Offer To Exchange Certain Outstanding Options Having

EXHIBIT (a)(1)


LOOKSMART, LTD.


OFFER TO EXCHANGE CERTAIN OUTSTANDING OPTIONS HAVING
AN EXERCISE PRICE OF MORE THAN $2.50 FOR NEW OPTIONS


THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, PACIFIC STANDARD TIME, ON MARCH 20, 2001, UNLESS THE OFFER IS EXTENDED. IN ADDITION, UNLESS WE ACCEPT THE OPTIONS THAT YOU ELECT FOR EXCHANGE OR CANCELLATION, YOU MAY WITHDRAW SUCH OPTIONS AT ANY TIME AFTER 12:00 MIDNIGHT, PACIFIC STANDARD
TIME, ON APRIL 17, 2001.


LookSmart, Ltd., which we refer to as "we," "the company" or "LookSmart," is offering service providers the opportunity to exchange certain outstanding stock options having an exercise price of more than $2.50 per share (the "eligible options") for new options that we will grant to purchase shares of our common stock (the "new options"). The eligible options do not include the "special options" described below, but you must surrender the special options, which will be cancelled, if you wish to accept this offer. Also, if you wish to accept this offer, you must elect to exchange all of your eligible options. No partial elections to exchange will be accepted.


We are making this offer upon the terms and subject to the conditions described in this "Offer to Exchange," the related cover letter and attached "Summary of Terms" (which together, as they may be amended from time to time, constitute the "offer"). This offer is not conditioned upon a minimum number of options being elected for exchange by you and accepted by us. This offer is subject to conditions that we describe in section 6 of this Offer to Exchange.


Which Options are Eligible Options? All options having an exercise price of more than $2.50 per share that are currently outstanding under the LookSmart, Ltd. Amended and Restated 1998 Stock Plan (the "Option Plan") are eligible options, other than (i) the special options described below, (ii) the class of options held by option holders who have not been service providers of LookSmart or one of its subsidiaries from the date they elect to exchange their eligible options until the date this offer expires, (iii) the class of additional options exercisable for at least 500,000 shares of our common stock at an exercise price of $39.00 per share, and (iv) the class of options with an exercise price of $2.50 per share or less.


What are the Special Options? The special options are options granted on April 20, 2000 at an exercise price of $43.00 per share, May 11, 2000 at an exercise price of $18.75 per share and on October 25, 2000 at an exercise price of $6.16 per share. These special options must be surrendered and cancelled if you accept this offer. However, unlike the eligible options, no new options will be issued in exchange for the special options.


Who Can Participate in the Exchange? You can participate in this exchange if you hold eligible options and were and have been continuously a service provider of LookSmart or one of its subsidiaries from the date you elect to exchange your eligible options until the date this offer expires.


How Many New Options Will I Receive? We will grant you new options to purchase that number of shares of common stock which is equal to the number of shares of common stock subject to the eligible options you elect to exchange and that we accept. The exact number of shares subject to the eligible options that you have now is set forth in the enclosed Election Form. Take a look at the Election Form now and contact Doris Young, LookSmart Stock Plan Administrator, if you have any questions.


What is the Exercise Price Per Share of the New Options? Each new option will have an exercise price of $2.50 per share.


What is the Vesting Period and Term of the New Options? Each new option will have the same vesting schedule and vesting commencement date as the eligible option it is replacing. Each new option will have a term that expires at 12:00 midnight, Pacific Standard Time, on December 31, 2005.


What does the Company Recommend that I Do? Although our board of directors has approved this offer, neither we nor our board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange options. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal advisors if you have questions about your financial or tax situation.


Shares of our common stock are quoted on the Nasdaq National Market under the symbol "LOOK." On February 16, 2001, the closing price of our common stock on the Nasdaq National Market was $2.44 per share. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your options.


You should direct questions about this offer or requests for assistance or for additional copies of the Offer to Exchange or the cover letter with the Summary of Terms to Doris Young, Stock Plan Administrator, at (415) 348-7571 or via e-mail at options@looksmart.net.


IMPORTANT


Regardless of whether you accept or reject this offer, you must complete and sign the Election Form and return it to Doris Young before 12:00 midnight, Pacific Standard Time, on March 20, 2001, unless the offer is extended. You do not need to return the stock option agreements for your eligible options and special options to effectively elect to accept this offer.


