support our efforts to expand our database page-server
and advertising technologies as well as develop our database. In addition, we
started a Looksmart Live group in July of 1999, resulting in an increase of $2.0
million in product development costs in the six months ended June 30, 2000 as
compared to the same period in 1999.
General and Administrative. General and administrative expense was $3.3
million for the quarter ended June 30, 2000, or 12% of total revenues, as
compared to $2.1 million, or 20% of total revenues, for the quarter ended June
30, 1999. For the six months ended June 30, 2000, general and administrative
expense was $6.1 million, or 13% of total revenues, as compared to $3.7 million,
or 21% of total revenues.
The dollar increase in the six months ended June 30, 2000 as compared to the
same period in 1999 consists primarily of increases in payroll expense due to
our expanding employee base, as well as an increase in listing, accounting,
legal, and other professional service costs incurred in connection with our
listing of CDI's on the Australian stock exchange.
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Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles expense was $1.8 million for the quarter ended June 30, 2000, or 7%
of total revenues, as compared to $1.5 million, or 15% of total revenues, for
the quarter ended June 30, 1999. For the six months ended June 30, 2000,
amortization of goodwill and intangibles expense was $3.8 million, or 7% of
total revenues, as compared to $1.9 million, or 11% of total revenues.
Goodwill and intangibles are the result of the purchase of intellectual property
at our inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-
Renker Internet and ITW NewCorp asset purchase transactions in April 1999 and
June 1999, and the Futurecorp stock purchase transaction in December 1999. In
May 2000, the Company contributed certain assets and liabilities related to its
choicemall property to Qsound Labs, Inc., resulting in a $4.6 million reduction
of goodwill acquired in the April 1999 Guthy-Renker Internet asset purchase. The
dollar increase in the six months ended June 30, 2000 as compared to the same
period in 1999 was due primarily to the fact that the six months ended June 30,
2000 includes six months of amortization expense of the goodwill resulting from
the Guthy-Renker Internet, ITW NewCorp and Futurecorp purchase transactions.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation expense was $389,000 for the quarter ended June 30, 2000, or 2% of
total revenues, as compared to $2.0 million, or 19% of total revenues, for the
quarter ended June 30, 1999. For the six months ended June 30, 2000,
amortization of deferred stock compensation expense was $1.6 million, or 3% of
total revenues, as compared to $2.8 million, or 16% of total revenues.
These amounts were recorded in connection with the grant of stock options to
employees and represent the difference between the deemed fair value of the
common stock subject to the options at the dates of grant and the exercise price
of the related options. The decrease in amortization expense in the six months
ended June 30, 2000 as compared to the same period of last year is primarily due
to the forfeiture of stock options by terminated employees of the Company, and
the intrinsic decrease of this expense in the method as prescribed by FIN 28.
Non-operating Income (Expense). The Company had net non-operating expense of
$2.4 million for the quarter ended June 30, 2000, as compared to net non-
operating income of $570,000 for the quarter ended June 30, 1999. For the six
months ended June 30, 2000, our net non-operating expense was $3.6 million, as
compared to a net non-operating income of $589,000 for the same period last
year.
The decrease in net non-operating income for the six months ended June 30, 2000
compared to the same period last year is due to a $3.5 million loss we
recognized as our 50% share of the BT LookSmart joint venture loss. BT
LookSmart initiated operations in February 2000. In addition, the $3.3 million
in interest income we recognized in the six months ended June 30, 2000 was
offset by $3.4 million in interest expense on the $50.0 million we drew down on
our credit facility from BT in February, 2000.
Income Taxes
Income tax expense was $47,000 for the quarter ended June 30, 2000 compared
to zero income tax expense for the quarter ended June 30, 1999. For the six
months ended June 30, 2000, income tax expense was $93,000, compared to $52,000
for the same period in 1999. Income tax expense is primarily associated with
our Australian operations.
Liquidity and Capital Resources
LookSmart invests cash pending investment or use predominantly in debt
instruments that are highly liquid, of high-quality investment grade, and have
maturities of less than one year with the intent to make such funds available
for operating purposes. At June 30, 2000, the Company had cash and cash
equivalents, restricted cash and short-term investments totaling $125.2 million.