We have not authorized any person to make any recommendation on our behalf as to whether you should elect to exchange or refrain from electing to exchange your options pursuant to the offer. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to give you any information or to make any representations in connection with the offer other than the information and representations contained in this document or in the related Election Form. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us.


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TABLE OF CONTENTS


Page
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SUMMARY TERM SHEET........................................................... 5


THE OFFER.................................................................... 10


1.NUMBER OF OPTIONS; EXPIRATION DATE....................................... 10


2.PURPOSE OF THE OFFER..................................................... 11


3.PROCEDURES............................................................... 11


4.WITHDRAWAL RIGHTS........................................................ 12


5.ACCEPTANCE OF OPTIONS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF NEW OPTIONS................................................ 12


6.CONDITIONS OF THE OFFER.................................................. 13


7.PRICE RANGE OF COMMON STOCK UNDERLYING THE OPTIONS....................... 14


8.SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF NEW OPTIONS................. 14


9.INFORMATION CONCERNING LOOKSMART, LTD.................................... 16


10.INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE OPTIONS.................................... 17


11.STATUS OF OPTIONS ACQUIRED BY US IN THE OFFER; ACCOUNTING CONSEQUENCES OF THE OFFER.................................................. 17


12.LEGAL MATTERS; REGULATORY APPROVALS..................................... 18


13.MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES........................... 18


14.EXTENSION OF THE OFFER; TERMINATION; AMENDMENT.......................... 19


15.FEES AND EXPENSES....................................................... 20


16.ADDITIONAL INFORMATION.................................................. 20


17.FORWARD LOOKING STATEMENTS; MISCELLANEOUS............................... 21


SCHEDULE A: INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF LOOKSMART, LTD....................................... 23


SCHEDULE B: BENEFICIAL OWNERSHIP TABLE....................................... 24


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SUMMARY TERM SHEET


The following are answers to some of the questions that you may have about this offer. We urge you to carefully read the remainder of this Offer to Exchange and the accompanying cover letter because the information in this summary is not complete. We have included references to the relevant sections of this Offer to Exchange where you can find a more complete description of the topics in this summary.


Q1. WHAT SECURITIES ARE WE OFFERING TO EXCHANGE?


We are offering to exchange all outstanding stock options having an exercise price of more than $2.50 per share that are outstanding under the option plan, other than special options and options that do not satisfy the eligibility requirements set forth under Question 8 herein. Although we will not exchange any new options for the special options, if you elect to accept this offer, you must surrender all of your special options for cancellation. (See Section 1)


Q2. WHAT WILL BE THE PER SHARE EXERCISE PRICE OF THE NEW OPTIONS?


Each new option will have an exercise price of $2.50 per share.


Q3. WHEN WILL THE NEW OPTIONS VEST?


Each new option will vest on the same vesting schedule as the options for which they were exchanged. Your vesting commencement date will also remain the same for each of your new options.


Q4. WHY ARE WE MAKING THE OFFER?


In light of recent stock market volatility, many of our outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price of our common stock. By making this offer we intend to maximize stockholder value by allowing service providers to share in the company's financial gains if the company does well in the future and by creating better performance incentives for, and thus increasing retention of, our service providers. We felt it appropriate to offer this exchange program, which, together with our regular grant process, will help us share the company's financial gains with you.


Q5. WHAT ARE THE SPECIAL OPTIONS?


In each of April, May and October 2000, we announced that we were awarding a special, one-time-only stock option grant to each service provider who held options with an exercise price per share greater than $68.00, $18.75 and $6.16, respectively. These grants were made on April 20, 2000 at an exercise price of $43.00 per share, May 11, 2000 at an exercise price of $18.75 per share and on October 25, 2000 at an exercise price of $6.16 per share. We recognized that many of our service providers had options with exercise prices that were greater than the then current market price of our common stock and we wanted to respond to the impact that the extraordinary volatility in our stock was having on our service providers.


Q6. WHY MUST THE SPECIAL OPTIONS BE SURRENDERED AND CANCELLED IF I CHOOSE TO
EXCHANGE MY ELIGIBLE OPTIONS?