Of this amount, $46.3 million constitutes restricted cash under the BT LookSmart
joint venture agreement and is reserved exclusively for the purpose of funding
the BT LookSmart joint venture.
As of June 30, 2000, we had working capital of $107.9 million. Current assets
included $121.3 million in cash and cash equivalents and $4.0 million in short-
term investments. Current liabilities included $16.0 million in deferred
revenues. Deferred revenues primarily reflect cash receipts in excess of the
revenues earned under our agreement with Microsoft.
Our operations used cash of $19.0 million and $5.7 million for the six months
ended June 30, 2000 and 1999, respectively. Net cash used in operations for the
six months ended June 30, 2000 resulted primarily from the net losses for the
period and increases in prepaid expenses related to our Netscape and NetZero
distribution agreements, accounts receivable and other assets, and a decrease in
deferred revenues partially offset by increases in trade accounts payable and
accrued liabilities.
Our investing activities used cash of $35.3 million and $14.6 million for the
six months ended June 30, 2000 and 1999, respectively. Investing activity in
each of the periods consists primarily of funding the BT LookSmart joint
venture, investment of restricted cash and purchases of fixed assets. The net
cash provided by investing activities in the six months ended June 30, 2000, is
primarily the result of liquidating $26.1 million in short-term investments
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during the period. Investing activities for the six months ended June 30, 2000
also included our proportionate share of the funding call by the BT Looksmart
joint venture. LookSmart and BT were each required to make a payment of $7.7
million to meet this funding call.
Our financing activities provided cash of $53.3 million and $59.4 million for
the six months ended June 30, 2000 and 1999, respectively. In February 2000, we
drew down $50.0 million on the BT line of credit, as explained below. In
February 1999 and March and April 1999, we received cash proceeds of $500,000
and $60.3 million from the issuance of Series A and Series C convertible
preferred stock, respectively.
In February 2000, LookSmart entered into a joint venture agreement with BT.
LookSmart and BT have equal equity interests in the joint venture, BT LookSmart,
which provides localized directory services in Europe and Asia. We account for
our investment in the joint venture using the equity method of accounting. Our
share of the joint venture's net income or loss is reported as non-operating
income or expense. The Company anticipates that the joint venture will require
significant cash contributions and will incur losses for the foreseeable future.
The agreement establishing the joint venture requires that LookSmart commit up
to $108.0 million in cash through March 2003. Under the terms of the agreement,
BT extended a $50.0 million credit facility with interest at 20% per annum. We
drew down $50.0 million from the credit facility in February 2000. Outstanding
principal and accrued interest on the credit facility are convertible into
LookSmart common stock at $35.00 per share at BT's discretion.
Our capital requirements depend on numerous factors, including our ability to
generate revenues, product development needs, hiring requirements, ability to
form alliances with strategic partners, market acceptance of our services, and
the amount of resources we invest in directory content, site development, sales
and marketing 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.
Management believes that our current working capital is sufficient to meet our
operating requirements for at least the next 12 months. The Company expects that
it will 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.
Year 2000 Risks
We have not experienced any immediately adverse impact from the transition to
the Year 2000 on January 1, 2000. However, we cannot guarantee that we, our
suppliers, partners and customers have not been or will not be affected in a
manner that is not yet apparent. In addition, certain computer programs that
were date sensitive to the Year 2000 may not process the Year 2000 as a leap
year and any consequential effects may remain unknown until later.
Factors Affecting Operating Results
You should carefully consider the risks described below before making an
investment decision regarding our common stock. If any of the following risks
actually occur, our business, financial condition and 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.
We have a history of net losses and expect to continue to incur net losses
We have incurred net losses since our inception, including net losses of
approximately $12.9 million and $64.7 million for the years ended December 31,
1998 and 1999 and $26.7 million for the six months ended June 30, 2000. As of
June 30, 2000, we had an accumulated deficit of approximately $114.6 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 our ability to
grow our revenues, capitalize on new sources of revenue and contain our
expenses. We expect to spend significant amounts to:
. develop our international business, particularly through our BT LookSmart
joint venture with British Telecommunications;
. maintain and expand our network of distribution partners;
. continue to develop and expand directories of Internet listings, both in the
U.S. and abroad;
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. develop new products and enhance the functionality of our search and
directory listings services; and
. acquire complementary technologies and businesses.
Because our operating expenses are likely to increase significantly in the
near term, we will need to generate significant additional revenues to achieve
operating profitability. Even if we do achieve operating profitability, we may
not be able to achieve net profitability or increase our operating profitability
on a quarterly or annual basis.
Our quarterly revenues and operating results may fluctuate, each of which may
negatively affect our stock price
Our quarterly revenues may fluctuate significantly as a result of a
variety of factors that could affect our operating results in any particular
quarter. These factors include:
. the level of user traffic on our and our distribution affiliates' websites
and our ability to monetize that traffic in any given quarter;
. the demand for our Internet search and navigation services;
. the level of demand for Internet advertising and changes in the advertising
rates we charge;
. the timing of revenue recognition under our listings, licensing and
advertising contracts;
. the level and timing of our entry into new contracts for advertising,
database licensing and syndication;
. seasonality of our advertising and ecommerce revenues, as Internet usage is
typically lower in the first and third quarters of the year;
. technical difficulties and systems downtime or failures, whether caused by
us, third party service providers or hackers;
. changes in our or our partners' pricing policies or termination of contracts;
and
. the timing of our delivery of URLs under the Microsoft contract. We recognize
quarterly revenues under this contract 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.
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 revenue shortfall. Our operating results may
vary as a result of changes in our expenses and costs.
Due to the above factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful, and you should not rely on
them 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
additional financing may not be available to us
Although we believe that our working capital will provide adequate liquidity
to fund our operations and meet our other cash requirements for at least the
next 12 months, unanticipated developments in the short term, such as the entry
into agreements which require large cash payments or the acquisition of
businesses with high negative cash flows, may necessitate additional financing.
In any case, we may seek to raise additional funds through public or private
debt or equity financings in order to:
. fund our operations and capital expenditures;
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. take advantage of favorable business opportunities, including geographic
expansion or acquisitions of complementary businesses or technologies;
. develop and upgrade our technology infrastructure;
. reduce outstanding debt;
. develop new product and service offerings;
. take advantage of favorable conditions in capital markets; or
. respond to competitive pressures.
The capital markets, and in particular the public equity market for Internet
companies, have traditionally been volatile. It is difficult to predict when, if
at all, it will be possible for Internet companies to raise capital through
these markets. We cannot assure you that the additional financing will be
available on terms favorable to us, or at all.
Our business prospects depend on the continued growth of Internet advertising
and our ability to generate advertising revenues
For the quarter ended June 30, 2000, advertising syndication revenues
accounted for 63% of our total revenues, as compared to 33% of our total
revenues in the quarter ended June 30, 1999. We expect that revenues from
advertising and syndication will continue to represent a significant portion of
our total revenues for the foreseeable future.
We compete with traditional media such as television, radio and print, as
well as online advertisers and high-traffic websites, for a share of
advertisers' total advertising expenditures. We expect downward pressure on
advertising prices in the industry generally due to the increasing amount of
advertising inventory becoming available on the Internet. 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 reduce or eliminate their expenditures on Internet advertising.
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. Acceptance of the Internet
among advertisers will depend, to a large extent, on the perceived effectiveness
of Internet advertising and the continued growth of commercial usage of the
Internet.
Currently, there are a variety of pricing models for selling advertising on
the Internet, including models based on the number of impressions delivered, the
number of clickthroughs by users, the duration over which the advertisement is
displayed or the number of keywords to which the advertisement is 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 some cases, we
share advertising revenue with our network partners based on the number of users
directed to the directory within their sites. A decrease in targeted advertising
sold, advertising rates or an increase in revenue sharing obligations could
adversely affect our operating results.
In addition, our ability to earn advertising revenues depends on the number
of advertising impressions per search and the number of clickthroughs. We
believe category searches generally result in a greater number of advertising
impressions per search and a higher number of clickthroughs than keyword
searches. Accordingly, if we are unable to implement category-based search
broadly across our network of affiliates, or if users decide to use keyword
searches more frequently than category searches, our advertising revenues could
decline.
In addition, our advertising revenues will depend on our ability to achieve,
measure and demonstrate to advertisers the breadth of the traffic base using our
search service and the value of our targeted advertising. 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, but if it does, it would negatively affect Internet-based
advertising.