The reason why we are not exchanging the special options, but are instead requiring that they be surrendered solely for cancellation, is that the special options were intended to accomplish the same goals as this offer. We want to provide performance incentives to each service provider through either the new options to be granted under this offer, or options already granted, but not both. If you wish to receive new options under this offer, you must surrender your special options for cancellation. If you do not accept this offer, you will keep the special options and all other options granted to you. We believe that requiring you to surrender your special options for cancellation in order to receive new options is consistent with our goals of creating


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strong performance incentives for our service providers, encouraging our service providers to remain in LookSmart's service and enhancing long-term stockholder value.


Q7. ARE THERE CONDITIONS TO THE OFFER?


The offer is subject to a number of conditions, including the conditions described in Section 6. However, the offer is not conditioned on a minimum number of option holders accepting the offer or a minimum number of options being exchanged.


Q8. ARE THERE ANY ELIGIBILITY REQUIREMENTS I MUST SATISFY IN ORDER TO RECEIVE
THE NEW OPTIONS?


The following classes of options are not eligible to participate in this offer: (i) the class of options held by option holders who have not been service providers of LookSmart or one of its subsidiaries from the date they elect to exchange their eligible options until the date this offer expires, (ii) the class of additional options exercisable for at least 500,000 shares of our common stock at an exercise price of $39.00 per share, and (iii) the class of options with an exercise price of $2.50 per share or less.


Q9. HOW MANY NEW OPTIONS WILL I RECEIVE IN EXCHANGE FOR THE OPTIONS I ELECT TO
EXCHANGE?


If you accept our offer, we will grant you new options to purchase that number of shares of common stock which is equal to the number of shares of common stock subject to the eligible options. No new options will be granted in exchange for the cancelled special options. The exact number of shares subject to eligible options and special options that you have now and that you would have if you accepted the offer is set forth in the enclosed Election Form.


Here are some examples:


Example #1: Assume you hold: (1) an eligible option to purchase 1,000 shares at an exercise price of $30.00 per share, (2) a special option to purchase 250 shares at an exercise price of $18.75 per share, and (3) a special option to purchase 100 shares at an exercise price of $6.16 per share. In order to participate in the offer, you would need to elect to exchange all three options for cancellation. You will then receive a new option to purchase 1,000 shares at an exercise price of $2.50 per share. Your new option will have the same vesting schedule and vesting commencement date as the original eligible option to purchase 1,000 shares which you elected to exchange.


Example #2: Assume you hold an eligible option to purchase 2,500 shares at an exercise price of $5.00 per share that vests in full over four years starting on June 15, 1999. If you elect to exchange the option, you will receive a new option to purchase 2,500 shares at an exercise price of $2.50 per share that vests in full over four years starting on June 15, 1999.


Q10. WHEN WILL I RECEIVE MY NEW OPTIONS?


We expect that the new options will be exercisable through your OptionsLink account on the date that we accept the offer. The new options will also be exercisable through Doris Young, the LookSmart Stock Plan Administrator, once you receive your new option agreement. We expect to distribute the new option agreements within eight weeks following the expiration of the offer.


Q11. WHEN WILL THE NEW OPTIONS EXPIRE?


The new options will expire at 12:00 midnight, Pacific Standard Time, on December 31, 2005.


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Q12. WILL I HAVE TO WAIT LONGER TO PURCHASE COMMON STOCK UNDER MY NEW OPTIONS
THAN I WOULD UNDER THE OPTIONS I EXCHANGE?


No. The new options you receive will be vested to the same extent as the options for which they were exchanged, and you will be able to exercise them to the same extent as you could have exercised the eligible options.


Q13. IF I ELECT TO EXCHANGE ELIGIBLE OPTIONS, DO I HAVE TO EXCHANGE ALL OF MY
ELIGIBLE OPTIONS OR CAN I JUST EXCHANGE SOME OF THEM?


You must exchange all of your eligible options in order to participate. If you have more than one eligible option, then you must exchange all of these option grants. For example, if you have three options grants (other than special options and ineligible options) at different exercise prices per share (for instance, $2, $20 and $40, respectively), and you accept the offer, you must exchange the $20 and $40 options. You will not be able to elect to exchange the $2 option. In addition, if you accept the offer, you must also surrender all of your special options. Your special options will be cancelled, and you will not receive new options in exchange for your special options.


Q14. WILL I HAVE TO PAY TAXES IF I EXCHANGE MY OPTIONS IN THE OFFER?