We derive a significant amount of our revenues from Microsoft, and if Microsoft
terminates their contract with us, our business could be harmed
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We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and after June 5, 2000, either party may terminate the
agreement for any reason on six months' notice. For the quarter ended June 30,
2000, revenues from Microsoft under this agreement accounted for $3.7 million or
13.5% of our total revenues. The cash payments we receive for each six-month
period under this agreement are subject to full or partial refund if we fail to
provide the stated number of URLs during that period. After the agreement is
terminated, Microsoft has the right 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 of
the agreement. Microsoft may not sublicense its rights to a specified group of
companies, which includes some of our competitors.
Our revenues and income potential are unproven and our business model is
continuing to evolve
We were formed in July 1996 and launched our search and navigation service 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 managing and growing a relatively new business, many of which
are beyond our control. In addition, we compete in the relatively new and
rapidly evolving Internet search infrastructure 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:
. profitably establish and expand our new product offerings, including express
listings, sub-site listings, premium information and LookSmart Live!;
. expand and maintain our network of distribution relationships, thereby
increasing the amount of traffic to Internet properties using our directory
services; and
. attract and retain a large number of advertisers from a variety of
industries.
Our failure to succeed in one or more of these areas may harm our business,
results of operations and financial condition.
The BT LookSmart joint venture will require a substantial investment of
resources and may not ever become profitable
Our success will depend in part upon the success of BT LookSmart, our joint
venture with British Telecommunications. We face many risks associated with BT
LookSmart, such as:
. we will recognize 50% of the net loss from the joint venture as non-operating
expense on our statement of operations. We expect the venture to incur
significant losses and require large capital expenditures for the foreseeable
future. As a result, LookSmart's revenues will be adversely impacted. We cannot
project when BT LookSmart will generate cash for us or become profitable, if at
all.
. we are obligated under the joint venture documents to make funding
contributions of up to $108 million over the first three years of BT LookSmart's
operation. If we are unable to meet our financing obligations, our equity
ownership of the joint venture will be proportionately reduced;
. the joint venture will face competition in international markets from a range
of competitors, including Yahoo!, the Microsoft Network, Alta Vista, UK Plus,
France Telecom, Deutsche Telecom, Tele Denmark, Scandinavian Online, Sonera
Plaza and other search infrastructure companies, content aggregators and
portals, many of which have greater capital resources and local experience in
these markets;
. the joint venture may fail to offer locally-relevant search products and
services, which would prevent it from aggregating a large base of Internet
traffic;
. the joint venture will face risks associated with conducting operations in
many different countries, including risks of currency fluctuations, government
and legal restrictions, privacy or tax laws, cultural or technical
incompatibilities and economic or political instability;
. the joint venture may be unable to aggregate a large amount of Internet
traffic and generate advertising and other revenue streams from that traffic;
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. the joint venture may fail to establish an effective management team and hire
experienced and qualified personnel in each of the countries in which it
competes; and
. we have not previously worked with British Telecommunications and may be
unable to forge an effective working relationship in the joint venture due to
differences in business goals, assessment of and appetite for risk or other
factors.
Many of our advertisers are emerging Internet companies that represent credit
risks
We expect to derive an increasingly significant portion of our revenues from
the sale of advertising to other Internet companies. Many of these companies
have limited operating histories and are operating at a loss. Moreover, many of
these companies have limited cash reserves and have limited access to additional
capital. To reflect the environment of heightened risk, we increased our
reserves for doubtful accounts receivable in the first quarter of 2000 by $1.0
million and in the second quarter of 2000 by $759,000. If any significant part
of our advertising base experiences financial difficulties, is not commercially
successful, or is unable or unwilling to pay our advertising fees for any
reason, our business will suffer.
If we are unsuccessful in expanding the network of affiliates using our
directory and search services, we may be unable to increase future revenues
Our success depends on our ability to expand the network of affiliates using
our directory and search services. We have invested, and will continue to
invest, a significant amount of our human and capital resources to expand this
network. However, we cannot assure you that we will continue to grow and expand
the network of websites using our search infrastructure services. If we are
unsuccessful in doing so, the reach of our search services, and consequently our
ability to generate advertising revenues, will be seriously harmed. In that
event, our business prospects and results of operations may deteriorate.
We face risks related to expanding into new services and businesses, including
LookSmart Live! and eCommerce/Distribution
To increase our revenues, we will need to expand into new business areas and
develop our ecommerce business, particularly our express listing and sub-site
listing services. Our success will depend upon the extent to which businesses
choose to use our express listing and sub-site listings products. These
products are in early stages and we cannot predict whether they will meet
projected levels of revenues in future quarters. Also, these products 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. For these and
other reasons, these initiatives may not generate sufficient revenues to offset
their cost.
For example, one of our new businesses, LookSmart Live!, is capital and human
resource intensive, and may be difficult to scale quickly and profitably. If we
are unable for any reason to expand the service in line with consumer de mand,
our reputation and business could suffer. In the second quarter of 2000, the
LookSmart Live! service generated an insignificant amount of revenues and had
$913,000 in operating expenses. If we are unable to generate revenues from the
traffic generated from this service, it may not become profitable and may harm
our results of operations and financial condition.
A failure to manage and integrate businesses we acquire could divert
management's attention and harm our operations. Acquisitions may also dilute 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 acquired companies into LookSmart could be expensive, time consuming and
strain our managerial resources. It may be difficult to retain key management
and technical personnel of the acquired company during the transition period
following an acquisition. We may not be successful in integrating any acquired
businesses or technologies and these transactions may not achieve anticipated
business 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
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connection with future acquisitions, which would adversely affect our operating
results.
Our stock price is extremely volatile and investors may not be able to resell
their shares for a profit
The stock market has recently experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet 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. You may not be able to sell your
shares for a profit as a result of a number of factors that may cause a decline
in our stock price, including:
. changes in the market valuations of Internet companies in general and
comparable companies in particular;
. actual or anticipated quarterly fluctuations in our operating results;
. changes in financial estimates by securities analysts;
. announcements of technological innovations or new products or services by us
or our competitors; or
. conditions or trends in the Internet that suggest a decline in rates of
growth of advertising-based Internet companies.
In the past, securities class action litigation has often been instituted
after periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs and
the diversion of management's attention and resources, regardless of the
outcome.
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 and licensed software
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. The following
developments may strain our capacity and result in technical difficulties with
our website or the websites of our distribution affiliates partners:
. substantial increases in editorial activity or the number of URLs in our
directory;
. customization of our directory for syndication with particular partners;
. substantially increased traffic using our directory; and
. the addition of new features or changes in our directory structure.
If we fail to address these constraints and difficulties in a timely manner,
our advertising and other revenues may decline and our business would likely
suffer. In addition, as we expand our service offerings and enter into new
business areas, we may be required to significantly modify 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, whether
caused by us, a third party service provider, unauthorized intruders and
hackers, or natural disasters, that causes an interruption in our service or a
decrease in the responsiveness of the web pages that we serve could result in
reduced user traffic, a decline in revenues and damage to our reputation. Our
users, partners and customers depend on ISPs, online service providers and other
third parties for access to the LookSmart directories. These service providers
have experienced significant outages in the past and could experience outages,
delays and other operating difficulties in the future.
In February 1999, we entered into an agreement with GlobalCenter, Inc. to
house our hardware equipment at their facilities in Santa Clara, California. We
do not presently maintain fully redundant systems at separate locations, so our
operations depend on GlobalCenter's ability to protect the systems in its data
center from system failures, earthquake,
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fire, power loss, water damage, telecommunications failure, hackers, vandalism
and similar events. GlobalCenter 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. Although we maintain property
insurance and business interruption insurance, we cannot guarantee that our
insurance will be adequate to compensate us for all losses that may occur as a
result of any system failure.
If we are unable to compete effectively in the Internet search infrastructure
market, our business and profitability will suffer
We compete in the Internet search infrastructure 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 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 search infrastructure
market are relatively low. As a result, new market entrants pose a threat to our
business, particularly with respect to software-based search solutions and
providing Internet search services to vertical market segments. We do not own
any patented technology that precludes or inhibits competitors from entering the
Internet search infrastructure 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, targeted
advertising and online interactive service capabilities. As we expand the scope
of our Internet services, we will compete directly with a greater number of
Internet search infrastructure providers, content aggregators 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;
. portals that have a branded franchise and a high frequency of repeat
visitors;
. metasearch services and software applications that allow a user to search the
databases of several directories and catalogs simultaneously; and
. category-based and directory-based services that offer information search and
retrieval capabilities.