If you accept the offer, you will not recognize income for U.S. federal income tax purposes at the time of the exchange or at the time we grant new options to you. We recommend that you consult with your own tax advisor to determine the tax consequences of accepting the offer. If you are a service provider based outside of the United States, we recommend that you consult with your own tax advisor to determine the tax and related consequences of this transaction under the laws of the country in which you live and work. (See Section 13)


Q15. IF MY CURRENT OPTIONS ARE INCENTIVE STOCK OPTIONS, WILL MY NEW OPTIONS BE
INCENTIVE STOCK OPTIONS?


No. All new options will be non-qualified stock options and not incentive stock options, regardless of whether the options you exchange are incentive stock options. (See Section 13)


Q16. IF I HAVE INCENTIVE STOCK OPTIONS, WHAT HAPPENS IF I ELECT NOT TO
EXCHANGE THEM IN THIS OFFER?


You will not be subject to current income tax if you do not elect to exchange your eligible incentive stock options for new options.


We believe that your incentive stock options will maintain their status as incentive stock options if you do not accept the offer. However, the IRS took the position in a 10-year old administrative ruling that an offer to exchange incentive stock options for new options constituted a "modification" of the incentive stock options, resulting in the deemed granting of new options and the potential for such options to lose their status as incentive stock options. This administrative ruling appears to be inconsistent with the Internal Revenue Code and applicable Treasury Regulations and it is unclear whether this administrative ruling continues to represent the position of the IRS. We recommend that you consult your own tax advisor with respect to whether the right to exchange your incentive stock options under this offer constitutes a "modification" of your incentive stock options.


If you choose not to exchange your eligible incentive stock options, we recommend that you consult with your own tax advisor to determine the tax consequences of our offer to exchange these options.


Q17. IF I ELECT TO EXCHANGE OPTIONS IN THE OFFER, WILL I BE ELIGIBLE TO
RECEIVE OTHER OPTION GRANTS BEFORE I RECEIVE MY NEW OPTIONS?


We intend to continue to review the option grants of all service providers from time to time as part of our normal compensation program. As a result of this review, we may decide to grant you additional options.


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Q18. WHAT ACCOUNTING IMPACT WILL THE OFFER HAVE ON LOOKSMART?


As a result of our decision to extend this offer to our service providers, all new options issued under this offer will be treated for financial reporting purposes as variable awards. This means that we will be required to record the non-cash accounting impact of decreases and increases in the company's stock price as compensation expense in connection with the new options issued under this offer. We will have to continue this variable accounting with respect to these new options until they are exercised, forfeited or terminated. The higher the market value of our common stock, the greater the compensation expense we will record.


Q19. WHEN DOES THE OFFER EXPIRE? CAN THE OFFER BE EXTENDED, AND IF SO, HOW
WILL I KNOW IF IT IS EXTENDED?


This Offer to Exchange expires on March 20, 2001, at 12:00 midnight, Pacific Standard Time, unless we extend it.


Although we do not currently intend to do so, we may, in our discretion, extend the offer at any time. If we extend the offer, we will publicly announce the extension no later than 9:00 a.m., Eastern Standard Time, on the next business day following the previously scheduled expiration of the offer period. If the offer is extended, then the grant date of the new options will also be extended. (See Section 14)


Q20. WHAT DO I NEED TO DO?


Whether you accept the offer or not, you need to make your election and sign the Election Form and deliver it to Doris Young, LookSmart's Stock Plan Administrator, before 12:00 midnight, Pacific Standard Time, on March 20, 2001, unless we extend the offer. If you do not sign and deliver the Election Form before the Offer to Exchange expires, it will have the same effect as if you rejected the offer. The contact information for Doris Young is listed under Question 24 and on the Election Form, but if you have questions about delivery, you may contact Doris at (415) 348-7571 or via e-mail at options@looksmart.net. You should review the Offer to Exchange, the cover letter and Summary of Terms, the Election Form and all of their attachments before making your election. We will only accept a paper copy of your Election Form. Delivery by e-mail will not be accepted. If you are not in the San Francisco office, we recommend that you use registered mail, with return receipt requested. In all cases, you should allow sufficient time to ensure timely delivery.


We may reject any eligible or special options to the extent that we determine the Election Form is not properly signed and completed or to the extent that we determine it would be unlawful to accept the options. Although we may later extend, terminate or amend the offer, we currently expect to accept all properly exchanged options promptly after this Offer to Exchange expires. If you do not sign and deliver the Election Form before the Offer to Exchange expires, it will have the same effect as if you rejected the offer.