To date, the Internet search infrastructure market has been characterized by
intense competition for consumer traffic. This has resulted in the payment of
consumer referral fees by us and others to 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 the cost of
referrals increases, our business and potential profitability could be harmed.
Recent acquisitions and strategic alliances involving our competitors could
reduce traffic on our network
A number of significant acquisitions and other alliances have been completed
or announced in the Internet search and navigation market involving some of our
competitors, including:
. CMGI's acquisition of an interest in Alta Vista and Alta Vista's planned
initial public offering;
. America OnLine's acquisition of Netscape Communications Corporation and
proposed acquisition of Time Warner, Inc.;
. InfoSpace's proposed acquisition of Go2Net;
. The Walt Disney Company's (Go Network) acquisition of a significant stake in
Infoseek Corporation;
. NBCi's formation from Snap, XOOM.com, NBC.com, NBC Interactive Neighborhood,
AccessHollywood.com, VideoSeeker and a 10% equity stake in CNBC.com;
. Yahoo, Inc.'s acquisition of Geocities and strategic partnership with Google;
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. Inktomi's acquisition of Ultraseek from the Go Network;
. @Home Network's acquisition of Excite, Inc.; and
. Ask Jeeves' acquisition of Direct Hit Corporation.
Although the effect of these transactions and agreements 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 our
network. In addition, these transactions align some of our competitors with
companies, including television networks, that are significantly larger and have
substantially greater capital, brand, marketing and technical resources than
LookSmart. As a result, these competitors may be able to respond more quickly to
new technologies and changes in consumer requirements and to develop and promote
their products and services more effectively than we can.
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, both through the BT LookSmart joint venture in Europe and
Asia and through our direct offerings of search and navigation services in
Australia, Canada and selected countries in Latin America. To date, we have
limited experience in 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, most foreign markets have lower levels of Internet
usage and online advertising than the United States. In pursuing our
international expansion strategy, we face several additional risks, including:
. lower per capita Internet usage and online shopping rates in many countries
abroad, due to a variety of causes such as lower disposable incomes, lack of
telecommunications and computer infrastructure and questions regarding adequate
on-line security for ecommerce transactions;
. less-developed Internet advertising markets in foreign markets, which may
make it more difficult to generate revenue from the traffic on our international
directories;
. relatively small Internet markets in some countries may prevent us from
aggregating sufficient traffic and advertising revenues and scaling our business
model in those countries;
. competition in international markets from a broad range of competitors,
including Yahoo!, Alta Vista and other United States and foreign
telecommunications firms, search engines, content aggregators and portals, many
of which have greater local experience than we do;
. uncertainty of market acceptance in new regions due to language, cultural,
technological or other factors;
. our potential inability to aggregate a large amount of Internet traffic and
find and develop relationships with advertisers;
. difficulties in recruiting qualified and knowledgeable staff and in building
locally relevant products and services;
. unexpected changes and differences in regulatory, tax and legal requirements
applicable to Internet services; and
. foreign currency fluctuations.
Our failure to address these risks could inhibit or preclude our efforts to
expand our business in international markets.
Our management and internal systems may be inadequate to handle the growth of
our business
Our workforce has grown from 55 employees on January 1, 1998 to approximately
600 employees worldwide on June 30, 2000. In addition, many members of our
management team have only recently started in their current positions, including
our Chief Financial Officer and Vice President of Finance. Implementation of our
growth strategy requires that we hire additional highly qualified personnel,
particularly in our engineering, international, product
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development and sales operations.
Our growth has placed, and 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.
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,
and they do not have stock options or restricted stock subject to vesting based
on continued employment.
Our success also depends on our ability to identify, attract, retain and
motivate highly skilled administrative, technical, editorial, finance and
marketing personnel. 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.
If we become subject to unfair hiring claims, we could be prevented from hiring
needed personnel, incur liability for damages and incur substantial costs in
defending ourselves
Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring practices
or that the employment of these persons would involve the disclosure or use of
trade secrets. These claims could prevent us from hiring personnel or cause us
to incur liability for damages. We could also incur substantial costs in
defending ourselves or our employees against these claims, regardless of their
merits. Defending ourselves from these claims could also divert the attention of
our management away from our operations.
We may face liability for intellectual property claims or information contained
in our search infrastructure services, and these claims may be costly to resolve
We make information available to end users on our search infrastructure
services, both on our website and our distribution affiliates' websites. We also
provide our distribution affiliates with custom-developed software and software
developed by others as part of our service offerings. Although we do not believe
that our website content and services infringe 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 or our distribution affiliates
could be subject to claims for defamation, invasion of privacy, negligence,
copyright or trademark infringement, breach of contract or other theories based
on the nature and content of our information and services. These types of claims
have been brought, sometimes successfully, against online service providers in
the past. 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.
Even if such claims do not result in liability to us or our distribution
affiliates, we could incur significant costs and diversion of management time in
investigating and defending against them. Our insurance may not cover claims of
this type, may not be adequate to cover all costs incurred in defense of these
claims, and may not indemnify us for all liability we incur.
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 advertising, obtaining information and commercial
transactions. Internet usage and ecommerce may not grow at projected rates 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, such as tax or privacy laws;
. general economic problems in the United States or abroad which decreases
users' disposable income;
. uncertainty regarding intellectual property ownership; and
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. lack of appropriate communications equipment.
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.
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, and lawsuits have
been filed against some Internet companies, regarding their use of 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. Any laws imposed to protect the
privacy of Internet users may affect the way in which we collect and use
personal information. We could incur additional expenses if new regulations or
court judgments regarding the use of personal information are introduced or if
any regulator chooses to investigate our privacy practices.
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. Although some 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, many consumers are not aware of or
technically proficient enough to customize these options. 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,
which could result in a decline in our revenues.
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 time and financial resources.
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 or revised state tax regulations may subject us to
additional state sales, income and other taxes. We cannot predict the effect of
current attempts to impose sales, income or other taxes on commerce over the
Internet. However, new or revised taxes and, in particular, sales taxes, would
likely increase our cost of doing business and decrease the attractiveness of
advertising and selling goods and services over the Internet. These events would
likely have an adverse effect on our business and results of operations.
Future sales of our securities 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, or the perception
that such sales could occur. As of August 10, 2000, approximately 43.0 million
shares of common stock were held by non-affiliates and approximately 46.6
million shares were held by affiliates, all of which are currently available for
----------
resale in the public market without registration, subject to compliance with
Rule 144 under the Securities Act. Moreover, as of August 10, 2000, the holders
of up to 42.2 million shares of common stock and warrants to purchase
approximately 2.1 million shares of common stock had rights to require us to
register those shares under the Securities Act.
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In addition, the Chess Depository Interests, or CDIs, which are publicly
traded on the Australian Stock Exchange under the symbol "LOK", are exchangeable
into shares of LookSmart common stock at a ratio of 20 CDIs per share of common
stock. Holders of CDIs may decide to exchange their CDIs for shares of LookSmart
common stock at any time. In that event, the exchanged shares of common stock
may be immediately available for resale at the option of the holders in the
Nasdaq National Market, which could depress the market price of LookSmart common
stock. As of August 1, 2000, the CDIs registered for trading on the Australian
Stock Exchange are exchangeable into an aggregate of approximately 8.8 million
shares of common stock.
These resales of common stock in the Nasdaq National Market, or the perception
that they may occur, could cause our stock price to decline. These events may
also make it more difficult for us to raise funds through future offerings of
common stock.
Directors, officers and significant stockholders have substantial influence over
LookSmart, which could prevent or delay a change in control
As of August 10, 2000, our executive officers, directors and significant
stockholders and the funds for whom they act as general partner, collectively
owned approximately 52% of the outstanding shares of LookSmart 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 asset sales. 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.
The anti-takeover provisions of Delaware's general corporation law and
provisions of our charter and bylaws may discourage a takeover attempt
Our charter and 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. Our board of directors has the authority to
issue shares of preferred stock and to determine the price, rights, preferences
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The 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
a third party to acquire a majority of our outstanding voting stock. In
addition, our charter and bylaws provide for a classified board of directors.