Q21. DURING WHAT PERIOD OF TIME MAY I CHANGE MY PREVIOUS ELECTION?


You may change your previous election at any time before 12:00 midnight, Pacific Standard Time, on March 20, 2001, unless we extend the offer. If we extend the offer beyond that time, you may change your previous election at any time until the extended expiration of the offer. To change your election, you must deliver the appropriate Change in Election Form to Doris Young before the Offer to Exchange expires. You may change your election more than once.


Once you have withdrawn options, you may re-elect to exchange options only by again following the delivery procedures described below. (See Section 4)


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Q22. WHAT HAPPENS TO MY OPTIONS IF I DO NOT ACCEPT THE OFFER OR IF MY OPTIONS
ARE NOT ACCEPTED FOR EXCHANGE?


Nothing. If you do not accept the offer, or if we do not accept the options you elect to exchange, you will keep all of your current options, including any special options, and you will not receive any new options. However, if you currently have incentive stock options that are eligible options under this offer and you do not accept the offer, see Question 16 above.


Q23. WHAT DO WE AND OUR BOARD OF DIRECTORS THINK OF THE OFFER?


Although our board of directors has approved this offer, neither we nor our board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange options. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal advisors if you have questions about your financial or tax situation.


Q24. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE OFFER?


For additional information or assistance, you should contact:


Doris Young, Stock Plan Administrator
625 Second Street
San Francisco, California 94107
LookSmart, Ltd.
telephone: (415) 348-7571
e-mail: options@looksmart.net


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THE OFFER


1. NUMBER OF OPTIONS; EXPIRATION DATE.


We are offering to exchange new options to purchase common stock in return for all eligible options that are properly elected for exchange and not validly withdrawn in accordance with Section 4 before the "expiration date" as defined below. Eligible options are all outstanding options that have an exercise price of more than $2.50 per share, excluding (i) the special options, (ii) the class of options held by option holders who have not been service providers of LookSmart or one of its subsidiaries from the date they elect to exchange their eligible options until the date this offer expires, (iii) the class of additional options exercisable for at least 500,000 shares of our common stock at an exercise price of $39.00 per share, and (iv) the class of options with an exercise price of $2.50 per share or less. IF YOU ARE NOT A SERVICE PROVIDER OF LOOKSMART OR ONE OF OUR SUBSIDIARIES FROM THE DATE YOU ELECT TO EXCHANGE YOUR ELIGIBLE OPTIONS THROUGH THE DATE WE GRANT THE NEW OPTIONS, YOU WILL NOT RECEIVE ANY NEW OPTIONS OR OTHER CONSIDERATION IN EXCHANGE FOR THE OPTIONS THAT YOU HAVE ELECTED TO EXCHANGE AND THAT WE HAVE ACCEPTED. This means that if you die, quit or we terminate your employment prior to the date we grant the new options for any reason, you will not receive anything for the options that you elected to exchange and that we accepted and cancelled.


You must elect to exchange all of your options having an exercise price of more than $2.50 per share if you decide to participate in the offer. We will not accept partial elections to exchange options for any portion of the shares subject to your options. Our offer is subject to the terms and conditions described in this Offer to Exchange, the cover letter and the attached Summary of Terms. We will only accept options that are properly returned and not validly withdrawn in accordance with section 4 of this Offer to Exchange before the offer expires on the "expiration date" as defined below.


We will grant you new options to purchase that number of shares of common stock which is equal to the number of shares of common stock subject to the eligible options you elect to exchange and we accept for the same. The exact number of shares subject to the options that you have now and that you would have if you accepted the exchange is set forth in the enclosed Election Form. New options will have the same vesting schedules and change of control provisions as the eligible options accepted for exchange. All new options will be issued under the LookSmart, Ltd. Amended and Restated 1998 Stock Plan (the "option plan"), and pursuant to a new option agreement between you and us. We will not issue any new options to you in exchange for your special options, which must be surrendered as a condition of accepting this offer and will be cancelled.


The term "expiration date" means 12:00 midnight, Pacific Standard Time, on March 20, 2001, unless and until we, in our discretion, extend the period of time during which the offer will remain open, in which event the term "expiration date" refers to the latest time and date at which the offer, as so exten ...