These provisions, along with Section 203 of the Delaware General Corporation
Law, could discourage potential acquisition proposals and could delay or prevent
a change of control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for interest rate
changes relates primarily to its short-term investments. The Company had no
derivative financial instruments as of June 30, 2000 or 1999. The Company
invests in debt instruments of high-quality corporate issuers with original
maturities greater than three months and current maturities less than twelve
months. The amount of credit exposure to any one issue and issuer is limited.
Foreign Currency Risk. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues in the quarters ended June 30,
2000 and 1999, and were derived entirely from our Australian operations. The
Company's international business is subject to risks typical of an international
business, including but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility, partially the exchange rate between the
Australian dollar and the United States dollar. The effect of foreign exchange
rate fluctuations on the Company for quarters ended June 30, 2000 and 1999 were
not material.
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PART II. OTHER INFORMATION
ITEM 1. 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 alleged 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
asserted claims for promissory and equitable estoppel and sought 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. The Appellate Division heard oral argument on the matter on November
16, 1999, and affirmed the lower court's ruling on December 9, 1999. The period
for appeal of the Appellate Division's ruling expired on April 30, 2000 with no
further appeal by Hollinger.
We are not a party to any other material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities.
None.
(b) Use of Proceeds.
On August 20, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-80581)
registering the initial public offering of 8,855,000 shares of our common stock
at an offering price of $12.00 per share. The initial public offering was
managed by Goldman, Sachs & Co., BancBoston Robertson Stephens and Hambrecht &
Quist. Gross proceeds of the offering, including the underwriters' exercise of
the over-allotment option, were approximately $106.3 million. Net proceeds to
LookSmart for the offering, after deducting commissions, fees and expenses
related to the offering, were approximately $96.9 million. As of June 30, 2000,
a portion of the net proceeds had been used for general corporate purposes,
including working capital, marketing and promotional activities, expanded
operations, new product development and increased personnel. The remaining
proceeds were invested in short-term investments in order to meet anticipated
cash needs for future working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2000, the Company held its annual stockholder meeting. At the
meeting, a quorum the stockholders of the Company considered two proposals: (1)
the election of two directors to the board of directors and (2) the ratification
of the appointment of the Company's independent accountants,
PricewaterhouseCoopers LLP, for the fiscal year ending December 31, 2000. The
remaining directors, Evan Thornley, Tracey Ellery, Scott Whiteside and Anthony
Castagna, were incumbent directors who did not stand for election at the
meeting. The following table shows the results of the voting on these matters.
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(1) Election of Directors:
<TABLE>
<CAPTION>
Name For Withheld
-------------------------- ---------------------- --------
<S> <C> <C>
Mariann Byerwalter 48,220,721 24,740
Robert Ryan 48,221,421 24,040
</TABLE>
(2) Ratification of Independent Auditors:
<TABLE>
<CAPTION>
For Against Abstain
------------------ ------- -------
<S> <C> <C>
48,224,419 20,192 890
</TABLE>
ITEM 5. OTHER INFORMATION
On May 25, 2000, the Company's board of directors adopted resolutions
amending the Bylaws of the Company and increasing the number of directors on the
board of directors from six to seven. The board of directors also appointed
James Tannenbaum to fill the newly created vacancy on the board of directors.
Mr. Tannenbaum was appointed as a Class II director. The terms of the Class II
directors, which also include Anthony Castagna and Scott Whiteside, expire at
the annual meeting of stockholders in 2001.
Dr. Tananbaum co-founded Advanced Medicine in April 1997 and has served as
its President and CEO since inception. He previously co-founded GelTex
Pharmaceuticals and served as a Director until January 1997. Dr. Tananbaum
holds an M.D. degree from Harvard Medical School, an M.B.A. degree from Harvard
Business School, and B.S.E.E. and B.S. degrees from Yale University.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits.
Exhibit 3 Restated Bylaws of the Company, as amended on May 25, 2000
Exhibit 27 Financial Data Schedule
(2) Current Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K during the quarter ended
June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 LOOKSMART, LTD.
By: /s/ Ned Brody
Ned Brody
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Robert Mally
Robert Mally
Controller
(Principal Accounting Officer)
26
